So the first thing you should notice when we get into this is that the numbers of the regulations have changed. We are now in Part 531, or the regs entitled “Wage Payments Under the Fair Labor Standards Act of 1938.” What? Do we really need a whole “Part” to talk about wage payments? Pay the wage, what’s the issue? And generally, you are right, for most employers there is no issue. In fact, the regs say:
(a) Standing alone, sections 6 and 7 of the Act require payments of the prescribed wages, including overtime compensation, in cash or negotiable instrument payable at par. Section 3(m) provides, however, for the inclusion in the ‘wage’ paid to any employee, under the conditions which it prescribes of the ‘reasonable cost,’ or ‘fair value’ as determined by the Secretary, of furnishing such employee with board, lodging, or other facilities. In addition, section 3(m) provides that a tipped employee’s wages may consist in part of tips. It is section 3(m) which permits and governs the payment of wages in other than cash.
29 CFR §531.27.
Generally, we are going to pay employees in cash, but that hasn’t always been the case. In fact, some companies used to pay in something called “scrip.” It was essentially Monopoly money, but don’t worry, the company store will take it. And that isn’t just ripe for abuse is it? In fact, the abuse used to be so bad that people used to write songs about it. Anybody remember the song 16 Tons? A guy named Tennessee Ernie Ford sang it. Don’t remember him? Johnny Cash sang it too. And the regulations recognize that potential for abuse and prohibit it: “Scrip, tokens, credit cards, ‘dope checks,’ coupons, and similar devices are not proper mediums of payment under the Act. They are neither cash nor ‘other facilities’ within the meaning of section 3(m).” 29 CFR § 531.34. The regs also specifically recognize state law that prohibits these kinds of payments.
Various Federal, State, and local legislation requires the payment of wages in cash; prohibits or regulates the issuance of scrip, tokens, credit cards, ‘dope checks’ or coupons; prevents or restricts payment of wages in services or facilities; controls company stores and commissaries; outlaws ‘kickbacks’; restrains assignment and garnishment of wages; and generally governs the calculation of wages and the frequency and manner of paying them. Where such legislation is applicable and does not contravene the requirements of the Act, nothing in the Act, the regulations, or the interpretations announced by the Administrator should be taken to override or nullify the provisions of these laws.
29 CFR §531.26.
As just one example, the Michigan Payment of Wages Act, (remember, I’m in Michigan) says:
(1) An employer or agent of an employer may pay wages to an employee by any of the following methods that protect the earnings of the employee from garnishment as required by 15 USC 1673 to the same extent they would be exempt while held by the employer:
(a) Payment in United States currency.
(b) Payment by a negotiable check or draft payable on presentation at a financial institution or other established place of business without discount in United States currency.
(c) Direct deposit or electronic transfer to the employee’s account at a financial institution.
(d) Issuing a payroll debit card that complies with subsection (6).
MCL § 408.476.
One thing before we go any further. First, the DOL’s Field Operations Handbook recognizes and allows direct deposit. But, there are very strict rules at both the federal and state level regarding direct deposit, so talk to an EMPLOYMENT LAWYER before you do this. And don’t rely on your payroll company, they are not lawyers.
But no matter how you pay the wage, wages are not considered paid unless they have been paid free and clear.
Whether in cash or in facilities, ‘wages’ cannot be considered to have been paid by the employer and received by the employee unless they are paid finally and unconditionally or ‘free and clear.’ The wage requirements of the Act will not be met where the employee ‘kicks-back’ directly or indirectly to the employer or to another person for the employer’s benefit the whole or part of the wage delivered to the employee. This is true whether the ‘kick-back’ is made in cash or in other than cash. For example, if it is a requirement of the employer that the employee must provide tools of the trade which will be used in or are specifically required for the performance of the employer’s particular work, there would be a violation of the Act in any workweek when the cost of such tools purchased by the employee cuts into the minimum or overtime wages required to be paid him under the Act. See also in this connection, §531.32(c).
29 CFR §531.35.
So, an employer can take credit for the “‘reasonable cost,’ or ‘fair value’ as determined by the Secretary, of furnishing the employee with board, lodging, or other facilities.” How do you do that? We are not going to get into it. It is going to have to be enough that you know that you need approval to do this and that there are regulations that help define “reasonable cost” and “fair value” and that is it.
And then there are tips. The other Section 3(m) exception to payments in cash are tips. First, who is a tipped employee?
(b) ‘Tipped employee’ is defined in section 3(t) of the Act as follows: Tipped employee means any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.
29 CFR § 532.50.
Then, what is a tip?
A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from payment of a charge, if any, made for the service. . . .
29 CFR § 531.52.
So the tip credit allows an employer to pay a tipped employee a lower cash wage that is supplemented by tips to equal the applicable minimum wage. DON’T FORGET STATE LAW MINIMUM WAGES WHICH MAY BE HIGHER. In order to take the tip credit, employers have to meet some requirements and there are some prohibitions about what the employer can do with the tips.
The law forbids any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. A tip is the sole property of the tipped employee.
Where an employer does not strictly observe the tip credit provisions of the Act, no tip credit may be claimed and the employees are entitled to receive the full cash minimum wage in addition to retaining tips they may/should have received.
The regs specifically state:
A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer, who has the right to determine who shall be the recipient of the gratuity. Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. Only tips actually received by an employee as money belonging to the employee may be counted in determining whether the person is a ‘tipped employee’ within the meaning of the Act and in applying the provisions of section 3(m) which govern wage credits for tips.
29 CFR 531.52.
And what exactly is tip pooling? Well . . .
[w]here employees practice tip splitting, as where waiters give a portion of their tips to the busboys, both the amounts retained by the waiters and those given the busboys are considered tips of the individuals who retain them, in applying the provisions of section 3(m) and 3(t). Similarly, where an accounting is made to an employer for his information only or in furtherance of a pooling arrangement whereby the employer redistributes the tips to the employees upon some basis to which they have mutually agreed among themselves, the amounts received and retained by each individual as his own are counted as his tips for purposes of the Act. Section 3(m) does not impose a maximum contribution percentage on valid mandatory tip pools, which can only include those employees who customarily and regularly receive tips. However, an employer must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employees’ tips for any other purpose.
As you can see, the reg does not specify how a tip pool is to be divided, as long as each employee is informed of the arrangement and the employer does not “retain any of the employees’ tips . . . .”
Next week we start overtime.