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[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

[[Page 18832]]

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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that have become out of date because of subsequent legislation.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: 
http://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 http://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

[[Page 18834]]

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)

[[Page 18835]]

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 employer could not use the tips of a `tipped employee' to 
satisfy more than 50 percent of the Act's applicable minimum wage.'' S. 
Rep. No. 93-690, at 43. Congress also made it clear in 1974 that 
``[a]ll tips received [by tipped employees were to] be paid out to 
tipped employees.'' Id., at 42. The commenters cited Wage and Hour 
opinion letters, the FOH and Fact Sheet 15 issued thereafter, 
which concluded that the 1974 Amendments clarified Congress' 
determination that tips are the property of the employees who receive 
them, not the employer, and that any agreement requiring an employee to 
turn over tips to the employer is, therefore, illegal.
    Based upon this history, NELP stated that the proposed rule and the 
preamble language provides ``misleading guidance on tips'' and 
``threaten[s] to increase confusion in this already high-violation 
industry.'' NELP asserted that it would be unlawful for an employer to 
pay a worker a cash wage of $1.00 in excess of the full minimum wage 
and then withhold $1.00 per hour of a worker's tips, and that the 
Department ``lacks the authority to create this exception to the 
general rule against tip stealing.'' NELP further concluded that the 
proposed regulations include misleading guidance that is ``confusing 
and encourages abuse that would adversely impact both tipped workers 
and their employers.'' Employers would hire workers for a wage that 
appeared to exceed the minimum wage, but then would lower their pay 
back to the minimum wage, and such action would expose ``employers to 
significant liability because it is out of step with the many state 
laws prohibiting this action.'' See also North Carolina Justice Center.
    NELA similarly stated that the proposed regulations ``create 
confusion with respect to the ownership of tips'' because they suggest 
that if an employer pays a direct (or cash) wage slightly in excess of 
the minimum wage, it can ``thereby obtain unfettered access to its 
employees' tips.'' NELA stated that the confusion ``is particularly 
dangerous given that some courts wrongly permit employers to pocket the 
tips of employees who are `paid' at least the minimum wage.'' 
Therefore, NELA suggested that the Department should clarify that tips 
are the property of the employee who receives them and that the tip 
retention requirement applies even if the employer pays a wage in 
excess of the minimum wage.
    The AFL-CIO similarly commented that the Department's regulatory 
``language--whether intended by the Department or the result of poor 
drafting--seems to permit employers to take the employee's tips if they 
are paid the minimum wage or greater * * * [which] was barred by 
Congress in 1974.'' See also Members of United States Congress. The 
AFL-CIO cited numerous opinion letters and court decisions for the 
conclusion that, whether or not an employer claims any tip credit, the 
employee must retain all tips (asserting the few court decisions that 
hold to the contrary are incorrect). Therefore, the AFL-CIO concluded 
that proposed Sec.  531.52 would ``turn the 1974 amendment on its 
head'' by allowing employers to require employees to surrender their 
tips when the amendment bars such agreements; the commenter further 
stated that the proposal conflicts with proposed Sec.  531.59, which 
states that section 3(m) requires employers to permit employees to 
retain all tips received with the exception of a valid, or bona fide, 
tip pool. Bruckner Burch commented that the final rule could 
incorporate examples from the Department's opinion letters, such as 
Wage Hour Opinion Letter WH-536, 1989 WL 610348 (Oct. 26 1989) (cited 
in the preamble), explaining when deductions may be made from the tips 
of employees who are paid in excess of the minimum wage, but that the 
rule as proposed created confusion.
    The Chamber of Commerce stated that it supported the elimination of 
the references in current Sec.  531.52 and other regulations to 
agreements between employers and employees that would make tips the 
property of the employer or require employees to turn over their

[[Page 18841]]

tips to employers. The commenter stated that ``Congress amended the 
FLSA in 1974 to clarify that employers are not permitted to retain 
employee tips. References within the current regulations to agreements 
that could permit employers to do so were misleading and confusing, 
within the context of the congressional amendment.''
    The Department agrees with the analysis in the comments that tips 
are the property of the employee, and that Congress deliberately 
amended the FLSA's tip credit provisions in 1974 to clarify that 
section 3(m) provides the only permitted uses of an employee's tips--
through a tip credit or a valid tip pool among only those employees who 
customarily and regularly receive tips. This has been the Department's 
longstanding position since the 1974 amendments. The Department has 
also taken the position since the 1974 amendments that these 
protections against the use of an employee's tips apply irrespective of 
whether the employer has elected the tip credit.
    The legislative history of the Act, as well as caselaw and opinion 
letters published shortly after the 1974 amendments, support the 
Department's position that section 3(m) provides the only permissible 
uses of an employee's tips regardless of whether a tip credit is taken. 
As noted supra, the tip credit provision permitting an employer to use 
an employee's tips to satisfy 50 percent of the employer's minimum wage 
obligation was originally enacted in 1966. Public Law 89-601, Sec.  
101(a), 80 Stat. 830 (1966). In 1974, when the Act was amended, a 
Senate Report stated that the amendment was intended to ``requir[e] 
that all tips received be paid out to tipped employees.'' S. Rep. No. 
96-690, at 42 (1974). The same Report further observed that the 
amendments required employees to retain all of their tips (except to 
the extent that they are used in a valid tip pool) and clarified that 
an employer could not use its employees' tips to satisfy more than 50 
percent of its minimum wage obligations. Id. at 42-43 (quoting 29 CFR 
531.52). In 1977, a Senate Report from the Committee on Human Resources 
considering further amendments to the FLSA indicated that the role of 
tips in the calculation of an employer's minimum wage obligations to 
its tipped employees had been resolved by the 1974 amendments:

    Tips are not wages, and under the 1974 amendments tips must be 
retained by the employees--which can include employees who are in an 
appropriate tip pool--and cannot be paid to the employer or 
otherwise used by the employer to offset his wage obligation, except 
to the extent permitted by section 3(m).

S. Rep. No. 95-440, at 25 (1977). In support of this statement, the 
Report cites to two cases, Richard v. Marriott Corp., 549 F.2d 303 (4th 
Cir. 1977), and Usery v. Emersons Ltd., 1976 WL 1668 (E.D. Va. 1976), 
both of which recognized shortly after the 1974 amendments that while 
section 3(m) is not entirely clear, it had the effect of limiting an 
employer's use of its employees' tips to the extent provided in the 
statute. In Marriott Corp., the Fourth Circuit concluded that tips 
belonged to the tipped employee, and that it was ``nonsense'' to argue 
after the 1974 amendments ``that compliance with the statute results in 
one-half credit, but that defiance of the statute results in 100 
percent credit.'' 549 F.2d at 305. In Emersons Ltd., the district court 
stated that ``[w]hile [section 3(m)] could have been worded more 
clearly, it is apparent, at least as a result of the 1974 amendment, 
that Congress intended to give the employer the benefits of tips 
received by the employee, but only to a limited extent.'' 1976 WL 1668, 
at *4.
    The Ninth Circuit recently held that section 3(m)'s limitations on 
an employer's use of an employee's tips apply only when the tip credit 
is taken, and that when a tip credit is not taken, tips are only the 
property of the employee absent an agreement to the contrary. Cumbie v. 
Woody Woo, Inc. d/b/a Vita Caf[eacute], 596 F.3d 577 (9th Cir. 2010); 
see also Platek v. Duquesne Club, 961 F. Supp. 835, 839 (W.D. Pa. 
1995), aff'd without opinion, 107 F.3d 863 (3d Cir.) (Table), cert. 
denied, 522 U.S. 934 (1997). The Department respectfully believes that 
Woody Woo was incorrectly decided. The issue in Woody Woo was whether 
section 3(m)'s limitation on mandatory tip pools to those employees who 
``customarily and regularly'' receive tips applies when an employer 
does not take a tip credit. In that case, tipped employees were 
required to turn over the majority of their tips to a tip pool that 
included employees, such as cooks and dishwashers, who are not 
``customarily and regularly'' tipped employees, and received a small 
portion of their tips back from the tip pool. The employer was 
precluded from taking a tip credit by State law and paid its tipped 
employees the full State minimum wage, which exceeded the Federal 
minimum wage.
    The Ninth Circuit started its analysis in Woody Woo with a 
statement from the 1942 Supreme Court decision in Williams v. 
Jacksonville Terminal Co., 315 U.S. 386 (1942), that `` '[i]n 
businesses where tipping is customary, the tips, in the absence of an 
explicit contrary understanding, belong to the recipient. Where, 
however, such an arrangement is made * * *, in the absence of statutory 
interference, no reason is perceived for its invalidity.' '' Woody Woo, 
596 F.3d at 579 (quoting Jacksonville Terminal, 315 U.S. at 397) 
(emphasis added by the Ninth Circuit). Thus, the Ninth Circuit stated 
that Jacksonville Terminal established a ``default rule that an 
arrangement to turn over or to redistribute tips is presumptively 
valid,'' and that the question before the court was whether the FLSA, 
as amended, ``imposes any 'statutory interference' that would 
invalidate Woo's tip-pooling arrangement.'' Id. After ``unpacking'' 
what it characterized to be ``dense statutory language'' in section 
3(m), the court concluded that it is ``clear'' that the current 
statutory language disrupts the Jacksonville Terminal default rule only 
when a tip credit is taken, because the language in the last sentence 
of section 3(m), providing that an employer cannot take a tip credit 
unless it has provided notice and permits employees to retain all of 
their tips (except for a valid tip pool), ``imposes conditions on 
taking a tip credit and does not state freestanding requirements 
pertaining to all tipped employees.'' Id. at 581. The Ninth Circuit 
therefore did not read section 3(m) as imposing any limitations on the 
use of an employee's tips when a tip credit is not taken. The court 
thus rejected the Department's position in its amicus curiae brief that 
Woody Woo made improper deductions from the cash wage paid when it 
required its employees to contribute their tips to an invalid tip pool, 
and that this improper deduction resulted in a minimum wage violation 
because the tipped employees did not receive the full minimum wage plus 
all tips received.
    The Department believes the Ninth Circuit incorrectly concluded 
that the 1974 amendments to the FLSA did not alter what it 
characterized as Jacksonville Terminal's default rule. The fact that 
section 3(m) does not expressly address the use of an employee's tips 
when a tip credit is not taken leaves a ``gap'' in the statutory 
scheme, which the Department has reasonably filled through its 
longstanding interpretation of section 3(m). See Barnhart v. Walton, 
535 U.S. 212, 218 (2002) (``[S]ilence, after all, normally creates 
ambiguity. It does not resolve it.''); see also Senger v. City of 
Aberdeen, SD, 466 F.3d 670, 672 (8th Cir. 2006) (recognizing 
Department's

[[Page 18842]]

authority to fill a ``gap'' in the FLSA's regulatory scheme). The Ninth 
Circuit's ``plain meaning'' construction is unsupportable. Congress 
would not have had to legislatively permit employers to use their 
employees' tips to the extent authorized in section 3(m) unless tips 
were the property of the employee in the first instance. In other 
words, if tips were not the property of the employee, Congress would 
not have needed to specify that an employer is only permitted to use 
its employees' tips as a partial credit against its minimum wage 
obligations in certain prescribed circumstances because an employer 
would have been able to use all of its employees' tips for any reason 
it saw fit. If, as the Ninth Circuit held, the FLSA places limitations 
on an employer's use of its employees' tips only in the context of a 
tip credit, an employer could simply eschew the tip credit and use a 
greater part of its employees' tips toward its minimum wage obligations 
than permitted under section 3(m). This would stand the 1974 amendment 
``on its head'' and would mean it has ``accomplished nothing.'' 
Emersons Ltd., 1976 WL 1668, at *4. If an employer could avail itself 
of this loophole, it would have no reason to ever elect the tip credit 
because, instead of using only a portion of its employees' tips to 
fulfill its minimum wage obligation, it could use all of its employees' 
tips to fulfill its entire minimum wage obligation to the tipped 
employees or other employees. This is essentially what the panel's 
decision permits, because if there are no restrictions on an employer's 
use of its employees' tips when it does not utilize a tip credit, the 
employer can institute a mandatory tip pool that requires employees to 
contribute all of their tips regardless of how much they receive back, 
or mandate that employees turn over all of their tips and use those 
tips to pay the minimum wage or for any other purpose.
    For example, if an employer is subject to the current Federal 
minimum wage of $7.25 an hour and its tipped employees receive $10 an 
hour in tips, an employer who uses the maximum tip credit against its 
minimum wage obligation has to pay a cash wage of $2.13 and can ``use'' 
$5.12 of an employee's tips as a credit toward the rest of the minimum 
wage payment. The employee thus receives $2.13 in cash wages and keeps 
all of her $10 in tips, for a total of $12.13. Woody Woo, however, 
permits an employer who eschews the tip credit to pay $7.25 to its 
tipped employees in cash wages to satisfy its minimum wage obligation 
and require an employee to turn over all $10 of the employee's tips. 
The employee now receives only $7.25 an hour, rather than $12.13. And 
the employer, while it pays $7.25, gains $10.00 that it can direct for 
its own purposes (in essence realizing a $2.75 profit from the 
employee's tips). Thus, under the Ninth Circuit's ``plain language'' 
reading of section 3(m), an employer that does not utilize a tip credit 
is permitted to use its employee's tips to a greater extent than an 
employer that does utilize such credit. This yields an absurd result 
and makes the 1974 amendment superfluous.
    As noted supra, the Department stated publicly immediately after 
the 1974 amendments that its tip credit regulations permitting 
employers to take control of employee tips through agreements were 
outdated, and indicated that new regulations were forthcoming. See Wage 
and Hour Opinion Letter WH-310, 1975 WL 40934, at *1 (Feb. 18, 1975). 
The Department also explicitly stated that the 1974 amendments 
superseded Jacksonville Terminal, explaining that ``the situation of a 
tipped employee is far different'' than it was in 1942. Wage and Hour 
Opinion Letter WH-321, 1975 WL 40945, at *1 (Apr. 30, 1975). As also 
noted supra, a number of commenters voiced concern that the proposed 
regulatory text in Sec.  531.52 was confusing on this point, and did 
not make the Department's position clear. In order to codify its 
longstanding interpretation of section 3(m) in its regulations, and in 
response to these commenters, the Department is amending Sec.  531.52 
in the final rule to make clear that tips are the property of the 
employee, and that section 3(m) sets forth the only permitted uses of 
an employee's tips--either through a tip credit or a valid tip pool--
whether or not the employer has elected the tip credit.
    The inclusion of the text in proposed Sec.  531.52 reading ``Where 
an employee is being paid wages no more than the minimum wage'' was 
intended to convey the fact that the Department only has authority 
under the FLSA to enforce, inter alia, the minimum wage provisions of 
that Act. See, e.g., 29 U.S.C. 216, 217. Thus, if an employer pays the 
employee a direct wage in excess of the minimum wage--and thus did not 
claim a credit against any portion of the employee's tips and did not 
utilize the employee's tips in any way--the employer would be able to 
make deductions but only from the cash wage amount paid directly by the 
employer and only to the extent that the deductions did not reduce the 
employer's direct wage payment to an amount below the minimum wage. See 
Wage and Hour Opinion Letter WH-536, 1989 WL 610348 (Oct. 26, 1989). In 
such a situation, the deduction would be viewed as coming from the 
employer's direct wage payment that exceeds the minimum wage. This is 
consistent with the Department's position regarding impermissible 
deductions in the non-tip context. See Wage and Hour Opinion Letter 
FLSA 2006-21, 2006 WL 1910966 (June 9, 2006) (explaining that no FLSA 
action lies against an employer who makes impermissible deductions from 
cash wages paid if those wages are in excess of the minimum wage and 
the deductions do not reduce the employee's pay below the minimum 
wage). However, the Department agrees with the commenters that the 
payment of tipped employees under the FLSA and State laws is a very 
complex issue, and that retention of this language from the proposed 
rule could result in unintended confusion among the regulated 
community. Consequently, the text in proposed Sec.  531.52 is revised 
to delete the introductory phrase in the fourth sentence of that 
section that reads: ``Where an employee is being paid wages no more 
than the minimum wage,'' to clarify under the final rule that an 
employer in all cases is prohibited from using an employee's tips for 
any reason other than as a tip credit to make up the difference between 
the required cash wage paid and the minimum wage or in furtherance of a 
valid tip pool.
ii. Required Employer Notice
    Commenters representing employees also objected to the Department's 
proposal in Sec.  531.59(b) and the accompanying preamble providing 
that employers only have to ``inform'' employees orally that they will 
treat tips as satisfying part of the employer's minimum wage 
obligation, but do not have to ``explain'' the tip credit or provide 
anything in writing. For example, NELP commented that the legislative 
history ``makes clear that informing workers is no mere formality, but 
that the employer must indeed explain the tip credit.'' NELP quoted S. 
Rep. 93-690 at 43 (1974), which provides that the employer is 
responsible for informing a tipped employee how the wage was calculated 
and that ``the employer must explain the tip provision of the Act to 
the employee and that all tips received by such employee must be 
retained by the employee.'' NELP stated that many tipped employees are 
low-wage and immigrant employees working in high-violation industries, 
and they do not understand the complicated tip credit rules. NELP 
suggested that requiring

[[Page 18843]]

employers to provide a clear written explanation to employees upon hire 
would help them understand the rules and would help employers because 
it ``would enable them to protect themselves from litigation claiming 
that they failed to provide adequate notice and therefore cannot take 
the tip credit.'' See also North Carolina Justice Center, Greater 
Boston Legal Services (simply informing an employee that it will use 
the tip credit would be ``jargon that would be meaningless to many 
workers, especially those with limited English proficiency or immigrant 
workers with limited experience with wages in this country * * * Having 
the explanation in writing, moreover, is especially important to those 
workers who may want or need to seek additional assistance, outside the 
workplace, to understand the information they are being provided.''); 
Members of United States Congress (the regulation should require 
employers to explain the tip credit rules so that employees understand 
``how their wages are calculated, as a matter of fairness and as a way 
of enforcing the law * * * To satisfy these goals, the Department 
should require employers to provide written notice * * * Written notice 
will also prevent unnecessary litigation, by improving employees' 
understanding of their rights.'').
    The AFL-CIO submitted similar comments and stated that the proposed 
regulation ``fails to satisfy the plain language of the statute, which 
requires not just that the employer `inform' the employee that it is 
taking a tip credit, but that `the employer [inform the employee] of 
the provisions of this subsection.' '' NELA also submitted similar 
comments and stated that, given the increasing importance of employee 
tips vis-[agrave]-vis the minimum wage, the tip credit regulations 
should ensure the fair operation of the tip credit provisions.
    Because the FLSA poster (Publication 1088) provides only a limited 
description of the tip credit rules and recognizes that ``other 
conditions must also be met,'' several commenters suggested that the 
regulation should set forth a sample notice providing the required 
explanation in full. NELA, the AFL-CIO, and Bruckner Burch PLLC stated 
that employers must tell employees not only that the employer will be 
using the tip credit, but also that a minimum wage is required by law, 
the amount of the minimum wage, how the tip credit works--that the 
employer must pay $2.13 and the balance of the full minimum wage 
required by the Act can come from the tip credit but that the employer 
must make up the difference if the employee does not receive sufficient 
tips, that the employee will retain all of his or her tips, and the 
formula for any tip pooling arrangement. These commenters stated that 
the Department should not rely on Kilgore v. Outback Steakhouse of 
Florida, Inc., 160 F.3d 294 (6th Cir. 1998), the case cited in the 
preamble to the proposed rule, because it was wrongly decided on the 
notice issue in that it did not take into account the legislative 
history or the statutory language requiring employees to be informed of 
the provisions of section 3(m). These commenters pointed, instead, to 
other decisions that held employers could not utilize the tip credit 
where they had not adequately informed employees of the law's 
requirements. Finally, NELA objected to the suggestion that paychecks 
received after the work is performed or prior work history can provide 
the requisite notice, because the statute requires an employer to 
provide notice of the tip credit provisions prior to taking any tip 
credit.
    Epstein Becker commented that the notice provision of section 3(m) 
does not require an employer to communicate its intent to use the tip 
credit; rather, it requires an employer to communicate the provisions 
of the section. Epstein Becker stated that the cases that require an 
employer to communicate its intent to treat tips as satisfying part of 
the minimum wage obligation do so without analysis of the statutory 
language and are incorrect. Epstein Becker further asserted that the 
information that would be useful to employees and required by section 
3(m) is that the employer must supplement an employee's tips if they 
are insufficient to raise the wage level to the minimum wage, that the 
cash wage must be at least $2.13, and all tips earned must be retained 
by the employee absent a valid tip pooling arrangement (and perhaps 
information regarding the required information as to the tip pool, 
although this is ``difficult to reconcile with the statute's 
language''). The commenter stated that the proposed regulation, 
requiring communication of the employer's intent to use the tip credit, 
does little to advance the purpose of the statute because virtually all 
employees know their employer intends to pay them a reduced tip wage 
based on prior work in the industry and any misunderstanding would be 
resolved with the first paycheck. Finally, Epstein Becker stated that 
the information on the FLSA poster (Publication 1088) is concise and 
understandable, and that the poster should contain all information that 
employers are required to communicate.
    The Chamber of Commerce and Littler Mendelson, P.C., agreed with 
the proposal regarding what an employer must communicate to employees 
and stated that it can be oral. They stated the proposal is a positive 
step in clarifying employer obligations and, thus, it should reduce the 
litigation on this issue by clearly articulating the required content 
of the notice.
    Section 3(m)(2) of the Act provides that the tip credit provisions 
``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 such employee [except for] pooling of tips among employees who 
customarily and regularly receive tips.'' 29 U.S.C. 203(m)(2) (emphasis 
added). The ``provisions of this subsection'' include how to determine 
the wage an employer is required to pay a tipped employee, which is 
``the amount paid such employee by the employee's employer'' (an amount 
that cannot be less than the cash wage required to be paid to a tipped 
employee on August 20, 1996, which was $2.13), and ``the additional 
amount on account of the tips received by such employee'' (an amount 
equal to the difference between the actual cash wage paid and the full 
minimum wage in effect under section 6(a)(1) of the Act). A Senate 
Report accompanying the 1974 amendments stated that the amendment 
``modifies Section 3(m) of the [FLSA] by requiring employer explanation 
to employees of the tip credit provisions, and by requiring that all 
tips received be paid out to tipped employees. * * * The tip credit 
provision of S. 2747 is designed to insure employer responsibility for 
proper computation of the tip allowance and to make clear that the 
employer is responsible for informing the tipped employee of how such 
employee's wage is calculated. Thus, the bill specifically requires 
that the employer must explain the provision of the Act to the employee 
and that all tips received by such employee must be retained by the 
employee.'' S. Rep. No. 93-690 at 42-43 (1974) (emphasis added).
    As discussed in the preamble to the proposed rule, the courts have 
disagreed over the level of notice required to ``inform'' a tipped 
employee about section 3(m). Thus, in Kilgore v. Outback Steakhouse of 
Florida, Inc., 160 F.3d 294, 298 (6th Cir. 1998), the Sixth Circuit 
held that while an employer must ``inform its employees of its intent 
to take a tip credit toward the

[[Page 18844]]

employer's minimum wage obligation,'' it was not required to 
``explain'' the tip credit. In Martin v. Tango's Restaurant, Inc., on 
the other hand, the First Circuit interpreted section 3(m)'s notice 
provision to require, ``at the very least notice to employees of the 
employer's intention to treat tips as satisfying part of the employer's 
minimum wage obligations,'' and stated that the provision ``could 
easily be read to require more.'' 969 F.2d 1319, 1322 (1st Cir. 1992); 
see Reich v. Chez Robert, Inc., 821 F. Supp. 967, 977 (D. N.J. 1993) 
(an employer does not meet its obligation to ``inform'' under section 
3(m) when it tells its tipped employees that they will be paid a 
specific wage but does not explain that that wage is below the minimum 
wage and that it is permitted by law based on the employees' tips), 
rev'd on other grounds, 28 F.3d 401 (3d Cir. 1994)). In Pellon v. 
Business Representation Int'l, Inc., 528 F. Supp. 2d 1306, 1310-11 
(S.D. Fla. 2007), aff'd, 291 Fed. Appx. 310 (11th Cir. 2008), the 
district court held that the employer in that case had fulfilled its 
duty to ``inform'' its tipped employees of the provisions of section 
3(m) by posting the FLSA poster and verbally notifying the employees 
that they would be paid $2.13 an hour plus tips, but noted that ``a 
prominently displayed poster containing all of the relevant tip credit 
information'' would also constitute sufficient notice. In Bonham v. 
Copper Cellar Corp., 476 F. Supp. 98 (E.D. Tenn. 1979), on the other 
hand, the court held that vague references to the minimum wage and a 
poster that was not prominently displayed did not meet the requirement 
to ``inform.''
    The Department has concluded that notice of the specific provisions 
of 3(m) is required to adequately inform the employee of the 
requirements of the tip credit. To the extent that the Sixth Circuit 
and other courts have reached different results, the Department notes 
that those courts generally failed to consider the important 
legislative developments underlying the FLSA's tip credit provisions 
and we choose to not be guided by those decisions in this revision of 
the regulations. Accordingly, based on the express provisions of the 
statute and the supporting legislative history, the Department agrees 
with the commenters stating that an employer must inform a tipped 
employee before it utilizes the tip credit, of the following: (1) The 
direct cash wage the employer is paying a tipped employee, which can be 
more than, but cannot be less than, $2.13 per hour; (2) the additional 
amount the employer is using as a credit against tips received, which 
cannot exceed the difference between the minimum wage specified in 
section 6(a)(1) of the FLSA and the actual cash wage paid by the 
employer to the employee; (3) that the additional amount claimed by the 
employer on account of tips as the tip credit may not exceed the value 
of the tips actually received by the employee; (4) that the tip credit 
shall not apply with respect to any tipped employee unless the employee 
has been informed of the tip credit provisions of section 3(m) of the 
Act; and (5) that all tips received by the tipped employee must be 
retained by the employee except for the pooling of tips among employees 
who customarily and regularly receive tips. Furthermore, the current 
FLSA recordkeeping regulation, at 29 CFR 516.28(a)(3), expressly 
requires that the amount per hour that the employer takes as a tip 
credit shall be reported to the employee in writing each time it is 
changed from the amount per hour taken in the preceding week.
    Upon careful reexamination of the terms of the statute, its 
legislative history, and a review of the public comments, the 
Department is revising its interpretation from the NPRM of the level of 
explanation that employers must provide when informing tipped employees 
about the tip credit pursuant to section 3(m). Accordingly, the text of 
the second and third sentences in proposed Sec.  531.59(b) are combined 
and revised in the final rule to provide:

    * * * Pursuant to section 3(m), an employer is not eligible to 
take the tip credit unless it has informed its tipped employees in 
advance of the employer's use of the tip credit of the provisions of 
section 3(m) of the Act, i.e.: The amount of the cash wage that is 
to be paid to the tipped employee by the employer; the additional 
amount by which the wages of the tipped employee are increased on 
account of the tip credit claimed by the employer, which amount may 
not exceed the value of the tips actually received by the employee; 
that all tips received by the tipped employee must 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 shall not apply to any employee who has not been informed 
of these requirements in this section. * * *

    Many commenters urged the Department to require employers to 
provide written notice to its tipped employees that explain section 
3(m)'s tip credit provision. Although the Department is not requiring 
in this rule that the employer ``inform'' its tipped employees of 
section 3(m)'s requirements in writing, employers may wish to do so, 
since a physical document would, if the notice is adequate, permit 
employers to document that they have met the requirements in section 
3(m) and the Department's regulations to ``inform'' tipped employees of 
the tip credit provision. Finally, the Final Rule changes the word 
``bona fide'' in the last sentence in proposed Sec.  531.59(b) to 
``valid''; although both terms in this context refer to a tip pool that 
includes only those employees who customarily and regularly receive 
tips, the term ``valid'' is used in those regulations pertaining to 
tips for consistency.
iii. Tip Pools
    Commenters also addressed issues relating to tip pooling. As noted, 
the NPRM proposed to add two new sentences to Sec.  531.54 (``Tip 
pooling'') to explain that the FLSA does not set a maximum cap on the 
percentage of an employee's tips that may be contributed to a valid tip 
pool, but that an employer must notify its tipped employees of any 
required tip pool contribution amount. 73 FR 43667 (Jul. 28, 2008). 
UNITE HERE stated its belief that tip pooling must be voluntary, as 
indicated by current Sec.  531.54 stating that an employer may 
redistribute tips to employees ``upon some basis to which they have 
mutually agreed among themselves,'' and concluded that an employer 
should not be able to require employees to participate in a tip pool 
because the rules the employer created might not be fair. It 
particularly saw a mandatory pool as a concern if it actually involved 
mandatory tip splitting, because then the employer could reduce the 
tipped employee to the minimum wage and use the tips ``to augment the 
cash compensation of other employees, thereby allowing the employer to 
reduce its own expenditures.'' It stated that the requirement that an 
employee retain all tips ``would be swallowed up by the exception'' in 
this situation. Therefore, UNITE HERE objected to the new language in 
Sec.  531.54 referring to ``any required tip pool contribution amount'' 
and stated that employers should not be permitted to require tipping 
out or tip pooling. It also stated that where tip pooling is voluntary, 
there is no need for a percentage limitation and the common practice is 
for employees to contribute all tips. UNITE HERE further commented 
that, if the Department allows mandatory tip pooling, the regulations 
should ensure that the pool is valid or ``bona fide'' such as by 
clarifying that employers may not retain any of the tips, tips may only 
go to employees who regularly and customarily receive tips (not 
employees such as cooks, dishwashers and

[[Page 18845]]

janitors), and employers may only take credit for the amount each 
employee actually ultimately receives.
    NELP objected to the proposed rule's statement that the FLSA does 
not impose a maximum contribution percentage on tip pools, stating that 
not having a cap ``makes it easier for employers to skim tips for 
themselves.'' It suggested that the rule impose a ``customary and 
reasonable'' standard, which it concluded may reasonably be read into 
the FLSA. See also North Carolina Justice Center and AFL-CIO.
    The Chamber of Commerce and Littler Mendelson, P.C. stated that 
they supported the elimination of the cap on ``the amount employers 
could require tipped employees to `tip out' to other tipped 
employees,'' noting that the rule requires an employer to notify 
employees of the amount they will be required to contribute to a tip 
pool. They stated that the tip credit rules ensure that employees will 
retain a sufficient proportion of their tips to satisfy minimum wage. 
Accordingly, Littler Mendelson, P.C., concluded that ``no employee will 
be harmed in any way even if a higher percentage of their tips are 
contributed to a tip pool.''
    In response to the comments, the Department has modified the two 
proposed new sentences at the end of Sec.  531.54 to read:

    * * * 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.

Other aspects of tip pooling are discussed in the section on ownership 
of tips, supra.
8. Fair Labor Standards Act Amendments of 1977
    On November 1, 1977, Congress amended section 3(t) of the FLSA, 29 
U.S.C. 203(t). Public Law 95-151, Sec.  3(a), 91 Stat. 1245. Section 
3(t) of the FLSA defines the phrase ``tipped employee.'' Prior to the 
1977 amendment, the definition encompassed ``any employee engaged in an 
occupation in which he customarily and regularly receives more than $20 
a month in tips.'' The 1977 amendment raised the threshold in section 
3(t) to $30 a month in tips. The proposed rule changed the references 
in 29 CFR 531.50(b), 531.51, 531.56(a)-(e), 531.57, and 531.58 from $20 
to $30. The commenters did not specifically address these technical 
updates to conform to the statute. Therefore, the final rule adopts the 
proposed changes to these regulations.
9. Meal Credit Under Section 3(m)
    The NPRM proposed to amend Sec.  531.30 to incorporate the 
Department's longstanding enforcement position regarding the acceptance 
of meals furnished as a credit towards the minimum wage. A ``wage'' 
paid pursuant to section 3(m) of the FLSA may include ``the reasonable 
cost * * * to the employer of furnishing * * * board, lodging, or other 
facilities * * * customarily furnished by such employer to his 
employees.'' 29 U.S.C. 203(m). ``Facilities'' include employer-provided 
meals. See 29 CFR 531.32. The Department's regulation at 29 CFR 531.30, 
however, provides that an employer's ability to take credit for a 
facility is limited to those instances where an employee's acceptance 
was ``voluntary and uncoerced.'' In other words, an employer could not 
take a wage credit for employees who did not choose to accept the meal.
    After a number of courts rejected the agency's position on this 
point with regard to credit for meals, the agency adopted an 
enforcement position providing that an employer can take a meal credit 
even if an employee does not voluntarily accept the meal. See FOH 
section 30c09(b) (``WH no longer enforces the `voluntary' provision 
with respect to meals.''); see also Davis Bros., Inc. v. Donovan, 700 
F.2d 1368, 1370 (11th Cir. 1983); Donovan v. Miller Properties, Inc., 
711 F.2d 49, 50 (5th Cir. 1983) (per curiam).
    Thus, under the agency's current enforcement policy articulated in 
the FOH, an employer may require an employee to accept a meal provided 
by the employer as a condition of employment, and may take credit for 
no more than the actual cost of that meal even if the employee's 
acceptance is not voluntary. The NPRM proposed to amend 29 CFR 531.30 
to reflect previous court decisions and the agency's current 
enforcement posture on meal credits.
    Several commenters addressed this issue. Littler Mendelson, P.C., 
stated that it supported the proposal providing that an employee does 
not have to voluntarily accept a meal, stating that this was ``not a 
change in the law'' because it merely incorporates the Wage and Hour 
Division's current policy and court decisions into the regulations.
    Commenters representing employees expressed a variety of views. The 
AFL-CIO stated that it opposed the change because it will make it 
easier for employers to deduct from workers' pay, ``whether or not such 
meals are adequate, and whether or not the employer is only deducting 
the reasonable cost of such meals.'' It also stated that it 
disadvantages employees who are unable to eat a meal because of dietary 
or health restrictions. Therefore, it concluded that the Department 
should issue guidance on the circumstances when an employer can claim a 
meal credit. NELP similarly stated that workers should not be required 
to pay for meals that they cannot eat. NELP stated that workers 
sometimes are not given an opportunity to eat a mid-shift meal, and yet 
an employer may automatically make a deduction for that meal. The meal 
provided may also consist of inferior ingredients or other dishes that 
cannot be offered for sale. See also North Carolina Justice Center. 
Comments by Members of United States Congress also stated that they 
opposed the change because ``employees may not even be able to consume 
employer-provided meals, because of dietary restrictions associated 
with their health, religion, personal preference, or the lack of time 
to eat the meals.'' The SEIU recognized that the proposed change to 
reflect the court cases and the FOH policy was ``unremarkable'' and 
that whether an employee accepted a meal voluntarily had not been a 
pressing issue for 25 years. The SEIU commented that the real issue was 
employees not being given the time to eat the meal for which they were 
charged or given notice of how the cost of the meal is calculated. 
Therefore, the SEIU suggested that the regulation require that 
employers using a meal credit ``maintain timekeeping records to 
indicate that the workers subject to the meal credit deduction actually 
had the time and opportunity to consume the meal'' and that they must 
provide employees with written notice that the meal cost will be 
deducted and an explanation as to how the cost was calculated.
    As explained supra, the former requirement that employee acceptance 
of a meal must be voluntary was rejected in the early 1980s by two 
courts of appeals. Davis Bros. v. Donovan, 700 F.2d 1368 (11th Cir. 
1983); Donovan v. Miller Properties, Inc., 711 F.2d 49 (5th Cir. 1983) 
(per curiam). The Department's enforcement position adopted after those 
rulings provided that where an employee is required to accept a meal as 
a condition of employment, the Department would take no enforcement 
action provided the employer takes credit for no more than the actual 
cost incurred. FOH 30c09(b). It should be noted that the employer in 
Davis Bros. deducted from employees'

[[Page 18846]]

wages no more than the actual or reasonable cost of the food provided, 
and allowed exceptions for employees who for medical reasons could not 
eat the food offered. There was no allegation of minimum wage 
violations based on the amount of the credit claimed, but simply that 
the employee's acceptance was made mandatory and not voluntary in 
contravention of Sec.  531.30. 700 F.2d at 1369-70. The Eleventh 
Circuit failed to discern any basis for the Department's construction 
in section 3(m) of ``customarily furnished'' by the employer to mean 
``voluntarily accepted'' by the employees. Id. at 1370. In the Miller 
Properties case, the Fifth Circuit affirmed a lower district court 
ruling in the employer's favor in a very brief decision that did not 
analyze the particular facts but simply stated it was affirming based 
on the reasoning of the Eleventh Circuit in Davis Bros. Donovan v. 
Miller Properties, Inc., 711 F.2d at 50.
    The proposed revisions to Sec.  531.30 did not modify or otherwise 
excuse compliance with other applicable requirements that limit an 
employer's credit for the reasonable or actual costs to the employer of 
furnishing the employee with board, lodging, or other facilities (if 
customarily furnished) under Section 3(m) of the Act (see 29 CFR 
531.3). Section 3(m) of the Act prescribes certain limitations and 
safeguards that control the payment of wages in other than cash or its 
equivalent. Special recordkeeping requirements must also be met as 
provided in 29 CFR part 516 (see Sec.  516.27), the provisions of which 
also were not modified by the revisions proposed in the NPRM.
    After careful consideration of the comments, the Department has 
determined that further study is warranted to assess the extent to 
which dietary or religious restrictions prevent employees from 
consuming employer-provided meals and whether adequate time is allowed 
for the employee to eat. The Department therefore is not adopting the 
proposal, but may provide guidance on this issue in the future.
10. Section 7(o) Compensatory Time Off
    Section 7 of the FLSA requires that a covered employee receive 
compensation for hours worked in excess of 40 in a workweek at a rate 
not less than one and one-half times the regular rate of pay at which 
the employee is employed. 29 U.S.C. 207(a). In 1985, subsequent to the 
U.S. Supreme Court's decision in Garcia v. San Antonio Metropolitan 
Transit Authority, 469 U.S. 528 (1985), which held that the FLSA may be 
constitutionally applied to State and local governments, Congress added 
section 7(o), 29 U.S.C. 207(o), to the FLSA to permit public agencies 
(i.e., States, local governments, and interstate agencies) to grant 
employees compensatory time off in lieu of cash overtime compensation 
pursuant to an agreement with the employees or their representatives. 
The purpose of this exception to the Act's usual requirement of cash 
overtime pay was ``to provide flexibility to State and local government 
employers and an element of choice to their employees regarding 
compensation for statutory overtime hours.'' H.R. Rep. No. 99-331 
(1985).
    Section 7(o) provides a detailed scheme for the accrual and use of 
compensatory time off. Subsection 7(o)(1) authorizes the provision of 
compensatory time off in lieu of overtime pay. Subsection 7(o)(2) 
specifies how a public employer creates a compensatory time off plan. 
Subsection 7(o)(3) establishes limits for the amount of compensatory 
time off that an employee may accrue. Section 7(o)(4) provides the 
requirements for cashing out compensatory time upon an employee's 
termination.Section 7(o)(5) governs a public employee's use of accrued 
compensatory leave. That section states:

    An employee of a public agency which is a State, political 
subdivision of a State, or an interstate governmental agency--(A) 
who has accrued compensatory time off authorized to be provided 
under paragraph (1), and (B) who has requested the use of such 
compensatory time, shall be permitted by the employee's employer to 
use such 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)(A), (B).
    In 1987, after notice and comment, the Department issued final 
regulations implementing section 7(o) (29 CFR 553.20-.28). Section 
553.25 of the regulations implements section 7(o)(5)'s requirements 
regarding the use of compensatory time off. Section 553.25(c) provides:

    (1) Whether a request to use compensatory time has been granted 
within a ``reasonable period'' will be determined by considering the 
customary work practices within the agency based on the facts and 
circumstances in each case. Such practices include, but are not 
limited to (a) the normal schedule of work, (b) anticipated peak 
workloads based on past experience, (c) emergency requirements for 
staff and services, and (d) the availability of qualified substitute 
staff.
    (2) The use of compensatory time in lieu of cash payment for 
overtime must be pursuant to some form of agreement or understanding 
between the employers and the employee (or the representative of the 
employee) reached prior to the performance of the work. (See Sec.  
553.23). To the extent that the []conditions under which an employee 
can take compensatory time off are contained in an agreement or 
understanding as defined in Sec.  553.23, the terms of such 
agreement or understanding will govern the meaning of ``reasonable 
period''.

Section 553.25(d) states:

    When an employer receives a request for compensatory time off, 
it shall be honored unless to do so would be ``unduly disruptive'' 
to the agency's operations. Mere inconvenience to the employer is an 
insufficient basis for denial of a request for compensatory time 
off. (See H. Rep. 99-331, p. 23.) For an agency to turn down a 
request from an employee for compensatory time off requires that it 
should reasonably and in good faith anticipate that it would impose 
an unreasonable burden on the agency's ability to provide services 
of acceptable quality and quantity for the public during the time 
requested without the use of the employee's services.

    The Department has consistently interpreted its regulations as 
requiring that an employee's request for compensatory time on a 
specific date must be granted unless doing so would unduly disrupt the 
agency's operations. Wage and Hour Opinion Letter 1994 WL 1004861 (Aug. 
19, 1994); DeBraska v. City of Milwaukee, 131 F. Supp. 2d 1032, 1034-35 
(E.D. Wis. 2000) (deferring to the Department's interpretation of its 
regulations as requiring that the specific compensatory time requested 
must be granted absent undue disruption). As discussed in the NPRM, 
however, the Ninth Circuit in Mortensen v. County of Sacramento, 368 
F.3d 1082 (9th Cir. 2004), and the Fifth Circuit in Houston Police 
Officers Union v. City of Houston, 330 F.3d 298 (5th Cir.), cert. 
denied, 540 U.S. 879 (2003), both declined to defer to the Department's 
regulations because they found the plain language of section 7(o)(5)(B) 
to require only that an employee be allowed to use compensatory time 
within a ``reasonable period'' of the date requested for such leave 
unless doing so would ``unduly disrupt'' the agency. Cf., Aiken v. City 
of Memphis, 190 F.3d 753 (6th Cir. 1999), cert. denied, 528 U.S. 1157 
(2000) (finding no FLSA violation where the city and the plaintiffs-
police officers had agreed that ``the reasonable period for requesting 
the use of banked compensatory time begins thirty days prior to the 
date in question and ends when the number of officers requesting the 
use of compensatory time on the given date would bring the precinct's 
staffing levels to the minimum level necessary for efficient 
operation'').
    Based on these appellate decisions, the NPRM proposed to revise 
section

[[Page 18847]]

553.25(c) to add a sentence that states that section 7(o)(5)(B) does 
not require a public agency to allow the use of compensatory time on 
the day specifically requested, but only requires that the agency 
permit the use of the time within a reasonable period after the 
employee makes the request unless the use would unduly disrupt the 
agency's operations. Additionally, the phrase ``within a reasonable 
period after the request'' was added to the final sentence of proposed 
Sec.  553.25(d) and the phrase ``during the time requested'' was 
replaced with ``during the time off'' to clarify the employer's 
obligation.
    Many commenters addressed the compensatory time off issue. NPELRA 
stated that it ``wholeheartedly supports the proposed regulatory 
change.'' It commented that its member agencies have been so concerned 
about litigation regarding this issue that they have eliminated all 
FLSA compensatory time off, but that the proposed rules will ensure 
consistency throughout the country, thereby ``reducing any incentives 
for public employers to eliminate FLSA compensatory time off, which 
benefits both employers and employees.'' NPELRA suggested that the 
Department revise Sec.  553.25(d) to ``state that the term `unduly 
disrupt' may be defined in the collective bargaining process in the 
same manner as the term `reasonable period' may be defined,'' stating 
that this would allow the parties to address circumstances unique to 
their particular organization and would result in less litigation. 
Finally, NPELRA commented that having to pay an employee overtime to 
fill in for an employee who is off creates an undue disruption and 
defeats the purpose of compensatory time off, as the Mortensen court 
found. Therefore, it suggested that the regulations specify that this 
is a factor an employer can consider in deciding whether to grant time 
off.
    The IPMA-HR, IMLA, and NLC also commended the Department for the 
proposed change, stating that it would be ``of great assistance to 
localities that must have adequate staff in order to provide services 
to citizens.'' They also urged the Department to provide that employers 
are not required to grant compensatory time off if it would mean that 
the employer would incur overtime expenses. Littler Mendelson, P.C., 
and SHRM also stated that they supported the proposed change, which 
appropriately conformed the regulation to the cited appellate court 
decisions.
    Commenters representing employees strongly opposed the proposal. 
See American Federation of State, County and Municipal Employees 
(AFSCME), American Federation of Government Employees (AFGE), 
International Union of Police Associations (I.U.P.A.), International 
Association of Fire Fighters, and AFL-CIO. AFSCME urged the Department 
to withdraw the proposal, stating that allowing an employer to deny an 
employee's requested day off without demonstrating that it creates an 
undue hardship would ``make a drastic change to the scope of the 
statute.'' AFSCME stated that there is no uniformity in the courts 
mandating the change, stating that a number of district court decisions 
have upheld the Department's current regulation. AFSCME also asserted 
that the Supreme Court's decision in Christensen v. Harris County, 529 
U.S. 576, 583-85 (2000), provides additional support for the conclusion 
that an employer cannot deny the specific date requested for reasons 
other than those set forth in section 7(o)(5), because the Court stated 
that the section ``imposes a restriction upon an employer's efforts to 
prohibit the use of compensatory time when employees request to do 
so.'' Therefore, AFSCME concluded ``that, at best, there are 
conflicting interpretations of the language of the statute and the 
implementing regulation.'' Id. Because employees request specific dates 
for ``milestones such as children's birthdays, family and friends' 
weddings, funerals, scheduled vacations and other date specific 
activities,'' it would harm employees to allow employers to deny the 
date requested absent undue disruption. Thus, absent consistent court 
interpretations, it stated it would be unwise public policy to change 
the regulation. See also AFGE (the current regulations ``strike the 
proper balance between the public sector employer's interest in 
assuring that its mission is carried out and the employee's interest in 
being able to use compensatory time in a meaningful manner''); I.U.P.A. 
(the current rule appropriately balances agencies' needs and the 
interests of employees, while the proposal ``would upset that balance, 
placing all of the burden on the employees, and allowing the employer 
to reap all the benefits''); and James D. Sewell (``When an officer or 
fireman needs to be off for a particular date, they need to be off that 
day, not a day the employer decides for them.'').
    The AFL-CIO made similar comments, stating that section 7(o)(5) is 
ambiguous and is best read as requiring an employer to act on an 
employee's request within a reasonable period after the request is made 
and to approve the specific day requested absent undue disruption. It 
noted that the Department had agreed with this interpretation in the 
current regulation, an amicus brief and an opinion letter, and it 
disputed that there was unanimity even among the appellate courts 
compelling a change. It cited the decision in Beck v. City of 
Cleveland, 390 F.3d 912 (6th Cir. 2004), which it stated found ``Aiken 
to have been effectively overruled by the Supreme Court's decision in 
Christensen,'' and it emphasized that neither the Fifth Circuit (in 
City of Houston) nor the Ninth Circuit (in Mortensen) considered the 
Supreme Court's decision in reaching their conclusions. The AFL-CIO 
emphasized that the current regulation is consistent with the 
legislative history, citing Senate Report 99-159, which stated that 
when an employer receives a comp time request, ``that request should be 
honored unless to do so would be unduly disruptive.'' It argued that 
the proposal ``would render meaningless the `unduly disrupt' language'' 
because it would likely never come into play if an employer can simply 
substitute a date that it wants for the date the employee requested.
    The I.U.P.A. also referred to the legislative history (House Report 
99-331 (1985)), which states that compensatory time off ``was intended 
to give `freedom and flexibility' to public employees and `additional 
options' to employers.'' The union therefore stated that the 
``reasonable period'' is better read as referring to the time between 
the date the employees submit their requests and the dates requested 
for time off, so that ``requests cannot provide such short notice that 
the employer would be scrambling to find a replacement.'' The I.U.P.A. 
commented that the rationale the Department offered for the change--
that the courts uniformly interpreted the statutory language as 
unambiguous--does not hold up because several district courts have held 
that the statute is ambiguous and agreed with the Department's current 
regulation. It stated that if the Department's rationale is correct, 
then the regulations are unnecessary; it is only if the Department's 
rationale is incorrect, and a court agrees that the statute is 
ambiguous, that the regulations will have an impact because the court 
will defer to the regulations for assistance in interpreting the 
statute. Therefore, the I.U.P.A. stated that the proposal would place 
``responsibility squarely on the shoulders of the Department'' because 
a court that found the statute ambiguous would defer to the regulation 
in denying police officers their chosen days off. Id.
    Comments by Members of United States Congress also opposed the 
Department's proposal, stating that it ``will undermine the ability of 
nearly 20

[[Page 18848]]

million public employees to use their accrued compensatory time off.'' 
They stated that the current rule is correct and consistent with the 
legislative history, and that the proposal upsets the careful balance 
that Congress struck. They also noted that only three of 13 courts of 
appeals have addressed this issue, and ``just two of them have 
expressed disapproval of the Department's longstanding view.'' 
Moreover, they noted that a number of district courts have upheld the 
current rule so the ``issue is unsettled in the federal courts.''
    The IAFF stated that the ``proposal is nonsensical in that it 
essentially eviscerates the purposes for which comp time usage is 
requested.'' The IAFF noted that under the proposed rule an employer 
would have authority to deny a comp time request for no reason 
whatsoever, so long as some alternative date within a reasonable period 
were offered. It also stated that, in many fire departments, employees 
request time off weeks or months in advance, which aids departments in 
maintaining adequate staffing by allowing them time to fill vacancies. 
However, the IAFF stated that the proposal leads to an illogical 
conclusion, because the more lead time an employee provides, the less 
likely it is that the employee will receive statutory protection of the 
right to use the requested time off. The IAFF concluded that, as the 
Department acknowledged in the NPRM, some fire fighters will simply not 
accept compensatory time in lieu of cash if the proposal is adopted. 
``Such an outcome would depart from the plain Congressional intent in 
enacting this statutory provision. It also would likely impose a 
substantial financial burden on local government departments that rely 
on compensatory time, rather than cash overtime * * *''
    Since the publication of the NPRM, another appellate court has 
addressed the issue of whether an employee's specific request to use 
compensatory time must be granted unless it unduly disrupts the 
agency's operation. In Heitmann v. City of Chicago, 560 F.3d 642 (7th 
Cir. 2009), the plaintiffs-police officers argued that the need to 
consider whether a request for leave created an ``undue disruption'' 
presupposed a particular time for the leave and that employees were 
therefore entitled to leave on the date and time of their choosing 
unless it would result in an undue disruption to the city. For its 
part, the city argued that it was required only to offer leave within a 
``reasonable time'' of the employee's request for leave. The court 
noted that the city's position was supported by Houston and Mortensen, 
while the plaintiffs' view was supported by Beck v. Cleveland, 390 F.3d 
912 (6th Cir. 2004), and section 553.25 of the Department's 
regulations. The court rejected the Fifth and Ninth Circuit's plain 
language reading of 7(o)(5), stating that section 7(o)(5) ``is anything 
but clear.''

    Words such as ``reasonable'' and ``undue'' are open-ended. They 
need elaboration, and the relation between these requirements needs 
explication. Here the agency has added vital details and its work 
prevails * * * unless it represents an implausible resolution.

560 F.3d at 646. The court found that the Department's interpretation 
of the requirements of section (7)(o)(5) in its regulations, which 
``makes compensatory leave more attractive to workers and hence a more 
adequate substitute for money,'' was reasonable and entitled to 
deference. Id. The court found that section 553.25(d) requires the 
employer to grant leave on the date and time requested unless doing so 
would create an undue disruption (in which case the employer would be 
able to defer the requested leave for a reasonable time). Id. at 647.
    The Seventh Circuit's Heitmann decision, which finds support in the 
Sixth Circuit's decision in Beck, indicates that the appellate courts 
are not as uniform in their reading of section 7(o)(5) as the 
Department understood them to be at the time of the NPRM. The 
Department now views the courts of appeals as being split on the proper 
interpretation of 7(o)(5), with the Sixth and Seventh Circuits 
requiring agencies to grant the specific leave requested absent undue 
disruption, and the Fifth and Ninth Circuits requiring agencies to 
grant leave within a reasonable time of the leave requested unless 
doing so would create an undue disruption. The Department believes that 
the better reading of section 7(o)(5) is that it requires employers to 
grant compensatory time on the specific date requested unless doing so 
would unduly disrupt the agency. The statutory reading set forth in 
Houston and Mortensen, which requires that the employer grant 
compensatory time within a reasonable period of the date requested, 
essentially nullifies the ``unduly disrupt'' provision of 7(o)(5). See 
Beck v. City of Cleveland, 390 F.3d 912, 925 (6th Cir. 2005) (``to 
grant the City the unlimited discretion to deny compensatory leave 
requests relieves the city of establishing the undue disruption 
requirement imposed by Congress''); DeBraska v. City of Milwaukee, 131 
F. Supp. 2d 1032, 1037 (E.D. Wis. 2000). Accordingly, in light of the 
recent appellate decision, and in consideration of the extensive 
comments received on this section, the Department has decided not to 
finalize the proposed revision to section 553.25(c) and (d) and to 
leave the current regulation unchanged consistent with its longstanding 
position that employees are entitled to use compensatory time on the 
date requested absent undue disruption to the agency. In response to 
comments concerning whether the payment of overtime is a consideration 
in determining whether the use of compensatory time off is unduly 
disruptive, the Department does not believe that any regulatory change 
is warranted. The Department maintains its longstanding position that 
the fact that overtime may be required of one employee to permit 
another employee to use compensatory time off is not a sufficient 
reason for the employer to claim that the compensatory time off request 
is unduly disruptive. See Wage and Hour Opinion Letter 1994 WL 1004861 
(Aug. 19, 1994); 52 FR 2012, 2017 (Jan. 16, 1987) (``The Department 
recognizes that situations may arise in which overtime may be required 
of one employee to permit another employee to use compensatory time 
off. However, such a situation, in and of itself, would not be 
sufficient for an employer to claim that it is unduly disruptive.'').
11. Fluctuating Workweek Method of Computing Overtime Under 29 CFR 
778.114
    The NPRM proposed to modify the Department's regulation at 29 CFR 
778.114 addressing the fluctuating workweek method of computing 
overtime compensation for salaried nonexempt employees to permit the 
payment of non-overtime bonuses and incentives without invalidating the 
guaranteed salary criterion required for the half-time overtime pay 
computation. The current regulation provides that an employer may use 
the fluctuating workweek method for computing half-time overtime 
compensation if an employee works fluctuating hours from week to week 
and receives, pursuant to an understanding with the employer, a fixed 
salary as straight-time compensation ``(apart from overtime premiums)'' 
for whatever hours the employee is called upon to work in a workweek, 
whether few or many. In such cases, an employer satisfies the overtime 
pay requirement of section 7(a) of the FLSA if it compensates the 
employee, in addition to the salary amount, at least one-half of the 
regular rate of pay for the hours worked in excess of 40 hours in each 
workweek.

[[Page 18849]]

Because the employee's hours of work fluctuate from week to week, the 
regular rate must be determined separately each week based on the 
number of hours actually worked each week.
    Paying employees bonus or premium payments for certain activities 
such as working undesirable hours is a common and beneficial practice 
for employees. The NPRM proposed that bona fide bonus or premium 
payments would not invalidate the fluctuating workweek method of 
compensation, but that such payments (as well as ``overtime premiums'') 
must be included in the calculation of the regular rate unless they are 
excluded by FLSA sections 7(e)(1)-(8). The proposal also added an 
example to Sec.  778.114(b) to illustrate these principles where an 
employer pays an employee a nightshift differential in addition to a 
fixed salary.
    The Department's view, at that time, was that the proposed 
modification clarified the rule and was consistent with the Supreme 
Court's decision in Overnight Transportation Co. v. Missel, 316 U.S. 
572 (1942), on which the existing regulation is patterned. See 73 FR 
43662 (Jul. 28, 2008). The Department's proposed modification was 
intended to allow employers to pay additional bona fide premium 
payments.
    The NPRM also proposed to increase the numerical values in the 
examples of overtime computations in Sec.  778.114(b) so the rates of 
pay would be no less than the current minimum wage. Frank Dean 
commented that the term ``approximately'' in two places carried over 
from the current regulatory language is potentially misleading and 
confusing and should be eliminated to make it clear that the 
calculation of statutorily mandated overtime is exacting. Mr. Dean 
recommended changing one of the weekly hour totals from 44 to 37.5 so 
that there would be an exact regular rate calculation in each instance, 
thereby eliminating the need to use ``approximately.'' We agree with 
this analysis and have incorporated his suggested revision into the 
final rule.
    Wage and Hour Consulting Services commented that the statement 
limiting the weekly hours worked in the example to ``never in excess of 
50 hours in a workweek'' in proposed Sec.  778.114(b)(1) was confusing 
and redundant and should be deleted as unnecessary because it is 
clearly explained elsewhere in the section that the wage rate of an 
employee paid under the fluctuating workweek method cannot fall below 
the minimum wage. This phrase was carried over from the current 
regulation and we believe that it does not cause confusion and is 
needed to establish in the example the concept that the employee's 
regular rate will not fall below the minimum wage. We have, therefore, 
retained the concept but have made minor wording changes to clarify the 
example.
    Beyond these two minor editorial comments, the comments were 
sharply divided on the substance of the proposed revisions to the 
fluctuating workweek provisions. In general, commenters representing 
employers favored the revisions while commenters representing employees 
strongly opposed the revisions.
    SHRM noted that it is common practice to pay a nonexempt salaried 
employee a bonus or premium as an incentive for various reasons, such 
as working less desirable hours. SHRM commented that other payment 
methods, such as hourly, piece rates, day rates, and job rates, 
contemplate that an employee may receive a bonus or other premium 
payments in addition to normal pay and asserted that it was logical and 
consistent to permit such payments under the fluctuating workweek 
method of compensation.
    The Chamber of Commerce also favored the revisions but sought 
further clarifications as to when and how bonuses should be included in 
regular rate calculations, particularly when bonuses (1) cover more 
than one workweek, (2) are not paid in the same workweek when the work 
was performed to which the bonus applies, and (3) are not allocable 
among workweeks in proportion to the amount of bonus actually earned 
each week. Littler Mendelson, P.C., also supported the proposed 
revisions, but suggested further revisions to add cross-references to 
other sections in part 778 regarding how to include bonuses in the 
regular rate to clarify that all the rules regarding bonuses for 
nonexempt employees apply equally whether the nonexempt employee is 
paid by the hour, on a salary basis or under the fluctuating workweek 
method. Because we believe the principles for including bonuses in the 
regular rate discussed in other sections of the regulations are clear, 
we do not find that further clarifications or additional cross-
references are necessary in this section.
    Fisher & Phillips LLP noted that part 778 is an interpretative rule 
and similarly noted that Sec.  778.114 ``is simply one in a series of 
examples of how the regular-rate principles of Section 778.109 apply in 
different situations.'' The commenter recommended revisions to clarify 
that the half time overtime calculation in section 778.114 applies 
regardless of whether the employee's hours fluctuate. The Department 
disagrees with this comment and notes that the application of section 
778.114 is properly limited to situations where the employee's hours 
fluctuate. See Flood v. New Hanover County, 125 F.3d 249, 253 (4th Cir. 
1997); FOH section 32b04b.
    Comments expressing strong opposition to the proposed revisions 
were mostly based on two primary criticisms. First, that receipt of 
premium and bonus payments is inconsistent with payment of a fixed 
salary. See NELP, SEIU, NELA, AFL-CIO, Members of United States 
Congress, and North Carolina Justice Center. Second, that the proposed 
revisions will encourage employers to schedule additional overtime for 
employees paid under the fluctuating workweek method or otherwise 
disadvantage workers by expanding its use to a larger portion of the 
workforce. See NELP, North Carolina Justice Center, NELA, AFL-CIO, and 
Members of United States Congress. A number of these comments opposing 
the revisions questioned the Department's authority for making the 
revisions and asserted they would administratively overturn uniform, 
well-settled case law without justification and urged the Department to 
withdraw them. Commenters stating that premium and bonus payments are 
inconsistent with the concept of a fixed salary generally asserted that 
the proposed revisions are inconsistent with the Supreme Court's 
decision in Missell, in which the Court approved the use of the 
fluctuating workweek method requiring payment of only the additional 
half-time premium for hours worked over 40 per week for an employee 
paid a fixed weekly wage who worked weekly hours that fluctuated. Based 
on the Court's ruling and the language of current Sec.  778.114(a), 
which provides that ``[a]n employee employed on a salary basis may have 
hours of work which fluctuate from week to week and the salary may be 
paid him pursuant to an understanding with his employer that he will 
receive such fixed amount as straight time pay for whatever hours he is 
called upon to work in a workweek, whether few or many,'' these 
commenters asserted that employees paid under the fluctuating workweek 
method must receive fixed weekly pay that does not vary. The proposal 
departs from this fundamental concept, the commenters asserted. These 
commenters also took issue with the statement in the NPRM that the 
current regulation has presented challenges in the courts, asserting 
that courts applying the fluctuating workweek method of payment have 
uniformly concluded that

[[Page 18850]]

paying additional ``non-overtime'' premiums violates section 779.114. 
See NELA (citing O'Brien v. Town of Agawam, 350 F.3d 279 (1st Cir. 
2003); Dooley v. Liberty Mutual Ins. Co., 369 F. Supp. 2d 81 (D. Mass. 
2005); Ayers v. SGS Control Services, Inc., 2007 WL 646326 (S.D.N.Y. 
2007)), SEIU, AFL-CIO, NELP, Members of United States Congress, and 
North Carolina Justice Center.
    Several commenters also noted that the proposal would permit 
employers to reduce employees' fixed weekly salaries and shift the bulk 
of the employees' wages to bonus and premium pay. See NELP, NELA, SEIU, 
and North Carolina Justice Center. These commenters argued that this 
would harm employees because it would lead to significant variations in 
weekly wages based on the hours worked. They stated that such 
variations in pay are inconsistent with the purpose of the fluctuating 
workweek. They further objected to the proposal because it would expand 
the use of the fluctuating workweek method to industries in which bonus 
and premium payments are common. See NELA, Members of United States 
Congress, SEIU, and North Carolina Justice Center. Comments submitted 
by Members of the United States Congress urged that instead of 
modifying this section to expand its use, the Department should 
consider narrowing the scope of the section to prevent employers from 
abusing this method to lower workers' pay.
    The Department has carefully considered all of the comments 
submitted on this section. While the Department continues to believe 
that the payment of bonus and premium payments can be beneficial for 
employees in many other contexts, we have concluded that unless such 
payments are overtime premiums, they are incompatible with the 
fluctuating workweek method of computing overtime under section 
778.114. As several commenters noted, the proposed regulation could 
have had the unintended effect of permitting employers to pay a greatly 
reduced fixed salary and shift a large portion of employees' 
compensation into bonus and premium payments, potentially resulting in 
wide disparities in employees' weekly pay depending on the particular 
hours worked. It is just this type of wide disparity in weekly pay that 
the fluctuating workweek method was intended to avoid by requiring the 
payment of a fixed amount as straight time pay for all hours in the 
workweek, whether few or many. The basis for allowing the half-time 
overtime premium computation under the fluctuating workweek method is 
the mutual understanding between the employer and the employee 
regarding payment of a fixed amount as straight time pay for whatever 
hours are worked each workweek, regardless of their number. While the 
example provided in the NPRM of nightshift premiums resulted in a 
relatively modest change in the employee's straight time pay, the 
Department now believes that the proposed regulation would have been 
inconsistent with the requirement of a fixed salary payment set forth 
by the Supreme Court in Overnight Motor Transport v. Missel. Moreover, 
on closer examination, the Department is persuaded that the courts have 
not been unduly challenged in applying the current regulation to 
additional bonus and premium payments. See O'Brien v. Town of Agawam, 
350 F.3d 279 (1st Cir. 2003); Adeva v. Intertek USA, 2010 WL 97991 
(D.N.J. 2010); Dooley v. Liberty Mutual Ins. Co., 369 F. Supp. 2d 81 
(D. Mass. 2005); Ayers v. SGS Control Services, Inc., 2007 WL 646326 
(S.D.N.Y. 2007).
    Finally, while the proper use of the fluctuating workweek method of 
pay results in an employee being paid time and one-half of the 
employee's regular rate for overtime hours, the Department is cognizant 
that this method of pay results in a regular rate that diminishes as 
the workweek increases, which may create an incentive to require 
employees to work long hours. The Department does not believe that it 
would be appropriate to expand the use of this method of computing 
overtime pay beyond the scope of the current regulation. Accordingly, 
the final rule has been modified from the proposal to restore the 
current rule requiring payment of the fixed salary amount as the 
straight time pay for whatever hours are worked in the workweek, that a 
clear mutual understanding of the parties must exist that the fixed 
salary is compensation (apart from overtime premiums) for the hours 
worked each workweek whatever their number, that the fixed salary 
amount must be sufficient to provide compensation at a rate not less 
than the minimum wage, and that the employee must receive extra 
compensation in addition to the fixed salary for all overtime hours 
worked at a rate not less than one-half the regular rate of pay. 
Editorial revisions have been included in the text of the final rule to 
delete gender-specific references and to update the computation 
examples to provide wage rates above the minimum wage and the exact 
calculation of the regular rate. The proposed examples in the NPRM at 
Sec.  778.114(b)(2) suggesting methods for making supplemental 
nightshift premium payments as part of the fluctuating workweek 
methodology for computing half-time overtime pay have been deleted from 
the final rule.

Other Revisions

    The current recordkeeping regulations on tipped employees at 29 CFR 
516.28 include an outdated parenthetical reference that suggests a 
limit ``(not in excess of 40 percent of the applicable statutory 
minimum wage)'' as the maximum amount of tip credit an employer may 
claim under the FLSA. 29 CFR 516.28(a)(3). This outdated reference 
reflected the former provisions of section 3(m) of the FLSA as amended 
by the 1977 FLSA Amendments, which has since been overtaken by 
subsequent statutory amendments passed in 1989 and 1996. See Public Law 
95-151, Sec.  3(b)(2), 91 Stat. 1249 (Nov. 1, 1977); Public Law 101-
157, Sec.  5, 103 Stat. 941 (Nov. 17, 1989); Public Law 104-188, Sec.  
2105(b), 110 Stat. 1929 (Aug. 20, 1996). The Department inadvertently 
overlooked updating this reference in part 516 when updating the other 
tip credit references in the NPRM. Because the regulatory reference has 
been superseded by subsequent statutory enactments, the Department is 
updating this section of the recordkeeping regulation in this final 
rule to conform it to current law and, because of the technical nature 
of the change, is doing so without prior notice and opportunity for 
public comment. The Department hereby finds, pursuant to the 
Administrative Procedure Act, that prior notice and opportunity for 
public comment on this ministerial change that is required by statutory 
amendment are impracticable, unnecessary, or contrary to the public 
interest. See 5 U.S.C. 553(b)(3)(B).
    The current interpretative regulation on ``Hours Worked,'' at 29 
CFR 785.7 (``Judicial construction''), cites incorrectly to a holding 
of the U.S. Supreme Court in Tennessee Coal, Iron & Railroad Co. v. 
Muscoda Local No. 123, 321 U.S. 590, 598 (1944). The typographical 
error in the phrase ``primarily for the benefit of the employer of his 
business'' is corrected by replacing the incorrect ``of'' with ``and.'' 
Because this change is required to conform the text to the cited 
holding, the Department is making this correction without prior notice 
and opportunity for public comment. The Department hereby finds, 
pursuant to the Administrative Procedure Act, that prior notice and 
opportunity for public comment on this ministerial change are

[[Page 18851]]

impracticable, unnecessary, or contrary to the public interest. See 5 
U.S.C. 553(b)(3)(B).

IV. Paperwork Reduction Act

    This rule does not impose new information collection requirements 
for purposes of the Paperwork Reduction Act of 1995, 44 U.S.C. 3501 et 
seq.

V. Executive Orders 12866 and 13563; Small Business Regulatory 
Enforcement Fairness Act; Regulatory Flexibility

    This final rule is not economically significant within the meaning 
of Executive Order 12866, or a ``major rule'' under the Unfunded 
Mandates Reform Act or Section 801 of the Small Business Regulatory 
Enforcement Fairness Act.
    As discussed previously in this preamble, over the years, Congress 
has amended the FLSA to refine or to add to exemptions and to clarify 
the minimum wage and overtime pay requirements. However, in many cases, 
the Department of Labor did not update the FLSA regulations to reflect 
these statutory changes. The Department believes that the existing 
outdated regulatory provisions may cause confusion within the regulated 
community resulting in inadvertent violations and the costs of 
corrective compliance measures to remedy them.
    The Department has determined that the final rule changes will not 
result in any additional compliance costs for regulated entities 
because the current compliance obligations derive from current law and 
not the outdated regulatory provisions that have been superseded years 
ago.
    The Department is aware that this interpretation appears to be 
inconsistent with OMB Circular A-4's guidance on the use of analysis 
baselines, which states: ``In some cases, substantial portions of a 
rule may simply restate statutory requirements that would be self-
implementing, even in the absence of the regulatory action. In these 
cases, you should use a pre-statute baseline'' to conduct the 
regulatory impact analysis. However, as the discussion below indicates, 
the Department believes the use of a pre-statute baseline would be 
extremely difficult for statutes enacted a decade or more in the past. 
Fundamental changes in the economy and labor market (e.g., the 
introduction of technology, changes in the size and composition of the 
labor force, changes in the economy that impact the demand for labor, 
etc.) would make it difficult, if not impossible, to separate those 
changes from changes that resulted from enactment of the statute.
    Moreover, the Department believes the economic impacts due to the 
statutory changes to the FLSA are typically greatest in the short run 
and diminish over time. This is due to labor markets determining the 
most efficient way to adjust to the new requirements, and because the 
Department believes many of the changes mandated by various revisions 
to the FLSA are reflective of the natural evolution of the labor market 
and would have become more common even in the absence of regulatory 
changes. For example, as nominal wages rise overtime, the marginal 
impact of a fixed minimum wage provision decreases, since it is less 
binding on the market. Therefore, the impacts resulting from the 
promulgation of the final regulations are not likely to be measurable. 
In fact, the Department anticipates that this final rule will simply 
enhance the Department's enforcement of, and the public's understanding 
of, compliance obligations under the FLSA by replacing outdated 
regulations with updated provisions that reflect current law.

1996 and 2007 Amendments to the FLSA Minimum Wage

    The current FLSA regulations reference the minimum wage in several 
places, some referring to the 1981 minimum wage of $3.35 and others 
referring to the 1991 minimum wage of $4.25. To eliminate the current 
inconsistencies between the FLSA regulations and the statute, the 
Department revised the regulations to refer to the statutory minimum 
wage provision rather than a specific minimum wage. Since the final 
regulations do not include any reference to a specific minimum wage, 
the Department believes they do not impose the burden of increasing the 
minimum wage from the levels specified in the current regulations. That 
burden was imposed by the statutory changes and is not derived from the 
FLSA regulations. Thus, the Department concludes that the only 
incremental effect of this final rule on the public from these changes 
is possibly clearing up some confusion. This differentiates the minimum 
wage provisions from many other rulemakings in which the Department is 
given little statutory discretion, but nonetheless is still required to 
update the CFR.

Small Business Job Protection 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), to state that for travel time 
involving the employee's use of employer-provided vehicles for 
commuting at the beginning and end of the workday to be considered 
noncompensable, the use of the vehicle must be ``conducted under an 
agreement between the employer and the employee or the employee's 
representative.'' The Department believes that since 1996 the labor 
market has adjusted to this statutory change and that it would be very 
difficult, if not impossible, to estimate the impact of this amendment. 
It is likely that as part of their overall compensation package, some 
employers and their employees have agreed to make the travel time 
compensable while others have agreed to make it noncompensable. In 
addition, since this provision simply clarifies that compensability 
should be subject to an agreement, but does not otherwise restrict the 
type of agreement employers and employees may reach, the Department 
believes this provision by its nature does not impose a significant 
burden on the public. Therefore, the Department concludes that the 
final rule will have no measurable effect on the public except to 
possibly clear up some confusion.
    In addition, section 2105 of the SBJPA amended the FLSA effective 
August 20, 1996, by adding section 6(g), 29 U.S.C. 206(g), which 
provides that ``[a]ny employer may pay any employee [who has not 
attained the age of 20] 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.'' The 
Department believes that the labor market has also adjusted to this 
change during the period since the enactment of the SBJPA. Although 
youths would obviously want to receive the normal minimum wage rather 
than the youth wage, some youths will decide to accept the lower youth 
wage in order to gain experience in the labor market. Similarly, 
although some employers may want to pay the lower youth wage, some may 
find compliance with the added requirements associated with the youth 
wage not to be worth the savings in wages. Thus, the Department 
concludes that the final rule will have no measurable effect on the 
public except to possibly clear up some confusion.

Agricultural Workers on Water Storage/Irrigation Projects

    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), by extending the exemption 
from overtime pay requirements applicable to workers on water storage 
and irrigation projects where at least 90

[[Page 18852]]

percent of the water is used for agricultural purposes, rather than 
where the water is used exclusively for agricultural purposes. The 
Department believes that the labor market has also adjusted to this 
change during the period since the enactment of the amendment. Although 
agricultural workers and workers employed on water storage/irrigation 
projects listed in the exemption are not required to be paid time and 
one-half for the hours worked in excess of 40 in a work week, their 
overall compensation will be determined by market forces. In some 
cases, employers and their employees will choose some form of premium 
overtime pay (even though it is not mandated by the FLSA) while others 
may choose a higher salary with no additional compensation for the 
hours worked in excess of 40 in a week. In addition, this provision 
applies to a relatively small part of the overall U.S. labor force; 
thus, the Department believes any possible impacts due to this 
exemption would likely not be substantial. Therefore, the Department 
concludes that the final rule will have no measurable effect on the 
public except to possibly clear up some confusion.

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 Department 
believes that the labor market has also adjusted to this change during 
the period since the enactment of the amendment. The Department also 
believes this regulatory change is not likely to cause an impact we 
would consider significant, since its application is limited and it 
simply clarifies that certain individuals may be considered volunteers.

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 change in definition impacts fire protection 
employees who may be covered by the partial overtime exemption allowed 
by Sec.  7(k) (29 U.S.C. 207(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. 213(b)(20)). The Department 
believes that these provisions apply to a relatively small proportion 
of the labor market, and that the market has adjusted to this change 
during the period since the enactment of the amendment. Thus, the 
Department concludes that the final regulatory changes will have no 
measurable effect on the public except to possibly clear up some 
confusion by replacing outdated regulations with updated provisions to 
reflect current law.

Stock Options Excluded From the Computation of the Regular Rate

    The Worker Economic Opportunity Act enacted by Congress on 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 ``[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 to the types of 
remuneration that are excluded from the computation of the regular 
rate. 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 Department believes that the labor markets have 
adjusted to this statute, which provides additional alternatives for 
employee compensation, but does not otherwise limit or mandate the 
overall levels of compensation owed to any category of worker. The 
final regulatory changes merely help to correct any confusion in this 
area.

Fair Labor Standards Act Amendments of 1974 and 1977

    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 Department believes that 
these provisions apply to a relatively small proportion of the labor 
market, and that the labor market has also adjusted to this change 
during the long period since the enactment of the amendment. Although 
salespersons primarily engaged in selling boats are not required to be 
paid time and one-half for the hours worked in excess of 40 in a work 
week, their overall compensation will be determined by market forces. 
In some cases, employers and their employees may choose some form of 
premium overtime pay (even though it is not mandated by the FLSA) while 
others may choose a higher salary and commissions with no additional 
compensation for the hours worked in excess of 40 in a week.
    Similarly, the Department believes that the market has adjusted to 
no exemptions for partsmen and mechanics servicing trailers or 
aircraft. Although there may have been some short run effects related 
to the statutory change, in the years since enactment of the statute, 
employers and their employees have adjusted to the overtime 
requirement. Thus, the Department concludes that the final regulatory 
changes will have no measurable effect on the public except to possibly 
clear up some confusion.
    On November 1, 1977, Congress amended section 3(t) of the FLSA, 29 
U.S.C. 203(t). Public Law 95-151, Sec.  3(a), 91 Stat. 1245. Section 
3(t) of the FLSA defines the phrase ``tipped employee.'' The amendment 
changed the conditions for taking the tip credit when making wage 
payments to qualifying tipped employees under the FLSA. Prior to the 
1977 amendment, the definition encompassed ``any employee engaged in an 
occupation in which he customarily and regularly receives more than $20 
a month in tips.'' The 1977 amendment raised the threshold in section 
3(t) to $30 a month in tips. Although the mandatory paid wage ($2.13) 
for tipped employees is below the full minimum wage, these workers must 
still receive hourly compensation (cash wages plus tips) at least equal 
to the minimum wage. Moreover, regardless of the minimum wage, if the 
hourly compensation is too low employers will have trouble finding a 
sufficient number of workers. The Department believes that the labor 
market has also adjusted to this change during the period since the 
enactment of the amendment and that the regulatory changes will have no 
measurable economic effect on the public except to possibly clear up 
some confusion.

Meal Credit Under Section 3(m)

    The Department proposed to amend Sec.  531.30 to reflect that, with 
the exception of meals, the employee's acceptance of a facility for 
which the employer seeks to take a 3(m) credit must be voluntary and 
uncoerced. The Department determined that the

[[Page 18853]]

proposed change would have no measurable economic impact. After 
consideration of the comments received, the Department has determined 
that further study of this issue is warranted, and therefore is not 
adopting the proposal. Because the Department is not implementing this 
proposal, there is no change to the status quo. As a result, the 
Department does not believe that there will be any measurable economic 
impact on the public.

Section 7(o) Compensatory Time Off

    In 1987, the Department issued final regulations implementing a 
detailed scheme for the accrual and use of compensatory time off under 
Section 7(o). 29 U.S.C. 207(o). Section 7(o)(5) governs a public 
employee's use of accrued compensatory leave. That section states:

    An employee of a public agency which is a State, political 
subdivision of a State, or an interstate governmental agency--(A) 
who has accrued compensatory time off authorized to be provided 
under paragraph (1), and (B) who has requested the use of such 
compensatory time, shall be permitted by the employee's employer to 
use such 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). As discussed supra, the Department proposed to 
amend Sec.  553.25(c) to comport with appellate court decisions reading 
the statutory language to state that once an employee requests 
compensatory time off, the employer has a reasonable period of time to 
allow the employee to use the time unless doing so would be unduly 
disruptive. Additionally, the Department proposed to clarify the 
employer's obligation when denying an employee's request for the use of 
compensatory time off in Sec.  553.25(d).
    In the NPRM, the Department stated its belief that the proposed 
changes would eliminate some of the confusion over the use of 
compensatory time off. The Department stated that it did not believe 
the proposed changes altered the nature of compensatory time off rights 
and responsibilities, but recognized that because of uncertainty as to 
their ability to use compensatory time when requested, some employees 
might choose not to accrue compensatory time off, thus resulting in 
some slight economic impacts.
    As already discussed in this preamble, since the publication of the 
NPRM, another appellate court has addressed this issue and concluded 
that the statutory language is unclear and the Department's regulations 
requiring an employer to grant the specific time requested unless it 
would unduly disrupt the agency's operations is reasonable. The 
Department has therefore reexamined its proposal based on all the 
appellate decisions and the public comments and has decided not to 
finalize the proposed revision to section 553.25(c) and (d) and to 
leave the current regulation unchanged consistent with its longstanding 
position that employees are entitled to use compensatory time on the 
date requested absent undue disruption to the agency. Because the 
proposed changes will not be implemented, the Department does not 
believe that there will be any measurable economic impact on the 
public.

Fluctuating Workweek Method of Computing Overtime Under 29 CFR 778.114

    The Department proposed to modify the regulation at 29 CFR 778.114 
addressing the fluctuating workweek method of computing overtime 
compensation for salaried nonexempt employees. The proposed regulation 
provided that bona fide bonus or premium payments would not invalidate 
the fluctuating workweek method of compensation, but that such payments 
(as well as ``overtime premiums'') must be included in the calculation 
of the regular rate unless they are excluded by FLSA sections 7(e)(1)-
(8). Paying employees bonus or premium payments for certain activities 
such as working undesirable hours is a common and beneficial practice 
for both employers and their employees.
    For the reasons discussed earlier in this preamble, while the 
Department continues to believe that the payment of bonus and premium 
payments can be beneficial for employees in many other contexts, we 
have concluded that unless such payments are overtime premiums, they 
are incompatible with the fluctuating workweek method of computing 
overtime under section 778.114. Therefore the final rule does not 
implement this proposed provision. Because the proposed changes will 
not be implemented, the Department does not believe that there will be 
any measurable economic impact on the public.
1. Executive Orders 12866 and 13563 (Regulatory Review)
    The Department does not believe that incorporating these statutory 
amendments into the FLSA and Portal Act regulations will impose 
measurable costs on private or public sector entities. The final rule 
changes should not result in additional compliance costs for regulated 
entities because employers have been obligated to comply with the 
underlying statutory provisions for many years. With this action, DOL 
is merely bringing up-to-date regulatory provisions that were 
superseded years ago.
2. Regulatory Flexibility Act
    Furthermore, because the final rule will not impose any measurable 
costs on employers, both large and small entities, the Department has 
determined that it would not have a significant economic impact on a 
substantial number of small entities within the meaning of the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). The Department 
certified to the Chief Counsel for Advocacy to this effect at the time 
the NPRM was published. The Department received no contrary comments 
that questioned the Department's analysis or conclusions in this 
regard. Consequently, the Department certifies once again pursuant to 5 
U.S.C. 604 that the revisions being implemented in connection with 
promulgating this final rule will not have a significant economic 
impact on a substantial number of small entities. Accordingly, the 
Department need not prepare a regulatory flexibility analysis.

VI. Unfunded Mandates Reform Act

    This final rule has been reviewed in accordance with the Unfunded 
Mandates Reform Act of 1995 (UMRA). 2 U.S.C. 1501 et seq. For the 
purposes of the UMRA, this rule does not impose any Federal mandate 
that may result in increased expenditures by State, local, or Tribal 
governments, or increased expenditures by the private sector, of more 
than $100 million in any year.

VII. Executive Order 13132 (Federalism)

    The Department has reviewed this rule in accordance with the 
Executive Order on Federalism (Executive Order 13132, 64 FR 43255, Aug. 
10, 1999). This rule does not have federalism implications as outlined 
in E.O. 13132. The rule does not have substantial direct effects on the 
States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government.

VIII. Executive Order 13175, Indian Tribal Governments

    The Department has reviewed this rule under the terms of Executive 
Order 13175 and determined it did not have ``tribal implications.'' The 
rule does not have ``substantial direct effects on one or more Indian 
tribes, on the relationship

[[Page 18854]]

between the Federal government and Indian tribes, or on the 
distribution of power and responsibilities between the Federal 
government and Indian tribes.'' As a result, no Tribal summary impact 
statement has been prepared.

IX. Effects on Families

    The Department certifies that this rule will not adversely affect 
the well-being of families, as discussed under section 654 of the 
Treasury and General Government Appropriations Act, 1999.

X. Executive Order 13045, Protection of Children

    The Department has reviewed this rule under the terms of Executive 
Order 13045 and determined this action is not subject to E.O. 13045 
because it is not economically significant as defined in E.O. 12866 and 
it does not impact the environmental health or safety risks of 
children.

XI. Environmental Impact Assessment

    The Department has reviewed this rule in accordance with the 
requirements of the National Environmental Policy Act of 1969 (NEPA), 
42 U.S.C. 4321 et seq., the regulations of the Council of Environmental 
Quality, 40 CFR 1500 et seq., and the Departmental NEPA procedures, 29 
CFR part 11, and determined that this rule will not have a significant 
impact on the quality of the human environment. There is, thus, no 
corresponding environmental assessment or an environmental impact 
statement.

XII. Executive Order 13211, Energy Supply

    The Department has determined that this rule is not subject to 
Executive Order 13211. It will not have a significant adverse effect on 
the supply, distribution or use of energy.

XIII. Executive Order 12630, Constitutionally Protected Property Rights

    The Department has determined that this rule is not subject to 
Executive Order 12630 because it does not involve implementation of a 
policy ``that has taking implications'' or that could impose 
limitations on private property use.

XIV. Executive Order 12988, Civil Justice Reform Analysis

    The Department drafted and reviewed this final rule in accordance 
with Executive Order 12988 and determined that the rule will not unduly 
burden the Federal court system. The rule was: (1) Reviewed to 
eliminate drafting errors and ambiguities; (2) written to minimize 
litigation; and (3) written to provide a clear legal standard for 
affected conduct and to promote burden reduction.

List of Subjects

29 CFR Part 4

    Administrative practice and procedures, Employee benefit plans, 
Government contracts, Labor, Law enforcement, Minimum wages, Penalties, 
Wages.

29 CFR Part 516

    Employment, Recordkeeping, Law enforcement, Labor.

29 CFR Part 531

    Employment, Labor, Minimum wages, Wages.

29 CFR Part 553

    Firefighters, Labor, Law enforcement officers, Overtime pay, Wages.

29 CFR Part 778

    Employment, Overtime pay, Wages.

29 CFR Part 779

    Compensation, Overtime pay.

29 CFR Part 780

    Agriculture, Irrigation, Overtime pay.

29 CFR Part 785

    Compensation, Hours of work.

29 CFR Part 786

    Compensation, Minimum wages, Overtime pay.

29 CFR Part 790

    Compensation, Hours of work.

    Signed at Washington, DC, this 16th day of March 2011.
Nancy J. Leppink,
Acting Administrator, Wage and Hour Division.
    For the reasons set forth above, the Department amends Title 29, 
Parts 4, 516, 531, 553, 778, 779, 780, 785, 786, and 790 of the Code of 
Federal Regulations as follows:

PART 4--LABOR STANDARDS FOR FEDERAL SERVICE CONTRACTS

0
1. The authority citation for part 4 is revised to read as follows:

    Authority: 41 U.S.C. 351 et seq.; 41 U.S.C. 38 and 39; 5 U.S.C. 
301; Pub. L. 104-188, Sec.  2105(b); Pub. L. 110-28, 121 Stat. 112; 
Secretary's Order 9-2009, 74 FR 58836 (Nov. 13, 2009).

Sec.  4.159  General minimum wage. [Amended]

0
2. Amend Sec.  4.159 by removing the last sentence.

0
3. Amend Sec.  4.167 by revising the twelfth sentence to the end, to 
read as follows:

Sec.  4.167  Wage payments--medium of payment.

    * * * The general rule under that Act provides, when determining 
the wage an employer is required to pay a tipped employee, the maximum 
allowable hourly tip credit is limited to the difference between $2.13 
and the applicable minimum wage specified in section 6(a)(1) of that 
Act. (See Sec.  4.163(k) for exceptions in section 4(c) situations.) In 
no event shall the sum credited as tips exceed the value of tips 
actually received by the employee. The tip credit is not available to 
an employer unless the employer has informed the employee of the tip 
credit provisions and all tips received by the employee have been 
retained by the employee (other than as part of a valid tip pooling 
arrangement among employees who customarily and regularly receive tips; 
see section 3(m) of the Fair Labor Standards Act).

PART 516--RECORDS TO BE KEPT BY EMPLOYERS

0
4. The authority citation for part 516 is revised to read as follows:

    Authority: Sec. 11, 52 Stat. 1066, as amended, 29 U.S.C. 211. 
Section 516.28 also issued under Pub. L. 104-188, Sec.  2105(b); 
Pub. L. 110-28, 121 Stat. 112. Section 516.33 also issued under 52 
Stat. 1060, as amended; 29 U.S.C. 201 et seq. Section 516.34 also 
issued under Sec. 7, 103 Stat. 944, 29 U.S.C. 207(q).

0
5. Amend Sec.  516.28 by revising the first sentence of paragraph 
(a)(3) to read as follows:

Sec.  516.28  Tipped employees.

    (a) * * *
    (3) Amount by which the wages of each tipped employee have been 
deemed to be increased by tips as determined by the employer (not in 
excess of the difference between $2.13 and the applicable minimum wage 
specified in section 6(a)(1) of the Act). * * *
* * * * *

PART 531--WAGE PAYMENTS UNDER THE FAIR LABOR STANDARDS ACT OF 1938

0
6. The authority citation for part 531 is revised to read as follows:

    Authority: Sec. 3(m), 52 Stat. 1060; sec. 2, 75 Stat. 65; sec. 
101, 80 Stat. 830; sec. 29(B), 88 Stat. 55, Pub. L. 93-259; Pub. L. 
95-151, 29 U.S.C. 203(m) and (t); Pub. L. 104-188, Sec.  2105(b); 
Pub. L. 110-28, 121 Stat. 112.

[[Page 18855]]

Sec.  531.7  [Removed and Reserved]

0
7. Remove and reserve Sec.  531.7.

0
8. Amend Sec.  531.36 by revising paragraph (a) to read as follows:

Sec.  531.36  Nonovertime workweeks.

    (a) When no overtime is worked by the employees, section 3(m) and 
this part apply only to the applicable minimum wage for all hours 
worked. To illustrate, where an employee works 40 hours a week at a 
cash wage rate of at least the applicable minimum wage and is paid that 
amount free and clear at the end of the workweek, and in addition is 
furnished facilities, no consideration need be given to the question of 
whether such facilities meet the requirements of section 3(m) and this 
part, since the employee has received in cash the applicable minimum 
wage for all hours worked. Similarly, where an employee is employed at 
a rate in excess of the applicable minimum wage and during a particular 
workweek works 40 hours for which the employee receives at least the 
minimum wage free and clear, the employer having deducted from wages 
for facilities furnished, whether such deduction meets the requirement 
of section 3(m) and subpart B of this part need not be considered, 
since the employee is still receiving, after the deduction has been 
made, a cash wage of at least the minimum wage for each hour worked. 
Deductions for board, lodging, or other facilities may be made in 
nonovertime workweeks even if they reduce the cash wage below the 
minimum wage, provided the prices charged do not exceed the 
``reasonable cost'' of such facilities. When such items are furnished 
the employee at a profit, the deductions from wages in weeks in which 
no overtime is worked are considered to be illegal only to the extent 
that the profit reduces the wage (which includes the ``reasonable 
cost'' of the facilities) below the required minimum wage. Facilities 
must be measured by the requirements of section 3(m) and this part to 
determine if the employee has received the applicable minimum wage in 
cash or in facilities which may be legitimately included in ``wages'' 
payable under the Act.
* * * * *

0
9. Revise Sec.  531.37 to read as follows:

Sec.  531.37  Overtime workweeks.

    (a) Section 7 requires that the employee receive compensation for 
overtime hours at ``a rate of not less than one and one-half times the 
regular rate at which he is employed.'' When overtime is worked by an 
employee who receives the whole or part of his or her wage in 
facilities and it becomes necessary to determine the portion of wages 
represented by facilities, all such facilities must be measured by the 
requirements of section 3(m) and subpart B of this part. It is the 
Administrator's opinion that deductions may be made, however, on the 
same basis in an overtime workweek as in nonovertime workweeks (see 
Sec.  531.36), if their purpose and effect are not to evade the 
overtime requirements of the Act or other law, providing the amount 
deducted does not exceed the amount which could be deducted if the 
employee had only worked the maximum number of straight-time hours 
during the workweek. Deductions in excess of this amount for such 
articles as tools or other articles which are not ``facilities'' within 
the meaning of the Act are illegal in overtime workweeks as well as in 
nonovertime workweeks. There is no limit on the amount which may be 
deducted for ``board, lodging, or other facilities'' in overtime 
workweeks (as in workweeks when no overtime is worked), provided that 
these deductions are made only for the ``reasonable cost'' of the items 
furnished. These principles assume a situation where bona fide 
deductions are made for particular items in accordance with the 
agreement or understanding of the parties. If the situation is solely 
one of refusal or failure to pay the full amount of wages required by 
section 7, these principles have no application. Deductions made only 
in overtime workweeks, or increases in the prices charged for articles 
or services during overtime workweeks will be scrutinized to determine 
whether they are manipulations to evade the overtime requirements of 
the Act.
    (b) Where deductions are made from the stipulated wage of an 
employee, the regular rate of pay is arrived at on the basis of the 
stipulated wage before any deductions have been made. Where board, 
lodging, or other facilities are customarily furnished as additions to 
a cash wage, the reasonable cost of the facilities to the employer must 
be considered as part of the employee's regular rate of pay. See 
Walling v. Alaska Pacific Consolidated Mining Co., 152 F.2d 812 (9th 
Cir. 1945), cert. denied, 327 U.S. 803.

0
10. Remove the undesignated center heading above Sec.  531.50.

0
11. Designate Sec. Sec.  531.50 through 531.60 as subpart D, and add a 
heading for subpart D to read as follows:

Subpart D--Tipped Employees

0
12. Revise Sec.  531.50 to read as follows:

Sec.  531.50  Statutory provisions with respect to tipped employees.

    (a) With respect to tipped employees, section 3(m) provides 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 August 20, 1996 [i.e., $2.13]; 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 
206(a)(1) of this title.
    (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.

Sec. Sec.  531.51, 531.56, 531.57, 531.58  [Amended]

0
13. In addition to the amendments set forth above, in 29 CFR part 531, 
remove the words ``$20'' and add, in their place, the words ``$30'' 
wherever they appear in the following places:
0
a. Section 531.51;
0
b. Section 531.56, the section heading and paragraphs (a) through (e);
0
c. Section 531.57; and
0
d. Section 531.58.

0
14. Amend Sec.  531.52 by revising the second sentence to the end of 
the paragraph to read as follows:

Sec.  531.52  General characteristics of ``tips.''

    * * * 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.

[[Page 18856]]

0
15. Amend Sec.  531.54 by adding two sentences to the end of the 
paragraph to read as follows:

Sec.  531.54  Tip pooling.

    * * * 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.

0
16. Revise Sec.  531.55 to read as follows:

Sec.  531.55  Examples of amounts not received as tips.

    (a) A compulsory charge for service, such as 15 percent of the 
amount of the bill, imposed on a customer by an employer's 
establishment, is not a tip and, even if distributed by the employer to 
its employees, cannot be counted as a tip received in applying the 
provisions of section 3(m) and 3(t). Similarly, where negotiations 
between a hotel and a customer for banquet facilities include amounts 
for distribution to employees of the hotel, the amounts so distributed 
are not counted as tips received.
    (b) As stated above, service charges and other similar sums which 
become part of the employer's gross receipts are not tips for the 
purposes of the Act. Where such sums are distributed by the employer to 
its employees, however, they may be used in their entirety to satisfy 
the monetary requirements of the Act.

0
17. Amend Sec.  531.56 by revising the last sentence in paragraph (d) 
to read as follows:

Sec.  531.56  ``More than $30 per month in tips.''

* * * * *
    (d) * * * It does not govern or limit the determination of the 
appropriate amount of wage credit under section 3(m) that may be taken 
for tips under section 6(a)(1) (tip credit equals the difference 
between the minimum wage required by section 6(a)(1) and $2.13 per 
hour).
* * * * *

0
18. Revise Sec.  531.59 to read as follows:

Sec.  531.59  The tip wage credit.

    (a) In determining compliance with the wage payment requirements of 
the Act, under the provisions of section 3(m) the amount paid to a 
tipped employee by an employer is increased on account of tips by an 
amount equal to the formula set forth in the statute (minimum wage 
required by section 6(a)(1) of the Act minus $2.13), provided that the 
employer satisfies all the requirements of section 3(m). This tip 
credit is in addition to any credit for board, lodging, or other 
facilities which may be allowable under section 3(m).
    (b) As indicated in Sec.  531.51, the tip credit may be taken only 
for hours worked by the employee in an occupation in which the employee 
qualifies as a ``tipped employee.'' Pursuant to section 3(m), an 
employer is not eligible to take the tip credit unless it has informed 
its tipped employees in advance of the employer's use of the tip credit 
of the provisions of section 3(m) of the Act, i.e.: The amount of the 
cash wage that is to be paid to the tipped employee by the employer; 
the additional amount by which the wages of the tipped employee are 
increased on account of the tip credit claimed by the employer, which 
amount may not exceed the value of the tips actually received by the 
employee; that all tips received by the tipped employee must 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 shall not apply to any employee who has not been 
informed of these requirements in this section. The credit allowed on 
account of tips may be less than that permitted by statute (minimum 
wage required by section 6(a)(1) minus $2.13); it cannot be more. In 
order for the employer to claim the maximum tip credit, the employer 
must demonstrate that the employee received at least that amount in 
actual tips. If the employee received less than the maximum tip credit 
amount in tips, the employer is required to pay the balance so that the 
employee receives at least the minimum wage with the defined 
combination of wages and tips. With the exception of tips contributed 
to a valid tip pool as described in Sec.  531.54, the tip credit 
provisions of section 3(m) also require employers to permit employees 
to retain all tips received by the employee.

0
19. Amend Sec.  531.60(a) by removing the paragraph designation ``(a)'' 
and revising the first and third sentences to read as follows:

Sec.  531.60  Overtime payments.

    When overtime is worked by a tipped employee who is subject to the 
overtime pay provisions of the Act, the employee's regular rate of pay 
is determined by dividing the employee's total remuneration for 
employment (except statutory exclusions) in any workweek by the total 
number of hours actually worked by the employee in that workweek for 
which such compensation was paid. * * * In accordance with section 
3(m), a tipped employee's regular rate of pay includes the amount of 
tip credit taken by the employer per hour (not in excess of the minimum 
wage required by section 6(a)(1) minus $2.13), the reasonable cost or 
fair value of any facilities furnished to the employee by the employer, 
as authorized under section 3(m) and this part 531, and the cash wages 
including commissions and certain bonuses paid by the employer. * * *
* * * * *

PART 553--APPLICATION OF THE FAIR LABOR STANDARDS ACT TO EMPLOYEES 
OF STATE AND LOCAL GOVERNMENTS

0
20. The authority citation for part 553 is revised to read as follows:

    Authority:  Secs. 1-19, 52 Stat. 1060, as amended (29 U.S.C. 
201-219); Pub. L. 99-150, 99 Stat. 787 (29 U.S.C. 203, 207, 211). 
Pub. L. 106-151, 113 Stat. 1731 (29 U.S.C. 203(y)).

0
21. Amend Sec.  553.210 by revising paragraph (a), removing paragraph 
(b), and redesignating paragraph (c) as (b) to read as follows:

Sec.  553.210  Fire Protection Activities.

    (a) As used in sections 7(k) and 13(b)(20) of the Act, the term 
``any employee * * * in fire protection activities'' refers to ``an 
employee, including a firefighter, paramedic, emergency medical 
technician, rescue worker, ambulance personnel, or hazardous materials 
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.''

0
22. In Sec.  553.212, revise paragraph (a) and the last sentence of 
paragraph (b) to read as follows:

Sec.  553.212  Twenty percent limitation on nonexempt work.

    (a) Employees engaged in law enforcement activities as described in 
Sec.  553.211 may also engage in some nonexempt work which is not 
performed as an incident to or in conjunction with their law 
enforcement activities. The performance of such nonexempt work will not 
defeat either the section 13(b)(20) or 7(k) exemptions unless it 
exceeds 20 percent of the total hours worked by that employee during 
the workweek or applicable work period. A person who spends more than

[[Page 18857]]

20 percent of his/her working time in nonexempt activities is not 
considered to be an employee engaged in law enforcement activities for 
purposes of this part.
    (b) * * * In addition, the hours of work in the different capacity 
need not be counted as hours worked for overtime purposes on the 
regular job, nor are such hours counted in determining the 20 percent 
tolerance for nonexempt work for law enforcement personnel discussed in 
paragraph (a) of this section.

Sec.  553.215  [Removed and Reserved]

0
23. Remove and reserve Sec.  553.215.

Sec. Sec.  553.221, 553.222, 553.223, 553.226, and 553.231  [Amended]

0
24. Amend Sec. Sec.  553.221, 553.222, 553.223, 553.226 and 553.231 to 
remove and add terms as follows. Remove the words ``firefighter'' or 
``firefighters'' and add, in their place, the words ``employee in fire 
protection activities'' or ``employees in fire protection activities,'' 
respectively, wherever they appear in the following places:
0
a. Section 553.221(a), (d), and (g);
0
b. Section 553.222(a) and (c);
0
c. Section 553.223(a), (c), and (d);
0
d. Section 553.226(c); and
0
e. Section 553.231(b).

PART 778--OVERTIME COMPENSATION

0
25. The authority citation for part 778 is revised to read as follows:

    Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201 et seq. 
Section 778.200 also issued under Pub. L. 106-202, 114 Stat. 308 (29 
U.S.C. 207(e) and (h)).

0
26. Revise Sec.  778.110 to read as follows:

Sec.  778.110  Hourly rate employee.

    (a) Earnings at hourly rate exclusively. If the employee is 
employed solely on the basis of a single hourly rate, the hourly rate 
is the ``regular rate.'' For overtime hours of work the employee must 
be paid, in addition to the straight time hourly earnings, a sum 
determined by multiplying one-half the hourly rate by the number of 
hours worked in excess of 40 in the week. Thus a $12 hourly rate will 
bring, for an employee who works 46 hours, a total weekly wage of $588 
(46 hours at $12 plus 6 at $6). In other words, the employee is 
entitled to be paid an amount equal to $12 an hour for 40 hours and $18 
an hour for the 6 hours of overtime, or a total of $588.
    (b) Hourly rate and bonus. If the employee receives, in addition to 
the earnings computed at the $12 hourly rate, a production bonus of $46 
for the week, the regular hourly rate of pay is $13 an hour (46 hours 
at $12 yields $552; the addition of the $46 bonus makes a total of 
$598; this total divided by 46 hours yields a regular rate of $13). The 
employee is then entitled to be paid a total wage of $637 for 46 hours 
(46 hours at $13 plus 6 hours at $6.50, or 40 hours at $13 plus 6 hours 
at $19.50).

0
27. Revise Sec.  778.111 to read as follows:

Sec.  778.111  Pieceworker.

    (a) Piece rates and supplements generally. When an employee is 
employed on a piece-rate basis, the regular hourly rate of pay is 
computed by adding together total earnings for the workweek from piece 
rates and all other sources (such as production bonuses) and any sums 
paid for waiting time or other hours worked (except statutory 
exclusions). This sum is then divided by the number of hours worked in 
the week for which such compensation was paid, to yield the 
pieceworker's ``regular rate'' for that week. For overtime work the 
pieceworker is entitled to be paid, in addition to the total weekly 
earnings at this regular rate for all hours worked, a sum equivalent to 
one-half this regular rate of pay multiplied by the number of hours 
worked in excess of 40 in the week. (For an alternative method of 
complying with the overtime requirements of the Act as far as 
pieceworkers are concerned, see Sec.  778.418.) Only additional half-
time pay is required in such cases where the employee has already 
received straight-time compensation at piece rates or by supplementary 
payments for all hours worked. Thus, for example, if the employee has 
worked 50 hours and has earned $491 at piece rates for 46 hours of 
productive work and in addition has been compensated at $8.00 an hour 
for 4 hours of waiting time, the total compensation, $523.00, must be 
divided by the total hours of work, 50, to arrive at the regular hourly 
rate of pay--$10.46. For the 10 hours of overtime the employee is 
entitled to additional compensation of $52.30 (10 hours at $5.23). For 
the week's work the employee is thus entitled to a total of $575.30 
(which is equivalent to 40 hours at $10.46 plus 10 overtime hours at 
$15.69).
    (b) Piece rates with minimum hourly guarantee. In some cases an 
employee is hired on a piece-rate basis coupled with a minimum hourly 
guaranty. Where the total piece-rate earnings for the workweek fall 
short of the amount that would be earned for the total hours of work at 
the guaranteed rate, the employee is paid the difference. In such weeks 
the employee is in fact paid at an hourly rate and the minimum hourly 
guaranty is the regular rate in that week. In the example just given, 
if the employee was guaranteed $11 an hour for productive working time, 
the employee would be paid $506 (46 hours at $11) for the 46 hours of 
productive work (instead of the $491 earned at piece rates). In a week 
in which no waiting time was involved, the employee would be owed an 
additional $5.50 (half time) for each of the 6 overtime hours worked, 
to bring the total compensation up to $539 (46 hours at $11 plus 6 
hours at $5.50 or 40 hours at $11 plus 6 hours at $16.50). If the 
employee is paid at a different rate for waiting time, the regular rate 
is the weighted average of the 2 hourly rates, as discussed in Sec.  
778.115.

0
28. Amend Sec.  778.113 by revising paragraph (a) and the fifth 
sentence of paragraph (b) to read as follows:

Sec.  778.113  Salaried employees--general.

    (a) Weekly salary. If the employee is employed solely on a weekly 
salary basis, the regular hourly rate of pay, on which time and a half 
must be paid, is computed by dividing the salary by the number of hours 
which the salary is intended to compensate. If an employee is hired at 
a salary of $350 and if it is understood that this salary is 
compensation for a regular workweek of 35 hours, the employee's regular 
rate of pay is $350 divided by 35 hours, or $10 an hour, and when the 
employee works overtime the employee is entitled to receive $10 for 
each of the first 40 hours and $15 (one and one-half times $10) for 
each hour thereafter. If an employee is hired at a salary of $375 for a 
40-hour week the regular rate is $9.38 an hour.
    (b) * * * The regular rate of an employee who is paid a regular 
monthly salary of $1,560, or a regular semimonthly salary of $780 for 
40 hours a week, is thus found to be $9 per hour. * * *
* * * * *

0
29. Amend Sec.  778.114 by revising paragraph (b) to read as follows:

Sec.  778.114  Fixed salary for fluctuating hours.

* * * * *
    (b) The application of the principles above stated may be 
illustrated by the case of an employee whose hours of work do not 
customarily follow a regular schedule but vary from week to week, whose 
total weekly hours of work never exceed 50 hours in a workweek, and 
whose salary of $600 a week is paid with the understanding that it 
constitutes the employee's compensation, except for overtime

[[Page 18858]]

premiums, for whatever hours are worked in the workweek. If during the 
course of 4 weeks this employee works 40, 37.5, 50, and 48 hours, the 
regular hourly rate of pay in each of these weeks is $15.00, $16.00, 
$12.00, and $12.50, respectively. Since the employee has already 
received straight-time compensation on a salary basis for all hours 
worked, only additional half-time pay is due. For the first week the 
employee is entitled to be paid $600; for the second week $600.00; for 
the third week $660 ($600 plus 10 hours at $6.00 or 40 hours at $12.00 
plus 10 hours at $18.00); for the fourth week $650 ($600 plus 8 hours 
at $6.25, or 40 hours at $12.50 plus 8 hours at $18.75).
* * * * *

0
30. Amend Sec.  778.200 by adding paragraph (a) (8) and revising 
paragraph (b) to read as follows:

Sec.  778.200  Provisions governing inclusion, exclusion, and crediting 
of particular payments.

    (a) * * *
    (8) Any 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 which is not otherwise 
excludable under any of paragraphs (a)(1) through (a)(7) of this 
section if--
    (i) Grants are made pursuant to a program, the terms and conditions 
of which are communicated to participating employees either at the 
beginning of the employee's participation in the program or at the time 
of the grant;
    (ii) In the case of stock options and stock appreciation rights, 
the grant or right cannot be exercisable for a period of at least 6 
months after the time of grant (except that grants or rights may become 
exercisable because of an employee's death, disability, retirement, or 
a change in corporate ownership, or other circumstances permitted by 
regulation), and the exercise price is at least 85 percent of the fair 
market value of the stock at the time of grant;
    (iii) Exercise of any grant or right is voluntary; and
    (iv) Any determinations regarding the award of, and the amount of, 
employer-provided grants or rights that are based on performance are--
    (A) Made based upon meeting previously established performance 
criteria (which may include hours of work, efficiency, or productivity) 
of any business unit consisting of at least 10 employees or of a 
facility, except that, any determinations may be based on length of 
service or minimum schedule of hours or days of work; or
    (B) Made based upon the past performance (which may include any 
criteria) of one or more employees in a given period so long as the 
determination is in the sole discretion of the employer and not 
pursuant to any prior contract.
    (b) Section 7(h). This subsection of the Act provides as follows:
    (1) Except as provided in paragraph (2), sums excluded from the 
regular rate pursuant to subsection (e) shall not be creditable toward 
wages required under section 6 or overtime compensation required under 
this section.
    (2) Extra compensation paid as described in paragraphs (5), (6), 
and (7) of subsection (e) of this section shall be creditable toward 
overtime compensation payable pursuant to this section.
* * * * *

0
31. Amend Sec.  778.208 by revising the first sentence to read as 
follows:

Sec.  778.208  Inclusion and exclusion of bonuses in computing the 
``regular rate.''

    Section 7(e) of the Act requires the inclusion in the regular rate 
of all remuneration for employment except eight specified types of 
payments. * * *

PART 779--THE FAIR LABOR STANDARDS ACT AS APPLIED TO RETAILERS OF 
GOODS OR SERVICES

0
32. The authority citation for part 779 is revised to read as follows:

    Authority: Secs. 1-19, 52 Stat. 1060, as amended; 75 Stat. 65; 
Sec. 29(B), Pub. L. 93-259, 88 Stat. 55; 29 U.S.C. 201-219.

0
33. Revise the undesignated center heading for Sec. Sec.  779.371 and 
779.372 to read as follows:
Automobile, Truck and Farm Implement Sales and Services, and Trailer, 
Boat and Aircraft Sales

0
34. Amend Sec.  779.371 by revising the fifth sentence of paragraph (a) 
to read as follows:

Sec.  779.371  Some automobile, truck, and farm implement 
establishments may qualify for exemption under section 13(a)(2).

    (a) * * * Section 13(b)(10) is applicable not only to automobile, 
truck, and farm implement dealers but also to dealers in trailers, 
boats, and aircraft. * * *
* * * * *

0
35. Amend Sec.  779.372 by revising paragraphs (a), (b)(1)(ii), (b)(2), 
and (c) to read as follows:

Sec.  779.372  Nonmanufacturing establishments with certain exempt 
employees under section 13(b)(10).

    (a) General. A specific exemption from only the overtime pay 
provisions of section 7 of the Act is provided in section 13(b)(10) for 
certain employees of nonmanufacturing establishments engaged in the 
business of selling automobiles, trucks, farm implements, trailers, 
boats, or aircraft. Section 13(b)(10)(A) states that the provisions of 
section 7 shall not apply with respect to ``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.'' Section 13(b)(10)(B) 
states that the provisions of section 7 shall not apply with respect to 
``any salesman primarily engaged in selling trailers, boats, or 
aircraft, if he is employed by a nonmanufacturing establishment 
primarily engaged in the business of selling trailers, boats, or 
aircraft to ultimate purchasers.'' This exemption will apply 
irrespective of the annual dollar volume of sales of the establishment 
or of the enterprise of which it is a part.
    (b) * * *
    (1) * * *
    (ii) The establishment must be primarily engaged in the business of 
selling automobiles, trucks, or farm implements to the ultimate 
purchaser for section 13(b)(10)(A) to apply. If these tests are met by 
an establishment the exemption will be available for salesmen, partsmen 
and mechanics, employed by the establishment, who are primarily engaged 
during the work week in the selling or servicing of the named items. 
Likewise, the establishment must be primarily engaged in the business 
of selling trailers, boats, or aircraft to the ultimate purchaser for 
the section 13(b)(10)(B) exemption to be available for salesmen 
employed by the establishment who are primarily engaged during the work 
week in selling these named items. An explanation of the term 
``employed by'' is contained in Sec. Sec.  779.307 through 779.311. The 
exemption is intended to apply to employment by such an establishment 
of the specified categories of employees even if they work in 
physically separate buildings or areas, or even if, though working in 
the principal building of the dealership, their work relates to the 
work of physically separate buildings or areas, so long as they are 
employed in a department which is functionally operated as part of the 
dealership.

[[Page 18859]]

    (2) This exemption, unlike the former exemption in section 
13(a)(19) of the Act prior to the 1966 amendments, is not limited to 
dealerships that qualify as retail or service establishments nor is it 
limited to establishments selling automobiles, trucks, and farm 
implements, but also includes dealers in trailers, boats, and aircraft.
    (c) Salesman, partsman, or mechanic. (1) As used in section 
13(b)(10)(A), a salesman is an employee who is employed for the purpose 
of and is primarily engaged in making sales or obtaining orders or 
contracts for sale of the automobiles, trucks, or farm implements that 
the establishment is primarily engaged in selling. As used in section 
13(b)(10)(B), a salesman is an employee who is employed for the purpose 
of and is primarily engaged in making sales or obtaining orders or 
contracts for sale of trailers, boats, or aircraft that the 
establishment is primarily engaged in selling. Work performed 
incidental to and in conjunction with the employee's own sales or 
solicitations, including incidental deliveries and collections, is 
regarded as within the exemption.
    (2) As used in section 13(b)(10)(A), a partsman is any employee 
employed for the purpose of and primarily engaged in requisitioning, 
stocking, and dispensing parts.
    (3) As used in section 13(b)(10)(A), a mechanic is any employee 
primarily engaged in doing mechanical work (such as get ready 
mechanics, automotive, truck, or farm implement mechanics, used car 
reconditioning mechanics, and wrecker mechanics) in the servicing of an 
automobile, truck or farm implement for its use and operation as such. 
This includes mechanical work required for safe operation, as an 
automobile, truck, or farm implement. The term does not include 
employees primarily performing such nonmechanical work as washing, 
cleaning, painting, polishing, tire changing, installing seat covers, 
dispatching, lubricating, or other nonmechanical work. Wrecker mechanic 
means a service department mechanic who goes out on a tow or wrecking 
truck to perform mechanical servicing or repairing of a customer's 
vehicle away from the shop, or to bring the vehicle back to the shop 
for repair service. A tow or wrecker truck driver or helper who 
primarily performs nonmechanical repair work is not exempt.
* * * * *

PART 780--EXEMPTIONS APPLICABLE TO AGRICULTURE, PROCESSING OF 
AGRICULTURAL COMMODITIES, AND RELATED SUBJECTS UNDER THE FAIR LABOR 
STANDARDS ACT

0
36. The authority citation for part 780 is revised to read as follows:

    Authority: Secs. 1-19, 52 Stat. 1060, as amended; 75 Stat. 65; 
29 U.S.C. 201-219. Pub. L. 105-78, 111 Stat. 1467.

0
37. Revise Sec.  780.400 to read as follows:

Sec.  780.400  Statutory provisions.

    Section 13(b)(12) of the Fair Labor Standards Act exempts from the 
overtime provisions of section 7 any employee employed in agriculture 
or in connection with the operation or maintenance of ditches, canals, 
reservoirs, or waterways, not owned or operated for profit, or operated 
on a sharecrop basis, and which are used exclusively for supply and 
storing of water, at least 90 percent of which was ultimately delivered 
for agricultural purposes during the preceding calendar year.

0
38. Amend Sec.  780.401 by revising the first sentence of paragraph (a) 
and paragraph (b) to read as follows:

Sec.  780.401  General explanatory statement.

    (a) Section 13(b)(12) of the Act contains the same wording 
exempting any employee employed in agriculture as did section 13(a)(6) 
prior to the 1966 amendments. * * *
    (b) In addition to exempting employees engaged in agriculture, 
section 13(b)(12) also exempts from the overtime provisions of the Act 
employees employed in specified irrigation activities. The effect of 
the 1997 amendment to section 13(b)(12) is to expand the overtime 
exemption for any employee employed in specified irrigation activities 
used for supply and storing of water for agricultural purposes by 
substituting ``water, at least 90 percent of which was ultimately 
delivered for agricultural purposes during the preceding calendar 
year'' for the prior requirement that all the water be used for 
agricultural purposes. Prior to the 1966 amendments employees employed 
in specified irrigation activities were exempt from the minimum wage 
and overtime pay requirements of the Act.
* * * * *

0
39. Revise Sec.  780.406 to read as follows:

Sec.  780.406  Exemption is from overtime only.

    This exemption applies only to the overtime provisions of the Act 
and does not affect the minimum wage, child labor, recordkeeping, and 
other requirements of the Act.

0
40. Revise Sec.  780.408 to read as follows:

Sec.  780.408  Facilities of system at least 90 percent of which was 
used for agricultural purposes.

    Section 13(b)(12) requires for exemption of irrigation work that 
the ditches, canals, reservoirs, or waterways in connection with which 
the employee's work is done be ``used exclusively for supply and 
storing of water at least 90 percent of which was ultimately delivered 
for agricultural purposes during the preceding calendar year.'' If a 
water supplier supplies water of which more than 10 percent is used for 
purposes other than ``agricultural purposes'' during the preceding 
calendar year, the exemption would not apply. For example, the 
exemption would not apply where more than 10 percent of the water 
supplier's water is delivered to a municipality to be used for general, 
domestic, and commercial purposes. Water used for watering livestock 
raised by a farmer is ``for agricultural purposes.''

PART 785--HOURS WORKED

0
41. The authority citation for part 785 is revised to read as follows:

    Authority: 52 Stat. 1060; 29 U.S.C. 201-219; 29 U.S.C. 254. Pub. 
L. 104-188, 100 Stat. 1755.

0
42. Amend Sec.  785.7 by revising the first sentence to read as 
follows:

Sec.  785.7  Judicial construction.

    The United States Supreme Court originally stated that employees 
subject to the act must be paid for all time spent in ``physical or 
mental exertion (whether burdensome or not) controlled or required by 
the employer and pursued necessarily and primarily for the benefit of 
the employer and his business.'' * * *
0
43. Amend Sec.  785.9 by adding a sentence after the third sentence in 
paragraph (a) to read as follows:

Sec.  785.9  Statutory exemptions.

    (a) * * * The use of an employer's vehicle for travel by an 
employee and activities that are incidental to the use of such vehicle 
for commuting are not considered ``principal'' activities when meeting 
the following conditions: The use of the employer's vehicle for travel 
is within the normal commuting area for

[[Page 18860]]

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 the representative of such employee. * * *

0
44. Amend Sec.  785.34 by adding a sentence after the first sentence to 
read as follows:

Sec.  785.34  Effect of section 4 of the Portal-to-Portal Act.

    * * * Section 4(a) further provides that the use of an employer's 
vehicle for travel by an employee and activities that are incidental to 
the use of such vehicle for commuting are not considered principal 
activities when the use of such vehicle is within the normal commuting 
area for the employer's business or establishment and is subject to an 
agreement on the part of the employer and the employee or the 
representative of such employee. * * *

0
45. Amend Sec.  785.50 by adding a sentence at the end of paragraph 
(a)(2) to read as follows:

Sec.  785.50  Section 4 of the Portal-to-Portal Act.

* * * * *
    (a) * * *
    (2) * * * For purposes of this subsection, 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.
* * * * *

PART 786--MISCELLANEOUS EXEMPTIONS AND EXCLUSIONS FROM COVERAGE

0
46. The authority citation for part 786 is revised to read as follows:

    Authority: 52 Stat. 1060, as amended; 29 U.S.C. 201-219. Pub. L. 
104-188, 100 Stat. 1755. Pub. L. 105-221, 112 Stat. 1248, 29 U.S.C. 
203(e).

0
47. Revise the heading to part 786 to read as set forth above.

0
48. Add subpart G consisting of Sec.  786.300 to read as follows:

Subpart G--Youth Opportunity Wage

Sec.  786.300  Application of the youth opportunity wage.

    Section 6(g) of the Fair Labor Standards Act allows any employer to 
pay any employee who has not attained the age of 20 years a wage of not 
less than $4.25 an hour during the first 90 consecutive calendar days 
after such employee is initially employed by such employer. For the 
purposes of hiring workers at this wage, no employer may take any 
action to displace employees, including partial displacements such as 
reducing hours, wages, or employment benefits. Any employer that 
violates these provisions is considered to have violated section 
15(a)(3) of the Act.

0
49. Add subpart H consisting of Sec.  786.350 to read as follows:

Subpart H--Volunteers at Private Non-Profit Food Banks

Sec.  786.350  Exclusion from definition of ``employee'' of volunteers 
at private non-profit food banks.

    Section 3(e)(5) of the Fair Labor Standards Act excludes from the 
definition of the term ``employee'' individuals who volunteer their 
services solely for humanitarian purposes at private non-profit food 
banks and who receive groceries from the food banks.

PART 790--GENERAL STATEMENT AS TO THE EFFECT OF THE PORTAL-TO-
PORTAL ACT OF 1947 ON THE FAIR LABOR STANDARDS ACT OF 1938

0
50. The authority citation for part 790 is revised to read as follows:

    Authority: 52 Stat. 1060, as amended; 110 Stat. 1755; 29 U.S.C. 
201-219; 29 U.S.C. 254.

0
51. Amend Sec.  790.3 by adding a sentence at the end of paragraph 
(a)(2) to read as follows:

Sec.  790.3  Provisions of the statute.

* * * * *
    (a) * * *
    (2) * * * For purposes of this subsection, 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.
* * * * *
[FR Doc. 2011-6749 Filed 4-4-11; 8:45 am]
BILLING CODE 4510-27-P
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