Updating Regulations Issued Under the Fair Labor Standards Act, 18832-18860 [2011-6749]

Agencies

• Wage and Hour Division
• DEPARTMENT OF LABOR
• Office of the Secretary

[Federal Register Volume 76, Number 65 (Tuesday, April 5, 2011)]
[Rules and Regulations]
[Pages 18832-18860]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-6749]



[[Page 18831]]

Vol. 76

Tuesday,

No. 65

April 5, 2011

Part II





Department of Labor





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Office of the Secretary



Wage and Hour Division



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29 CFR Part 4, 516, 531, et al.



Updating Regulations Issued Under the Fair Labor Standards Act; Final 
Rule

Federal Register / Vol. 76 , No. 65 / Tuesday, April 5, 2011 / Rules 
and Regulations

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DEPARTMENT OF LABOR

Office of the Secretary

29 CFR Part 4

Wage and Hour Division

29 CFR Parts 516, 531, 553, 778, 779, 780, 785, 786, and 790

RIN 1215-AB13, 1235-AA00


Updating Regulations Issued Under the Fair Labor Standards Act

AGENCY: Wage and Hour Division, Department of Labor.

ACTION: Final rule.

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SUMMARY: In this final rule, the Department of Labor (Department or 
DOL) revises regulations issued pursuant to the Fair Labor Standards 
Act of 1938 (FLSA) and the Portal-to-Portal Act of 1947 (Portal Act) 
that have become out of date because of subsequent legislation. These 
revisions conform the regulations to FLSA amendments passed in 1974, 
1977, 1996, 1997, 1998, 1999, 2000, and 2007, and Portal Act amendments 
passed in 1996.

DATES: Effective Date: These rules are effective on May 5, 2011.

FOR FURTHER INFORMATION CONTACT: Montaniel Navarro, Wage and Hour 
Division, U.S. Department of Labor, Room S-3502, 200 Constitution 
Avenue, NW., Washington, DC 20210; telephone: (202) 693-0067 (this is 
not a toll-free number). Copies of this final rule may be obtained in 
alternative formats (Large Print, Braille, Audio Tape or Disc), upon 
request, by calling (202) 693-0023 (not a toll-free number). TTY/TDD 
callers may dial toll-free (877) 889-5627 to obtain information or 
request materials in alternative formats.
    Questions of interpretation and/or enforcement of regulations 
issued by this agency may be directed to the nearest Wage and Hour 
Division (WHD) District Office. Locate the nearest office by calling 
our toll-free help line at (866) 4USWAGE ((866) 487-9243) between 8 
a.m. and 5 p.m. in your local time zone, or log onto the WHD's Web site 
for a nationwide listing of Wage and Hour District and Area Offices at: 
https://www.dol.gov/esa/contacts/whd/america2.htm.

SUPPLEMENTARY INFORMATION: The Regulatory Information Number (RIN) 
identified for this rulemaking changed with the publication of the 2010 
Spring Regulatory Agenda due to an organizational restructuring. The 
old RIN was assigned to the Employment Standards Administration, which 
no longer exists. A new RIN has been assigned to the WHD.

I. Overview of Changes

    The FLSA requires covered employers to pay their nonexempt 
employees a Federal minimum wage and overtime premium pay of time and 
one-half the regular rate of pay for hours worked in excess of forty 
(40) in a work week. The FLSA also contains a number of exemptions from 
the minimum wage and overtime pay requirements.
    Over the years, Congress has amended the FLSA to refine or to add 
to these exemptions and to clarify the minimum wage and overtime pay 
requirements. A 1974 amendment to section 13(b)(10) of the FLSA, 29 
U.S.C. 213(b)(10), extended an overtime exemption to include any 
salesman primarily engaged in selling boats and eliminated the overtime 
exemption for partsmen and mechanics servicing trailers or aircraft. 
Congress also in 1974 revised aspects of the FLSA's tip credit 
provisions, 29 U.S.C. 203(m) and (t), which were further revised by 
amendments enacted in 1977 and 1996. As part of the Small Business Job 
Protection Act of 1996, Congress amended section 4(a) of the Portal 
Act, 29 U.S.C. 254(a), to define circumstances under which pay is not 
required for employees who use their employer's vehicle for home-to-
work commuting purposes. The 1996 Act also created a youth opportunity 
wage of $4.25 per hour under section 6(g) of the FLSA, 29 U.S.C. 
206(g). In 1997, Congress amended section 13(b)(12) of the FLSA, 29 
U.S.C. 213(b)(12), to expand the exemption from overtime pay for 
workers on ditches, canals, and reservoirs when 90% (rather than 100%) 
of the water is used for agricultural purposes. In 1998, Congress added 
section 3(e)(5) to the FLSA, 29 U.S.C. 203(e)(5), to provide that the 
term ``employee'' does not include individuals who volunteer to private 
non-profit food banks solely for humanitarian purposes and who receive 
groceries from those food banks. In 1999, Congress added section 3(y) 
to the FLSA, 29 U.S.C. 203(y), to define an employee who is engaged in 
``fire protection activities.'' In 2000, Congress added section 7(e)(8) 
to the FLSA, 29 U.S.C. 207(e)(8), that treats stock options meeting 
certain criteria as an additional type of remuneration that is 
excludable from the computation of the regular rate. As part of the 
U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq 
Accountability Appropriations Act, 2007, Congress increased the FLSA 
minimum wage in three steps: to $5.85 per hour effective July 24, 2007; 
to $6.55 per hour effective July 24, 2008; and to $7.25 per hour 
effective July 24, 2009.
    Additionally, a number of courts have examined the interpretation 
of the FLSA's compensatory time provisions in section 7(o)(5) 
concerning public agency employers' obligation to grant employees' 
requests to use ``comp time'' within a ``reasonable period after making 
the request if the use of the compensatory time does not unduly disrupt 
the operations of the public agency.'' 29 U.S.C. 207(o)(5). Finally, 
the regulations governing the ``fluctuating workweek'' method of 
computing half-time overtime pay for salaried nonexempt employees, who 
work variable or fluctuating hours from week to week need updating to 
delete outmoded examples.
    The Department published a notice of proposed rulemaking (NPRM) in 
the Federal Register on July 28, 2008 (73 FR 43654 (Jul. 28, 2008)), 
inviting comments on revisions to the regulations to implement these 
statutory amendments and to address the issues raised by the courts. 
Comments were due on or before September 11, 2008. In response to a 
number of requests for an extension of the time period for filing 
written comments, the Department on August 22, 2008 (73 FR 49621 (Aug. 
22, 2008)) extended the deadline 15 days to September 26, 2008. The 
Department received approximately 30 substantive comments in response 
to the NPRM from a variety of sources, including labor unions and other 
employee representatives, employees, employer organizations, 
governmental representatives, Members of Congress, and law firms. 
Comments may be viewed at https://www.regulations.gov, by searching for 
docket id: WHD-2008-0003.
    The comments reflected a wide variety of views on the merits of 
particular sections of the proposed regulations. Many included 
substantive analyses of the proposed revisions. The Department 
acknowledges that there are strongly held views on several of the 
issues presented in this rulemaking, and it has carefully considered 
all of the comments, analyses, and arguments made for and against the 
proposed changes in developing this final rule. The Department has 
narrowed the scope of this final rule to address those sections which 
require change to reflect statutory enactment or outdated examples 
contained in the regulations and therefore is not proceeding with some 
of the changes proposed in the NPRM including proposed changes to 
regulations regarding compensatory time, the fluctuating workweek, and

[[Page 18833]]

meal credits. The Department is also not proceeding with the proposed 
rule that service managers, service writers, service advisors, and 
service salesman are exempted from the overtime provision. We have also 
further clarified the tip credit provision to reflect long-standing and 
settled WHD policy concerning the ownership of tips.

II. Summary of Comments

    This section presents a topical summary of the major comments 
received on the proposed revisions, together with a discussion of the 
changes that have been made in the final regulatory text in response to 
the comments received.

1. 2007 Amendment to the FLSA Minimum Wage

    The U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and 
Iraq Accountability Appropriations Act, 2007, Public Law 110-28, 121 
Stat. 112 (May 25, 2007), included an amendment to the FLSA that 
increased the applicable Federal minimum wage under section 6(a) of the 
FLSA in three steps: to $5.85 per hour effective July 24, 2007; to 
$6.55 per hour effective July 24, 2008; and to $7.25 per hour effective 
July 24, 2009. This legislation did not change the definition of 
``wage'' in section 3(m) of the FLSA for purposes of applying the tip 
credit formula in determining the wage paid to a qualifying tipped 
employee. Thus, the minimum required cash (or ``direct'') wage for a 
tipped employee under the FLSA remains $2.13 per hour. The maximum 
allowable tip credit for Federal purposes under the FLSA increased as a 
result of the 2007 legislation, and is determined by subtracting $2.13 
from the applicable minimum wage provided by section 6(a)(1) of the 
FLSA. See 29 U.S.C. 203(m).
    The Department proposed changes in several of the FLSA's 
implementing regulations that cite to the applicable minimum wage to 
reflect these statutory changes, including at 29 CFR 516.28, 531.36, 
531.37, 778.110, 778.111, 778.113, and 778.114, as well as changes to 
the McNamara-O'Hara Service Contract Act regulations to eliminate 
outdated references to the FLSA minimum wage in 29 CFR 4.159 and 4.167. 
The Department did not receive any comments specifically addressing 
these non-substantive conforming updates, although several commenters 
did commend the Department generally for its effort to update the 
regulations. See, e.g., Littler Mendelson, P.C., Chamber of Commerce, 
International Public Management Association for Human Resources (IMPA-
HR), the International Municipal Lawyers Association (IMLA), and the 
National League of Cities (NLC). Therefore, the final rule adopts the 
technical updates in these sections as proposed.

2. Small Business Job Protection Act of 1996

    On August 20, 1996, Congress enacted the Small Business Job 
Protection Act of 1996 (SBJPA), Public Law 104-188, 100 Stat. 1755. 
SBJPA amended the Portal Act to define circumstances under which pay is 
not required for employees who use their employer's vehicle for home-
to-work commuting purposes. It also amended the FLSA by creating a 
youth opportunity wage and modifying the allowable tip credit.
A. Employee Commuting Flexibility Act of 1996
    Sections 2101 through 2103 of Title II of SBJPA, entitled the 
``Employee Commuting Flexibility Act of 1996,'' amended section 4(a) of 
the Portal Act, 29 U.S.C. 254(a). The amendment, effective upon 
enactment, provides that

    The use of an employer's vehicle for travel by an employee and 
activities performed by an employee which are incidental to the use 
of such vehicle for commuting shall not be considered part of the 
employee's principal activities if the use of such vehicle for 
travel is within the normal commuting area for the employer's 
business or establishment and the use of the employer's vehicle is 
subject to an agreement on the part of the employer and the employee 
or representative of such employee.

Employee Commuting Flexibility Act of 1996, Section 2102, 29 U.S.C. 
254(a).

    The House Committee Report states that the purpose of the amendment 
is to clarify how the Portal Act applies to ``employee use of employer-
provided vehicles for commuting at the beginning and end of the 
workday.'' H.R. Rep. No. 104-585, at 6 (1996). It states that such 
travel time is to be considered noncompensable if the use of the 
vehicle is ``conducted under an agreement between the employer and the 
employee or the employee's representative.'' Id. at 4. The agreement 
may be a formal written agreement, a collective bargaining agreement, 
or an understanding based on established industry or company practices. 
Id.; see Rutti v. LoJack Corp., Inc., 596 F.3d 1046, 1052 (9th Cir. 
2010). In addition, ``the work sites must be located within the normal 
commuting area of the employer's establishment.'' H.R. Rep. No. 104-
585, at 4. Activities that are merely incidental to the use of the 
vehicle for commuting at the start or end of the day are similarly 
noncompensable, such as communication between the employee and employer 
to obtain assignments or instructions, or to report work progress or 
completion. Id. at 5.
    This statutory amendment to the Portal Act affects certain 
regulations in 29 CFR parts 785 and 790 issued pursuant to the FLSA and 
the Portal Act. Current section 785.9(a) explains the statutory 
provisions that exclude from work time certain ``preliminary'' and 
``postliminary'' activities performed prior to or subsequent to the 
workday. The NPRM proposed to add to that section a new provision that 
activities incidental to the use of an employer-provided vehicle for 
commuting are not considered principal activities, and are not 
compensable, when they meet the requirements of the 1996 amendment. 
Current Sec.  785.34 discusses the effect of section 4 of the Portal 
Act on determining whether time spent in travel is working time. The 
NPRM proposed to add a reference to the statutory conditions under 
which commuting in an employer-provided vehicle will not be considered 
part of the employee's principal activities and therefore not 
compensable. The NPRM also proposed to revise Sec. Sec.  785.50 and 
790.3 to incorporate the 1996 amendment into the quotation of section 4 
of the Portal Act.
    A number of commenters addressed this proposal. Several commenters 
noted that the proposal simply quotes the statutory text in the 
regulation, and they stated that the proposal therefore does not 
provide adequate guidance regarding the limited impact of this 
amendment. See National Employment Lawyers Association (``NELA''), 
American Federation of Labor and Congress of Industrial Organizations 
(``AFL-CIO''), National Employment Law Project (``NELP''), and Comments 
from Members of United States Congress. A variety of commenters 
representing employees suggested that the Department should emphasize 
the narrow nature of this amendment by stating that, under the 
continuous workday principle, it does not affect the compensability of 
hours worked within the workday (the time between when an employee 
commences a principal activity and the time the employee ceases a 
principal activity). See, e.g., NELA, NELP, North Carolina Justice 
Center, and Service Employees International Union (``SEIU''). They also 
suggested that the Department should include clarifying language, such 
as the statement that ``otherwise non-compensable [traveling] is not 
compensable merely because the

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employee uses his employer's vehicle * * * Likewise, otherwise 
compensable travel time does not become non-compensable simply through 
the use of an employer-owned vehicle.'' See, e.g., NELP (quoting Burton 
v. Hillsborough County, 181 Fed. Appx. 829, 835 (11th Cir. 2006) 
(unpublished)), NELA, North Carolina Justice Center, and Greater Boston 
Legal Services. They also emphasized that the amendment did not change 
the analysis of what constitutes a ``principal'' work activity that is 
compensable. See NELP, SEIU, and NELA. These commenters cited court 
decisions addressing commuting time issues, some of which they thought 
were correctly decided and some of which they thought were wrong. Many 
of the commenters suggested that the Department should withdraw its 
proposal and reissue a new NPRM that would provide concrete examples of 
what constitutes an activity that is ``incidental'' to commuting and 
what activities are compensable. See, e.g., AFL-CIO, SEIU, NELP, and 
NELA.
    Commenters representing employers approved of the addition of 
language to the regulations to conform them to the Employee Commuting 
Flexibility Act. See Chamber of Commerce, Littler Mendelson, P.C., 
Society for Human Resource Management (``SHRM''), and National 
Automobile Dealers Association. Both the Chamber of Commerce and 
Littler Mendelson stated that it would be helpful for the Department to 
provide further guidance regarding issues such as what types of 
activities are incidental to the use of a vehicle for commuting, how 
the normal commuting area of the employer's business is determined, and 
what constitutes an agreement regarding the use of an employer-provided 
vehicle. Both commenters cited court decisions addressing these issues 
(holding, for example, that transporting tools and equipment during a 
commute is incidental; that normal commuting area is determined on a 
case-by-case basis; and that a formal written agreement is not 
necessary).
    SHRM also suggested that the final rule should state that employees 
should not incur any out-of-pocket expenses related to commuting, such 
as for gas, tolls, parking or maintaining the employer's vehicle. The 
Department notes that the House Committee Report similarly stated that 
``[i]t is the intent of the Committee that the employee incur no out-
of-pocket or direct cost for driving, parking or otherwise maintaining 
the employer's vehicle in connection with commuting in employer-
provided vehicles.'' H.R. Rep. No. 104-585, at 5. While the Department 
has not added language to this effect to the final rule, it notes that 
its longstanding interpretation of the amendment comports with both the 
Committee report and SHRM's comment. See Wage and Hour Opinion Letter 
2001-11 (April 18, 2001).
    As the comments from both employee and employer representatives 
show, the question of the compensability of employees' commuting time 
is an important issue. Therefore, the Department does not believe that 
it would be helpful or appropriate to leave the regulations 
inconsistent with the statute while it simply starts the NPRM process 
anew, as a number of employee representatives suggested. Rather, in 
order to avoid confusion and needless litigation, the Department 
continues to believe that it is important to update the regulations to 
reflect the current state of the law by incorporating the statutory 
provisions of the Employee Commuting Flexibility Act into the 
regulations. Furthermore, the cases that both employee and employer 
representatives cited show that issues related to the compensability of 
driving time and other activities are very fact-specific and must be 
resolved on a case-by-case basis, in light of all the factors present 
in the particular situation. As a result, the Department does not 
believe that it would be useful to include examples in the regulatory 
text. The Department will consider providing additional guidance at a 
later date on these and other issues, such as commuting distance, 
costs, incidental activities, and the nature of the agreement through 
non-regulatory means. Similarly, because the regulations in 29 CFR part 
790 already fully address issues related to the continuous workday 
principle and principal activities, the Department does not believe it 
is necessary to add to those regulations. The Department does observe, 
however, that nothing in the Employee Commuting Flexibility Act or this 
regulation alters or supersedes continuous workday principles. Only 
commuting time that occurs before the first principle activity or after 
the last principle activity in the workday is excluded from compensable 
time. Therefore, the final rule adopts the changes to Sec. Sec.  
785.9(a), 785.34, 785.50 and 790.3 as proposed.
B. Youth Opportunity Wage
    Section 2105 of the SBJPA amended the FLSA by adding section 6(g), 
which provides that ``[a]ny employer may pay any employee of such 
employer, during the first 90 consecutive calendar days after such 
employee is initially employed by such employer, a wage which is not 
less than $4.25 an hour.'' 29 U.S.C. 206(g)(1). This subminimum wage 
``shall only apply to an employee who has not attained the age of 20 
years.'' 29 U.S.C. 206(g)(4). The amendment also protects current 
workers by prohibiting employers from taking action to displace 
employees, including reducing hours, wages, or employment benefits, for 
the purpose of hiring workers at the opportunity wage. 29 U.S.C. 
206(g)(2). It also states that any employer violating this subsection 
shall be considered to have violated the anti-discrimination provisions 
of section 15(a)(3) of the FLSA. 29 U.S.C. 206(g)(3).
    The NPRM proposed to add a new subpart G to 29 CFR part 786 to set 
forth the provisions of the youth opportunity wage. The Department 
received one comment regarding this update. The National Automobile 
Dealers Association stated that it supported the proposal. The final 
rule adopts the new subpart G as proposed but changes the title to 
``Miscellaneous Exemptions and Exclusions from Coverage.''
C. Tip Credit Amendments of 1996
    Section 2105 of Title II of the SBJPA also amended section 3(m) of 
the FLSA, 29 U.S.C. 203(m), by providing that

    In determining the wage an employer is required to pay a tipped 
employee, the amount paid such employee by the employee's employer 
shall be an amount equal to--(1) the cash wage paid such employee 
which for purposes of such determination shall be not less than the 
cash wage required to be paid such an employee on the date of the 
enactment of this paragraph; and (2) an additional amount on account 
of the tips received by such employee which amount is equal to the 
difference between the wage specified in paragraph (1) and the wage 
in effect under section 6(a)(1). The additional amount on account of 
tips may not exceed the value of the tips actually received by an 
employee. The preceding 2 sentences shall not apply with respect to 
any tipped employee unless such employee has been informed by the 
employer of the provisions of this subsection, and all tips received 
by such employee have been retained by the employee, except that 
this subsection shall not be construed to prohibit the pooling of 
tips among employees who customarily and regularly receive tips.

Public Law 104-188, Sec.  2105(b) (1996). Prior to the 1996 amendments, 
section 3(m) of the FLSA required an employer to pay its tipped 
employees a cash wage equal to 50 percent of the minimum wage (then 
$4.25 an hour). See Public Law 101-157, Sec.  5 (1989). As amended, 
section 3(m)(1) provides that an employer's minimum cash wage 
obligation to its tipped employees is the minimum cash wage required on 
August 20, 1996, the date of the SBJPA enactment. Thus, section 3(m)(1)

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established an employer's minimum cash wage obligations to tipped 
employees at the pre-SBJPA amount: 50 percent of the then-minimum wage 
of $4.25 per hour, or $2.13 per hour. See 29 U.S.C. 203(m)(1).
    Subsection (2) of the 1996 amendments bases an employer's maximum 
allowable tip credit on a specific formula in relation to the 
applicable minimum wage, stating that an employer may take a tip credit 
equal to the difference between the required minimum cash wage 
specified in paragraph 3(m)(1) ($2.13) and the minimum wage ($7.25 
effective July 24, 2009). Thus, the maximum Federal tip credit that an 
employer currently is permitted to claim under the FLSA is $7.25 minus 
$2.13, or $5.12 per hour.
    As explained in the NPRM, this 1996 amendment affects certain 
regulations in 29 CFR part 531. Current Sec.  531.50(a) quotes section 
3(m) of the FLSA as it appeared in 1967, when the regulation was 
published. To incorporate the 1996 amendment, the NPRM proposed to 
replace the old statutory language with the current statutory 
provision. Current Sec. Sec.  531.56(d), 531.59, and 531.60 refer to 
the pre-1996 statutory language setting the tip credit at 50 percent of 
the minimum wage. The proposed rule deleted or changed these references 
to reflect the current statutory requirements (maximum tip credit 
equaling the difference between the minimum wage required by section 
6(a)(1) of the FLSA and the $2.13 required cash wage). Additional 
changes related to tipped employees are discussed in this preamble at 
sections 7B and 8, infra.
    The Department received many comments relating to tipped employees; 
however, those comments generally addressed the issues discussed infra 
in sections 7B and 8 of this preamble, not the technical changes to the 
formula for computing the tip credit addressed here. The Chamber of 
Commerce and Littler Mendelson, P.C., stated that they supported these 
changes to the regulations to conform them to the statutory amendments, 
thereby clarifying that employers are only required to pay $2.13 per 
hour in cash wages regardless of what the minimum wage is. The Chamber 
of Commerce also noted that there was a typographical error in Sec.  
531.59(b); the cross-reference to Sec.  531.31 should have referred to 
Sec.  531.54. Because the Department received no other substantive 
comments relating to these issues, and having the regulations 
consistent with the statute will help to eliminate confusion, the final 
rule adopts the changes to Sec. Sec.  531.50(a), 531.56(d), 531.59 and 
531.60 related to the statutory tip credit calculation as proposed, 
except for the correction of a typographical error in 531.50(a) and the 
cross-reference in Sec.  531.59.

3. Agricultural Workers on Water Storage/Irrigation Projects

    Section 105 of The Departments of Labor, Health and Human Services, 
Education, and Related Agencies Appropriations Act, Public Law 105-78, 
111 Stat. 1467 (Nov. 13, 1997), amended section 13(b)(12) of the FLSA, 
29 U.S.C. 213(b)(12), which provides an overtime exemption for 
agricultural employees and employees employed in connection with the 
operation or maintenance of certain waterways used for supply and 
storing of water for agricultural purposes. The 1997 amendment deleted 
``water for agricultural purposes'' and substituted ``water, at least 
90 percent of which was ultimately delivered for agricultural purposes 
during the preceding calendar year.'' Thus, this amendment makes the 
exemption from overtime pay requirements applicable to workers on water 
storage and irrigation projects when at least 90 percent of the water 
is used for agricultural purposes, rather than when the water is used 
exclusively for agricultural purposes.
    The NPRM proposed to update the regulations in 29 CFR part 780, 
Subpart E to incorporate the statutory amendment. Thus, proposed Sec.  
780.400 correctly quoted the statute, including the amendment. Proposed 
Sec.  780.401 provided an updated general explanatory statement of the 
history of the exemption. Proposed Sec.  780.406 deleted the last 
sentence of the current rule, which refers to the 1966 amendments, as 
no longer necessary. Proposed Sec.  780.408 was updated to describe the 
``at least 90 percent'' requirement for using the water for 
agricultural purposes.
    The Department received one comment addressing this proposal. The 
AFL-CIO noted that current Sec.  780.408 states that if a small amount 
of water is used by the farmer for domestic purposes, this does not 
prevent the application of the exemption. The AFL-CIO stated that the 
``[t]olerance for a `small amount' of water that is used for domestic 
purposes may have made sense under the old statutory provision, which 
required exclusive use of the water for agricultural purposes. However, 
now that Congress has amended the exemption to permit 10 percent of the 
water for non-agricultural purposes, there is no longer any 
justification for this exception. Any water that is used for `domestic 
purposes' (that is, non-agricultural purposes) should count toward the 
new statutory 10 percent tolerance.''
    The Department agrees that, in light of the 10 percent tolerance 
for water used for non-agricultural purposes, there is no longer any 
need for the specific tolerance of domestic use by a farmer. Therefore, 
the final rule further modifies proposed Sec.  780.408 to delete the 
three sentences relating to domestic use on farms. The final rule 
adopts Sec. Sec.  780.400, 780.401 and 780.406 as proposed.

4. Certain Volunteers at Private Non-Profit Food Banks

    Section 1 of the Amy Somers Volunteers at Food Banks Act, Public 
Law 105-221, 112 Stat. 1248 (Aug. 7, 1998), amended section 3(e) of the 
FLSA, 29 U.S.C. 203(e), by adding section (5) to provide that the term 
``employee'' does not include individuals volunteering solely for 
humanitarian purposes at private non-profit food banks and who receive 
groceries from those food banks. 29 U.S.C. 203(e)(5). The proposed rule 
renamed 29 CFR part 786 ``Miscellaneous Exemptions and Exclusions From 
Coverage'' and added subpart H to set forth this exclusion from FLSA 
coverage. The Department did not receive any comments specifically 
addressing this section of the NPRM. The final rule adopts subpart H as 
proposed.

5. Employees Engaged in Fire Protection Activities

    In 1999, Congress amended section 3 of the FLSA, 29 U.S.C. 203, by 
adding section (y) to define ``an employee in fire protection 
activities.'' This amendment states that an ``employee in fire 
protection activities'' means

an employee, including a firefighter, paramedic, emergency medical 
technician, rescue worker, ambulance personnel, or hazardous 
material worker, who--(1) is trained in fire suppression, has the 
legal authority and responsibility to engage in fire suppression, 
and is employed by a fire department of a municipality, county, fire 
district, or State; and (2) is engaged in the prevention, control, 
and extinguishment of fires or response to emergency situations 
where life, property, or the environment is at risk.

Public Law 106-151, 113 Stat. 1731 (1999); 29 U.S.C. 203(y). Such 
employees may be covered by the partial overtime exemption allowed by 
Sec.  7(k) or the overtime exemption for public agencies with fewer 
than five employees in fire protection activities pursuant to Sec.  
13(b)(20). 29 U.S.C. 207(k); 213(b)(20).
    The NPRM proposed to make several revisions to 29 CFR part 553, 
subpart C,

[[Page 18836]]

to incorporate this amendment. In the first sentence of proposed Sec.  
553.210(a), the statutory amendment language was substituted for the 
current four-part regulatory definition of the term ``any employee * * 
* in fire protection activities.'' The proposed rule also deleted the 
last sentence of current Sec.  553.210(a) stating that, ``[t]he term 
would also include rescue and ambulance service personnel if such 
personnel form an integral part of the public agency's fire protection 
services,'' and it deleted the cross-reference to Sec.  553.215. The 
``integral part'' test for the public agency employees is no longer 
needed because the new statutory standards define when such rescue and 
ambulance personnel qualify as employees in fire protection activities. 
Section 553.215(a) of the current rule discusses ambulance and rescue 
service employees who are employees of a public agency other than a 
fire protection or law enforcement agency. The section 3(y) amendment, 
however, specifically states that one of the requirements to be an 
``employee in fire protection activities'' is that the employee is 
employed by a fire department of a municipality, county, fire district, 
or State. The proposed rule, therefore, deleted Sec.  553.215(a) 
because it permits non-fire department public agencies to treat their 
ambulance and rescue service employees as employees engaged in fire 
protection activities, contrary to the new statutory provision. The 
proposed rule also deleted Sec. Sec.  553.215(b) (stating that rescue 
service employees of hospitals and nursing homes cannot qualify for the 
exemption) and 553.215(c) (stating that ambulance and rescue service 
employees of private organizations do not come within the exemption) as 
unnecessary in light of the clear statutory requirement for employment 
by a fire department. Finally, in Sec. Sec.  553.221, 553.222, 553.223, 
and 553.226, the Department proposed to substitute ``employee in fire 
protection activities'' or ``employees in fire protection activities,'' 
respectively, wherever the terms ``firefighter'' or ``firefighters'' 
appeared.
    The Department reexamined other regulations in part 553, Subpart C, 
in light of the section 3(y) amendment to assess whether any other 
changes were appropriate. Current Sec.  553.210 characterizes as exempt 
work-related incidental activities, such as equipment maintenance, 
lecturing and fire prevention inspections. Current Sec.  553.210 also 
recognizes that employees can be included within the exemption whether 
their status is ``trainee,'' ``probationary,'' or ``permanent,'' and 
regardless of their particular specialty or job title or assignment to 
certain support activities. The Department stated its belief in the 
NPRM that these provisions are consistent with statutory intent and 
remain the appropriate interpretation of the new statutory definition 
and, thus, the Department proposed no further changes to Sec.  553.210.
    Current Sec.  553.212 recognizes that exempt employees may engage 
in some nonexempt work, such as firefighters who work for public forest 
conservation agencies and who plant trees and perform other 
conservation activities unrelated to their firefighting duties during 
slack times, and set a 20% tolerance for such work. As explained in the 
NPRM, the Department reexamined this regulation, particularly in light 
of McGavock v. City of Water Valley, 452 F.3d 423, 427-28 (5th Cir. 
2006), in which the appellate court concluded that the 20% tolerance 
for nonexempt work in Sec.  553.212 was rendered ``obsolete and without 
effect'' by the statutory amendment. 73 FR 43658 (Jul. 28, 2008); see 
also Huff v. DeKalb County, Ga., 516 F.3d 1273, 1278 (11th Cir. 2008) 
(agreeing that new section 3(y) is a streamlined definition that made 
existing provisions in Sec. Sec.  553.210 and 553.212 obsolete). The 
proposed rule therefore deleted Sec.  553.212 as unnecessary in light 
of these court decisions and the new statutory definition of 
``employee[s] in fire protection activities'' in section 3(y) of the 
Act.
    The Department received several comments addressing these issues. 
The National Public Employment Labor Relations Association (``NPELRA'') 
stated that the removal of the 20 percent test was ``an important 
clarification'' because it was obsolete and yet some people still 
believe that it applies. This commenter suggested that the rules should 
go further in describing the terms ``legal authority and responsibility 
to engage in fire suppression'' (as meaning that the employee who has 
been trained may engage in such tasks) and ``is engaged in the 
prevention, control or extinguishment of fires'' (because a fire 
department at an airport may extinguish a fire only once per year or 
less). The IMPA-HR, IMLA, and NLC stated that it was important to 
distinguish between the section 3(y)(1) tests relating to ``the status 
of employees who are trained in fire suppression--that they have the 
legal authority and responsibility to engage in fire suppression and be 
employed by a public fire department''--and the disjunctive test in 
section 3(y)(2) relating to the duties of an employee, which require 
``that the employee either be engaged in firefighting or respond to 
emergencies.'' They agreed with the court's statement in McGavock that 
``emergency personnel trained as firefighters could be exempt even if 
they `spend one hundred percent of their time responding to medical 
emergencies.' '' They suggested that the Department add a sentence in 
Sec.  553.210 providing that emergency medical personnel who are 
employed by a fire department and trained in fire suppression will be 
exempt as long as they either are engaged in firefighting or respond to 
emergency situations.
    On the other hand, William Pincus, an attorney representing 
firefighters, stated that the 20% test was not obsolete because, even 
after the section 3(y) amendment, it is still necessary to distinguish 
between exempt and nonexempt activities. The 20 percent test defines 
when employees who perform work that is nonexempt fall outside the 
exemption. This commenter cited a pre-amendment court decision holding 
that without the rule a public agency would be free to assign a 
firefighter to do any kind of work (road repair, sanitation, parks and 
recreation) without fear of losing the exemption, and stated that 
nothing in the amendment changes this analysis. The International 
Association of Fire Fighters (``IAFF'') commented that the second 
sentence of proposed Sec.  553.210(a) would create confusion because, 
by using the wording ``the term includes'', the proposal implies that 
employees engaged in incidental nonfirefighting functions such as 
equipment maintenance, attending community fire drills and inspecting 
homes for fire hazards are exempt even if they do not satisfy the 
section 3(y) statutory criteria. The IAFF also stated that the third 
sentence of this section is overbroad because is suggests that the term 
includes all ``trainees.'' The IAFF stated that ``trainees who have not 
completed requisite training and have no certification in fire 
suppression are neither `trained,' nor have the `legal authority * * * 
to engage,' in fire suppression.'' The commenter thus distinguished 
between a ten-year firefighter sent to a training course in hazardous 
materials who remains exempt and an untrained individual in an 
introductory fire suppression course before certification. This 
commenter further suggested that the third sentence, relating to 
employees assigned to support activities, is incorrect because 
``[w]here employees have been assigned to other jobs in which they do 
not have the authority or responsibility

[[Page 18837]]

to engage in fire suppression and/or they do not engage in fire 
protection activities or response to emergency situations, the 
employees do not fit the statutory definition.'' Finally, the IAFF 
stated that existing Sec.  553.210(b) is obsolete, and the Department 
should remove it or explain why it is retained.
    After careful review of the comments received on this issue and 
reexamining the legislative history of the section 3(y) amendment, it 
is the Department's view that the statutory definition of an ``employee 
in fire protection activities'' requires no further regulatory guidance 
at this time; however, the Department may provide additional guidance 
in the future, as appropriate. As a result, this final rule implements 
the proposed change to Sec.  553.210(a) substituting the statutory 
amendment language for the current four-part regulatory definition of 
the term ``any employee * * * in fire protection activities.'' In 
addition, the Department is deleting the remainder of paragraph (a) as 
unnecessary due to the statutory definition. This change also removes 
language from the rule that commenters identified as confusing or 
inconsistent with FLSA section 3(y). Likewise, current paragraph (b) is 
deleted from this final rule because it is no longer necessary. Current 
paragraph (c) of Sec.  553.210 will be redesignated as paragraph (b) in 
this final rule.
    With regard to the 20 percent test, the Department continues to 
believe that Congress defined, without further limitation, the 
particular criteria for when an employee qualifies as ``an employee in 
fire protection activities'' in section 3(y). Thus, an employee who 
performs the described duties under the circumstances and the 
conditions set forth in section 3(y) is ``an employee in fire 
protection activities'' without regard to the 20 percent tolerance for 
nonexempt work contained in Sec.  553.212 of the current rule. The 
specific definition adopted by Congress renders the 20 percent 
tolerance for nonexempt work applied under the former regulatory 
definition obsolete. However, Sec.  553.212 also applies to employees 
engaged in law enforcement activities, and the definition of ``an 
employee in fire protection activities'' in section 3(y) does not 
impact those employees. Therefore, the final rule does not delete Sec.  
553.212(a) in its entirety; instead, it deletes from Sec.  553.212(a) 
only the reference to employees engaged in ``fire protection''. The 20 
percent tolerance for nonexempt work for employees engaged in law 
enforcement activities in section 553.212(a) will remain in effect. 
Likewise, since section 3(y) did not impact the applicability of 
section 7(p)(2)'s rule regarding the occasional or sporadic employment 
of public agency employees, including fire protection and law 
enforcement personnel, the final rule also retains Sec.  553.212(b), 
which discusses this statutory provision. Section 553.212(b) does 
contain a reference to the 20 percent tolerance for nonexempt work, and 
the final rule makes a slight modification to that section to make 
clear that the 20 percent tolerance is only applicable to law 
enforcement personnel.
    With regard to the IAFF comments, the current regulation at Sec.  
553.214 directly addresses the status of trainees, and it clarifies 
that a trainee qualifies for exemption ``only when the employee meets 
all the applicable tests described in Sec.  553.210.'' The Department 
is not aware of instances of the exemption being claimed for trainees 
who have not gained certification and therefore do not have the legal 
authority or responsibility to engage in fire suppression, or of 
confusion surrounding this issue since passage of the section 3(y) 
amendment. Moreover, the Department believes that the statutory terms, 
such as legal authority and responsibility, should continue to be 
interpreted and applied on a case-by-case basis, based upon the 
specific facts in each situation, as reflected in Wage and Hour Opinion 
Letter FLSA 2006-20 (June 1, 2006). Therefore, no additional changes 
are required to implement this statutory provision.

6. Stock Options Excluded From the Computation of the Regular Rate

    The Worker Economic Opportunity Act, Public Law 106-202, 114 Stat. 
308 (May 18, 2000), amended Sec. Sec.  7(e) and 7(h) of the FLSA. 29 
U.S.C. 207(e), (h). In Sec.  7(e), a new subsection (8) adds to the 
types of remuneration that are excluded from the computation of the 
regular rate when determining overtime pay ``[a]ny value or income 
derived from employer-provided grants or rights provided pursuant to a 
stock option, stock appreciation right, or bona fide employee stock 
purchase program'' meeting particular criteria. In Sec.  7(h), the 
amendment clarifies that the amounts excluded under Sec.  7(e) may not 
be counted toward the employer's minimum wage requirement under section 
6, and that extra compensation excluded pursuant to the new subsection 
(8) may not be counted toward overtime pay under Sec.  7.
    The proposed rule incorporated the amendments made by the Worker 
Economic Opportunity Act by adding to the regulatory provisions which 
simply quote the statute in Sec.  778.200(a) and (b). Section 778.208 
was also revised simply to update from ``seven'' to ``eight'' the 
number of types of remuneration excluded in computing the regular rate.
    Only two commenters addressed this section of the proposed rule. 
SHRM stated that ``[t]his addition to the existing regulations is 
appropriate, and we encourage DOL to include it as proposed in its 
final rule.'' The AFL-CIO stated that the Department should do more 
than just restate the statutory language, specifically noting the need 
to clarify how an employer must communicate to employees the ``terms 
and conditions'' of stock benefit programs and under what ``other 
circumstances'' an employee may exercise a stock option or stock 
appreciation right in less than six months. The AFL-CIO did not offer 
any regulatory language or suggested solutions that it thought would be 
helpful, but only stated that the Department should withdraw the 
proposal and reissue a new NPRM providing further guidance.
    The Department does not believe that it would be helpful or 
appropriate to leave the regulations inconsistent with the statute 
while it starts the NPRM process anew. Rather, in order to avoid 
confusion, the Department continues to believe that it is important to 
update the regulations to reflect the current state of the law by 
incorporating the Worker Economic Opportunity Act into the regulations. 
Therefore, the final rule adopts the changes to Sec.  778.200 with 
minor editorial edits and Sec.  778.208 as proposed. The Department 
will consider offering further guidance on the issues raised in the 
comments and other issues through non-regulatory means.

7. Fair Labor Standards Act Amendments of 1974

A. Service Advisors Working for Automobile Dealerships and Boat 
Salespersons
    On April 7, 1974, Congress enacted an amendment to section 
13(b)(10) of the FLSA, 29 U.S.C. 213(b)(10). Public Law 93-259, 88 
Stat. 55 (1974). This amendment added an overtime exemption for 
salespersons primarily engaged in selling boats (in addition to the 
pre-existing exemption for sellers of trailers or aircraft). This 
amendment also eliminated the overtime exemption for partsmen and 
mechanics servicing trailers or aircraft. The proposed rule revised 29 
CFR part 779, Subpart D--Exemptions for Certain Retail or Service 
Establishments--to conform the regulations to this 1974 amendment. 
Section 779.371(a) was revised to reflect the amendment's addition of 
boat salespersons to the exemption. Proposed Sec.  779.372(a) clarified 
that ``any

[[Page 18838]]

salesman, partsman, or mechanic'' primarily engaged in selling or 
servicing automobiles, trucks, or farm implements are covered by the 
exemption; and that salespersons primarily engaged in selling trailers, 
boats, or aircraft are also exempt, but not partsmen or mechanics for 
such vehicles. Portions of Sec.  779.372(b) and (c) were also changed 
accordingly.
    Section 13(b)(10)(A) of the FLSA provides that ``any salesman, 
partsman, or mechanic primarily engaged in selling or servicing 
automobiles, trucks, or farm implements, if he is employed by a 
nonmanufacturing establishment primarily engaged in the business of 
selling such vehicles or implements to ultimate purchasers'' shall be 
exempt from the overtime requirements of the Act. 29 U.S.C. 
213(b)(10)(A). The current regulation at 29 CFR 779.372(c)(4) states 
that an employee described as a service manager, service writer, 
service advisor, or service salesman who is not primarily engaged in 
the work of a salesman, partsman, or mechanic is not exempt under 
section 13(b)(10)(A).
    As discussed in the preamble to the proposed rule, three appellate 
courts have held that service advisors are exempt under section 
13(b)(10)(A) because they are ``salesmen'' who are primarily engaged in 
servicing automobiles. 73 FR 43658 (Jul. 28, 2008). Based upon the two 
earliest court decisions, the Wage and Hour Division in 1978 recognized 
in an Administrator-issued opinion letter that in certain circumstances 
service advisors or writers ``can be properly regarded as engaged in 
selling activities.'' See Wage and Hour Opinion Letter WH-467, 1978 WL 
51403 (July 28, 1978). The opinion letter noted, however, that this 
``would not be true in the case of warranty work, since the selling of 
the warranty is done by the vehicle salesman when the vehicle is sold, 
not by the service writer.'' Therefore, the NPRM proposed to change 
Sec.  779.372(c), titled ``Salesman, partsman, or mechanic,'' to follow 
the courts' holdings that employees performing the duties typical of 
service advisors are within the section 13(b)(10)(A) exemption. Section 
779.372(c)(1) was revised to include such an employee as a salesman 
primarily engaged in servicing automobiles. Section 779.372(c)(4) was 
rewritten to clarify that such employees qualify for the exemption.
    A number of commenters addressed this issue. The National 
Automobile Dealers Association stated that the retail automobile and 
truck dealership industry has relied upon the Administrator's 1978 
opinion letter and that it supported the proposed clarification that 
such employees are exempt. Littler Mendelson, P.C., similarly stated 
that it supported the change, because it ``will eliminate confusion 
resulting from the inconsistency between the [Field Operations 
Handbook] and the current regulatory guidance, and is not a change in 
the law.''
    Other commenters disagreed with the proposed rule. The AFL-CIO 
stated that the proposal ignored congressional intent ``to carve a 
narrow exemption for salesmen who work at automobile dealerships.'' The 
AFL-CIO, NELA, and NELP traced the legislative history, focusing on the 
addition of the requirement that the salesman must be ``primarily 
engaged in selling or servicing such vehicles.'' These commenters 
disagreed with the court decisions interpreting the exemption, stating 
that service advisors merely coordinate between customers and the 
mechanics who actually perform the services, and that the exemption 
should not be extended to employees outside its plain language simply 
because they are ``functionally similar'' to an exempt employee. The 
AFL-CIO concluded that ``neither integration with exempt employees nor 
the performance of functions related to those of exempt employees 
qualifies an employee as one who is primarily engaged in either selling 
or servicing vehicles.'' (Emphasis in original). NELA concluded that 
the exemption ``requires an employee to either primarily service the 
vehicle or `sell' the vehicle--not sell the service of the vehicle, as 
Walton concluded.'' Comments submitted by Members of the United States 
Congress similarly opposed the Department's proposal, stating that the 
1966 exemption only exempts salesmen who sell automobiles and mechanics 
who service automobiles, and not salesmen who sell services. They 
stated that the Department's proposal ``would abandon its longstanding 
and correct interpretation of Section 13(b)(10),'' and would ignore the 
Supreme Court's command to construe FLSA exemptions narrowly. Id.
    The AFL-CIO stated that, if the Department does treat service 
writers as salesmen primarily engaged in servicing vehicles, then it 
urged the Department to exclude any time spent in ``selling'' warranty 
work from the determination of whether the writer has spent the 
majority of his time in selling, since that right to free parts and 
service has already been sold by the salesman of the vehicle. NELA 
stated that the proposed regulatory text was confusing because it 
appears to exempt service writers only if they are selling the 
servicing of vehicles that the dealership sells, which would be 
difficult for both the employee and the employer to know. Both NELP and 
the North Carolina Justice Foundation commented that the proposal 
exempts service writers based upon their job title alone, rather than 
based upon an analysis of their actual job duties, which is contrary to 
the requirement to look at the circumstances of the whole activity.
    Upon further consideration of the issue, the Department has decided 
not to adopt the proposed change to Sec.  779.372(c)(4) to specifically 
include service managers, service writers, service advisors, or service 
salesmen as qualifying for exemption. As commenters point out, the 
statute does not include such positions and the Department recognizes 
that there are circumstances under which the requirements for the 
exemption would not be met. The Department notes that current Sec.  
779.372(c)(1) is based on its reading of 13(b)(10)(A) as limiting the 
exemption to salesmen who sell vehicles and partsmen and mechanics who 
service vehicles. The Department believes that this interpretation is 
reasonable and disagrees with the Fourth Circuit's conclusion in Walton 
v. Greenbrier Ford, Inc., 370 F.3d 446, 452 (4th Cir. 2004), that the 
regulation impermissibly narrows the statute. Therefore, the Department 
has concluded that current 779.372(c) sets forth the appropriate 
approach to determining whether employees in such positions are subject 
to the exemption. However, the final rule adopts Sec.  779.372(a)-(b) 
as proposed.
B. Tipped Employees
    Section 3(m) of the FLSA defines the term ``wage.'' The FLSA was 
amended in 1966 to include hotels and restaurants within the scope of 
its coverage for the first time. In order to alleviate these 
industries' new minimum wage obligations, the 1966 amendments also 
provided for the first time, within section 3(m)'s definition of a 
``wage,'' that an employer could utilize a limited amount of its 
employees' tips as a credit against its minimum wage obligations to 
those employees through a so-called ``tip credit.'' The Department's 
current tip credit regulations were promulgated in 1967, one year after 
the tip credit was first introduced, and prior to the 1974 amendments 
to the FLSA, which amended the tip credit provision in section 3(m) by 
providing that an employer could not take a tip credit unless:


[[Page 18839]]


    (1) [its] employee has been informed by the employer of the 
provisions of this subsection and (2) all tips received by such 
employee have been retained by the employee, except that this 
subsection shall not be construed to prohibit the pooling of tips 
among employees who customarily and regularly receive tips.

Public Law 93-259, Sec.  13(e), 88 Stat. 55 (1974). Thus, as amended in 
1974, section 3(m) required that the employer inform its employees 
about the tip credit prior to utilizing it, required that a tipped 
employee retain all of his or her tips, and limited employer-imposed, 
mandatory tip pools to employees who ``customarily and regularly 
receive tips.''
    The section 3(m) requirement that the employer ``inform'' its 
tipped employees of the provisions of section 3(m) prior to taking a 
tip credit has been strictly enforced by the Department and by the 
courts. Courts have disallowed the use of the tip credit for lack of 
notice even ``where the employee has actually received and retained 
base wages and tips that together amply satisfy the minimum wage 
requirements,'' remarking that ``[i]f the penalty for omitting notice 
appears harsh, it is also true that notice is not difficult for the 
employer to provide.'' Reich v. Chez Robert, Inc., 28 F.3d 401, 404 (3d 
Cir. 1994) (citing Martin v. Tango's Restaurant, 969 F.2d 1319, 1323 
(1st Cir. 1992)).
    Prior to the 1974 amendments, the compensation of tipped employees 
was often a matter of agreement. Tipped employees could agree, for 
example, that an employer was only obligated to pay cash wages when an 
employee's tips were less than the minimum wage, or that the employee's 
tips would be turned over to the employer, who could then use the tips 
to pay the full minimum wage. See Usery v. Emersons Ltd., 1976 WL 1668, 
at *2 (E.D. Va. 1976), vacated and remanded on other grounds sub. nom. 
Marshall v. Emersons Ltd., 593 F.2d 565 (4th Cir. 1979). The 1974 
section 3(m) amendments were intended to prohibit such agreements. See 
S. Rep. No. 93-690, at 43 (1974) (``The [retention requirement] is 
added to make clear the original Congressional intent that an employer 
could not use the tips of a 'tipped employee' to satisfy more than 50 
percent of the Act's applicable minimum wage.''). The Department's 
current regulations, which were in effect prior to the 1974 amendments 
and allowed an employer to require employees to turn over all their 
tips to the employer, were therefore superseded by the statutory 
amendment to the extent that they permitted employers to utilize 
employees' tips to satisfy more than 50% of their minimum wage 
obligation.
    Under the 1974 amendments to section 3(m), an employer's ability to 
utilize an employee's tips is limited to taking a credit against the 
employee's tips as permitted by section 3(m). Section 3(m) provides the 
only method by which an employer may use tips received by an employee. 
An employer's only options under section 3(m) are to take a credit 
against the employee's tips up to the statutory differential, or to pay 
the entire minimum wage directly. See Wage and Hour Opinion Letter WH-
536, 1989 WL 610348 (October 26, 1989) (defining when an employer does 
not claim a tip credit as when the employer does not retain any tips 
and pays the employee the minimum wage).
    As amended in 1996, section 3(m) provides that the ``wage'' of a 
tipped employee equals the sum of the cash wage paid by the employer, 
which is fixed at a minimum of $2.13 an hour, and the amount it claims 
as a tip credit. The maximum permissible tip credit under section 3(m) 
is calculated using the current Federal minimum wage. Thus, in a 
situation in which an employee earns $10 an hour in tips and the 
employer pays $2.13 an hour in cash wages and claims the statutory 
maximum as a tip credit, the employee has received only the minimum 
wage because tips in excess of the maximum tip credit are not 
considered ``wages'' under 3(m). Using the current minimum wage of 
$7.25 an hour as an example, the maximum permissible tip credit is 
$7.25 minus $2.13, which permits the employer to take a tip credit 
against its minimum wage obligation of $5.12 an hour, provided it has 
informed its tipped employees of the tip credit provision and has 
permitted the employees to retain all of their tips.
    Since the amount of tips the employee receives in excess of the 
allowable tip credit are not considered ``wages'' paid by the employer, 
any deductions by the employer from the employee's tips would result in 
a violation of the employer's minimum wage obligation because the 
employer has only paid the employee the minimum wage (cash wage of 
$2.13 plus the tip credit up to $7.25). A deduction from the employee's 
tips would be subtracted from the $7.25 minimum wage payment and would 
bring the employee below the minimum wage.
    The NPRM proposed to update the regulations to incorporate the 1974 
amendments, the legislative history, subsequent court decisions, and 
the Department's interpretations. Proposed Sec. Sec.  531.52, 
531.55(a), 531.55(b), and 531.59 eliminated references to employment 
agreements providing either that tips are the property of the employer 
or that employees will turn tips over to their employers, and clarified 
that the availability of the tip credit provided by section 3(m) 
requires that all tips received must be paid out to tipped employees in 
accordance with the 1974 amendments. Section 531.55(a), which describes 
compulsory service charges, also was updated by changing the example of 
such a charge from 10 percent to 15 percent to reflect more current 
customary industry practices.
    The 1974 amendments also clarified that section 3(m)'s statement 
that employees must retain their tips does not preclude the practice of 
tip pooling ``among employees who customarily and regularly receive 
tips.'' 29 U.S.C. 203(m). The Department's regulation on the subject 
provides that ``the amounts received and retained by each individual 
[through a tip pooling arrangement] as his own are counted as his tips 
for purposes of the Act.'' 29 CFR 531.54.
    Wage and Hour has interpreted the tip pooling clause more fully in 
opinion letters and in its Field Operations Handbook (``FOH''). The FOH 
provides, for example, that a tip pooling arrangement cannot require 
employees to contribute a greater percentage of their tips to the tip 
pool than is ``customary and reasonable.'' FOH section 30d04(b). The 
agency expanded upon this position, in its opinion letters and in 
litigation, that ``customary and reasonable'' equates to 15 percent of 
an employee's tips or two percent of daily gross sales. See, e.g., Wage 
and Hour Opinion Letter WH-468, 1978 WL 51429 (Sept. 5, 1978). Several 
courts have rejected the agency's maximum contribution percentages, 
however, ``because neither the statute nor the regulations mention [the 
requirement stated in the agency interpretation] and the opinion 
letters do not explain the statutory source for the limitation that 
they create.'' Kilgore v. Outback Steakhouse of Fla., Inc., 160 F.3d 
294, 302-03 (6th Cir. 1998); see Davis v. B&S, Inc., 38 F. Supp. 2d 
707, 718 n.16 (N.D. Ind. 1998) (citing Dole v. Continental Cuisine, 
Inc., 751 F. Supp. 799, 803 (E.D. Ark. 1990) (``The Court can find no 
statutory or regulatory authority for the Secretary's opinion 
[articulated in an opinion letter] that contributions in excess of 15% 
of tips or 2% of daily gross sales are excessive.''). In light of these 
court decisions, the NPRM proposed to update Sec.  531.54 to clarify 
that section 3(m) of the FLSA does not impose a maximum tip pool 
contribution percentage. Moreover, the NPRM proposed to state that the

[[Page 18840]]

employer must inform each employee of the required tip pool 
contribution.
    The 1974 amendments also revised another aspect of section 3(m). 
Prior to the 1974 amendments, section 3(m) of the FLSA provided that an 
employee could petition the Wage and Hour Administrator to review the 
tip credit claimed by an employer. See Public Law 89-601, 80 Stat. 830 
(1966) (``[I]n the case of an employee who (either himself or acting 
through his representative) shows to the satisfaction of the Secretary 
that the actual amount of tips received by him was less than the amount 
determined by the employer as the amount by which the wage paid him was 
deemed to be increased * * * the amount paid such employee by his 
employer shall be deemed to have been increased by such lesser 
amount.''). The 1974 amendments eliminated the review clause to clarify 
that the employer, not the employee, bears the ultimate burden of 
proving ``the amount of tip credit, if any, [he] is entitled to 
claim.'' S. Rep. No. 93-690, at 43. Two outdated regulatory provisions 
promulgated in 1967, however, still purport to permit petitions to the 
Wage and Hour Administrator for tip credit review despite the fact that 
the statute no longer provides for this review. See 29 CFR 531.7, 
531.59.
    Consistent with the 1974 amendments, the NPRM proposed to delete 
Sec.  531.7, which permits employees to petition the Wage and Hour 
Administrator for tip credit review. References to the Administrator's 
review in Sec.  531.59 also were deleted, and the language was updated 
to reflect the burden on the employer to prove the amount of the tip 
credit to which it is entitled.
    Numerous commenters addressed the issues relating to tipped 
employees.
i. Ownership of Employee Tips
    Commenters representing employees expressed concern with several of 
the Department's proposed revisions. First, a variety of commenters 
stated that they were opposed to the Department's reference in Sec.  
531.52 to the fact that an employer is prohibited from using an 
employee's tips for any reason other than to make up the difference 
between the required cash wage paid and the minimum wage where ``an 
employee is being paid wages no more than the minimum wage.'' See, 
e.g., NELA, AFL-CIO, Bruckner Burch PLLC, and NELP. These commenters 
further noted that the preamble addresses the converse situation where 
an employer does pay more than the minimum wage in cash, and the 
preamble states that such an employer ``would be able to make 
deductions so long as they did not reduce the direct wage payment below 
the minimum wage.'' 73 FR 43659 (Jul. 28, 2008). They objected to these 
statements, based upon the legislative history of the tip credit 
provisions.
    These commenters pointed out that section 3(m) first was amended in 
1966, following a Supreme Court decision that concluded that employers 
could use employees' tips to satisfy the entire minimum wage. That 
amendment provided that employers could credit tips toward 50 percent 
of the minimum wage. After the Wage and Hour Division issued 
regulations concluding that an employer could still require employees 
to turn over all their tips, effectively achieving a tip credit equal 
to 100 percent of the minimum wage, Congress again amended the statute 
in 1974 to provide that all tips received by an employee must be 
retained by the employee (except for valid, or bona fide, tip pooling). 
The commenters noted that the legislative history clarifies that 
Congress wanted in 1974 ``to make clear [its] original * * * intent 
that an