The Audits Have Arrived! Here’s what you need to know…
As we’ve reported over the last couple of years, the restaurant industry has been under increased scrutiny and as we predicted, these audits have arrived in our state in a big way. The recent Madison investigation was part of an “education and enforcement initiative” in Midwestern college towns and resorts, but DOL indicates they aren’t done with restaurants in our state. In the past most audits were typically the result of a complaint, but now DOL has gotten away from that approach and is proactively looking for violations! Representatives from the DOL recently confirmed that restaurants are being targeted so it is critical that you know what the laws require and ensure you are following the letter of the law.
Some of the FLSA violations in the Madison investigation included:
- Paying employees fixed salaries without regard to how many hours they worked, leading to overtime violations when they worked more than 40 hours in a week.
- Improperly calculating overtime for tipped employees.
- Paying overtime in cash, off the books, at “straight time” rates.
- Deducting the cost of uniforms, breakages, or shortages from workers’ pay; reducing their hourly wages below the federal minimum wage.
- Failing to keep accurate and thorough records of employees’ wages and hours worked.
- Failing to pay for all hours worked.
- Paying servers tips only.
- Requiring tipped employees to surrender tips to an illegal tip pool; and
- Requiring minor aged employees to work outside of the hours allowed by the law.
Do You Have a Tipping Pool? Beware of how they are used…
The DOL shared with WRA that improper tip pools were the most common violation in the Madison area audits that resulted in $724,000 in back wages due to employees! They also shared that a tip jar serves as a red flag to investigators that there may be tip pool problems lurking at that restaurant.
Tips are the property of the employee who earned them! Can the employer count the tips towards meeting minimum wage using the tip credit? Yes, but there are rules governing this. Can tips be distributed through a valid tip pool? Yes, but the key word is valid. The DOL has found that too often management has a hand in “employee run” tip pools or tend to include ineligible employees (BOH and management themselves) in “management run” tip pools.
Reviewing the DOL’s Fact Sheet #15 "Tipped Employees Under the Fair Labor Standards Act (FLSA)" should help keep your restaurant out of tip trouble. This fact sheet provides a good overview of the rules and requirements regarding tipped employees as well as typical problems that can trip up employers. Some of these include: invalid tip pools, improper payroll deductions from tipped employees, incorrectly calculating overtime for tipped employees and failing to bring tipped employees up to the minimum wage rate if they haven’t received/claimed enough in tips plus base wages over the pay period.
Tipped Employees: Tipped employees are defined by the DOL as those who customarily and regularly receive more than $30 per month in tips. Tips are the property of the employee. The employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (“tip credit”) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.
Tip Credit: The FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.33 in Wisconsin) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $4.92 per hour in Wisconsin (the minimum wage of $7.25 minus the minimum required cash wage of $2.33).
The DOL put in place new regulations surrounding the tip credit in 2011. Make sure you are following the rules outlined below.
The employer must provide the following information to a tipped employee before the employer may use the tip credit:
- the amount of cash wage the employer is paying a tipped employee, which must be at least $2.33 per hour;
- the additional amount claimed by the employer as a tip credit, which cannot exceed $4.92 (the difference between the minimum required cash/base wage of $2.33 and the current minimum wage of $7.25);
- that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
- that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
- that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
The employer may provide oral or written notice to its tipped employees informing them of items 1-5 above. An employer who fails to provide the required information cannot use the tip credit provisions and therefore must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.
Minimum Wage Issues – Paying out tipped employees
Wisconsin’s minimum wage rate has matched the federal minimum wage rate of $7.25 per hour since July of 2009, but there is still confusion out there. WRA’s Hotline Team often gets questions about minimum wage, the opportunity wage, the (now defunct) Wisconsin minor minimum wage and the tip credit.
Remember, all Wisconsin restaurants must comply with Wisconsin state labor laws. Restaurants meeting certain criteria are covered by the Federal Fair Labor Standards Act (FLSA) and must obey federal laws in addition to state laws. If the two laws differ, the business must follow the stricter (or the law more favorable to employees) of the two.
Here are the basics
General minimum wage $7.25/hour
Opportunity minimum wage $5.90*/hour
*The federal opportunity wage rate is $4.25. Wisconsin’s opportunity wage rate of $5.90 is higher and therefore more favorable for the employee and is the rate that should be used.
Since July, 2009 there is no longer a separate minor minimum wage in Wisconsin. The opportunity wage of $5.90 for eligible employees remains in effect. After the opportunity wage period of 90 consecutive calendar days on the job, all employees regardless of age must be paid the full minimum wage of $7.25. An opportunity employee is an employee who is not yet 20 years old and who has been in employment status with a particular employer for 90 or fewer consecutive calendar days from the date of initial employment.
For employees age 20 or older and employees age 14 - 19 (after opportunity wage)
$2.33/hour (base/cash wages)
+$4.92/hour (tip credit)
For new hires under age 20 (using opportunity wage)
$2.13*/hour (base/cash wages)
+$3.77/hour (tip credit)
*The federal cash wage for tipped employees is $2.13. Wisconsin’s rate of $2.33 is higher and therefore more favorable for the employee and is the rate that should be used AFTER opportunity wage period. ($2.13 can be used during the opportunity wage period.)
How to avoid a common – and costly DOL violation
In accordance with the FLSA, an employer of a tipped employee is required to pay no less than $2.33 (using Wisconsin’s higher rate instead of federal rate of $2.13) per hour in direct (or base/cash) wages, provided that amount plus the tips received equals at least the minimum wage of $7.25 an hour. If an employee’s tips combined with the employer’s direct (or base/cash) wages do not equal the minimum wage, the employer must make up the difference. (This can be calculated over the workweek, not per shift).
Don’t dip below minimum wage
Taking deductions for walk-outs, breakage or cash register shortages that reduce the employee’s wages below the minimum wage is another pitfall to avoid.
Overtime Violations – You can’t afford to get this wrong!
One of the most common refrains you’ll hear about Department of Labor (DOL) audits and lawsuits is overtime violations. Typical problems include misclassifying workers, letting employees waive their overtime pay, refusing to pay overtime and incorrectly calculating overtime for tipped employees.
Straight from DOL
An employer who requires or permits an employee to work overtime is generally required to pay the employee premium pay for such overtime work [this would apply to unauthorized overtime as well].
The federal overtime provisions are contained in the Fair Labor Standards Act (FLSA). Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay. There is no limit in the Act on the number of hours employees aged 16 and older may work in any workweek. The Act does not require overtime pay for work on Saturdays, Sundays, holidays, or regular days of rest, unless overtime is worked on such days.
The Act applies on a workweek basis. An employee's workweek is a fixed and regularly recurring period of 168 hours — seven consecutive 24-hour periods. It need not coincide with the calendar week, but may begin on any day and at any hour of the day. Different workweeks may be established for different employees or groups of employees. Averaging of hours over two or more weeks is not permitted. Normally, overtime pay earned in a particular workweek must be paid on the regular pay day for the pay period in which the wages were earned.
DOL Shares Typical Problems
Fixed Sum for Varying Amounts of Overtime: A lump sum paid for work performed during overtime hours without regard to the number of overtime hours worked does not qualify as an overtime premium even though the amount of money paid is equal to or greater than the sum owed on a per-hour basis. For example, no part of a flat sum of $180 to employees who work overtime on Sunday will qualify as an overtime premium, even though the employees' straight-time rate is $12.00 an hour and the employees always work less than 10 hours on Sunday. Similarly, where an agreement provides for 6 hours pay at $13.00 an hour regardless of the time actually spent for work on a job performed during overtime hours, the entire $78.00 must be included in determining the employees' regular rate.
Salary for Workweek Exceeding 40 Hours: A fixed salary for a regular workweek longer than 40 hours does not discharge FLSA statutory obligations. For example, an employee may be hired to work a 45 hour workweek for a weekly salary of $405. In this instance the regular rate is obtained by dividing the $405 straight-time salary by 45 hours, resulting in a regular rate of $9.00. The employee is then due additional overtime computed by multiplying the 5 overtime hours by one-half the regular rate of pay ($4.50 x 5 = $22.50).
Overtime Pay May Not Be Waived: The overtime requirement may not be waived by agreement between the employer and employees. An agreement that only 8 hours a day or only 40 hours a week will be counted as working time also fails the test of FLSA compliance. An announcement by the employer that no overtime work
will be permitted, or that overtime work will not be paid for unless authorized in advance, also will not impair the employee's right to compensation for compensable overtime hours that are worked.
Exempt vs. non-exempt
FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees (and certain computer employees). To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week (current threshold - the new DOL overtime rule is addressed below - but as of Dec. 1, 2016 new salary level will be $913 per week). Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.
Note from WRA: Keep in mind that salaried employees who work more than 40 hours a week would still be owed overtime unless exempt as an executive, administrative or professional worker as defined by law. Just saying that your employee is salaried doesn’t mean that he/she actually fits the criteria. Some employers mistakenly believe that labeling an employee salaried means no overtime. Not true! DOL or Wisconsin’s Department of Workforce Development (DWD) could find that your employee is improperly classified. Click on the link to Q & A’s to learn more about exempt vs. non-exempt or contact the WRA Hotline at 800-589-3211 (note - one of the FAQs refers to the current salary threshold of $455 per week - keep in mind that goes up to $913 on Dec. 1st).
New DOL Overtime rules recently released
The new federal overtime rule will go into effect Dec. 1, 2016. The rule:
- Guarantees time-and-half pay to any salaried employee earning under $47,476 a year ($913 a week) and who works more than 40 hours in a week. That’s double the current salary threshold of $23,660 ($455 a week).
- Automatically updates the salary threshold every three years, tying it to the 40th percentile of full-time salaried workers in the lowest-income Census region (currently the South). The first update would be Jan. 1, 2020. Based on current wage trends, the DOL projects a salary threshold of $51,000 by Jan. 1, 2020.
- Makes no changes in the duties tests used to determine whether a salaried employee above the threshold is considered an executive, administrative or professional employee and thus exempt from overtime pay.
- For the first time, allows certain bonuses and incentive payments to count toward up to 10 percent of the new salary level.
Click here for more guidance on new OT rules.