In a victory for restaurant employers, the Tenth Circuit Court of Appeals has ruled that Relish Catering can keep customer tips without violating the Fair Labor Standards Act (FLSA), so long as the employee is paid at an hourly rate above minimum wage. The court also found that the U.S. Department of Labor overreached in its regulatory rulemaking in this area and rejected the department’s interpretation of the law.

The Facts

Bridgette Marlow worked for Relish Catering at an hourly rate of $12 ($18 for overtime). If customers paid a gratuity, Relish kept the money. Ms. Marlow didn’t like that and sued Relish and its manager/part owner in federal court, alleging that Relish had violated the minimum-wage provisions of the FLSA because it kept customer tips she claimed should have gone to her and other catering workers.

The FLSA (Section 203(m)) gives employers of “tipped employees”—such as hotels and restaurants—the option of paying a reduced hourly wage of $2.13 so long as their workers receive enough tips to bring them to the $7.25 minimum wage. If there are not enough tips, the employer must pay the difference; if there are more than enough, the excess tips go to employees.

The court granted Relish’s motion for judgment on the pleadings and dismissed the case, and the Tenth Circuit has now affirmed that dismissal.

What the Appeals Court Said and Why It is Important

The Court of Appeals found that the FLSA’s restrictions on employers’ use of tips apply only when the employer uses tips as a credit against the employee’s minimum wage. If an employer such as Relish pays its employees more than the minimum wage without regard to tips, the FLSA does not restrict the employer’s use of tips. The court also found that a DOL regulation categorically barring employers from retaining tips is invalid because it exceeded the DOL’s authority.

This case serves as an example of the importance of the FLSA’s technical language and how such language can sometimes actually favor the employer. It also serves as an example of the increasing number of cases where the courts have found that an agency of the federal government has exceeded its authority in issuing a regulation, standard or interpretation.