- Restaurateurs Must Balance Tipping Policies with Increasing Minimum Wage
- April 25, 2017 | Author: Rosemarie Salguero
- Law Firm: Lerch, Early & Brewer, Chartered - Bethesda Office
- Already besieged by wage and hour lawsuits, restaurants should review and revise their tip credit and tip pooling policies to ensure compliance with minimum wage increases. Below is a quick overview of the landscape for restaurateurs who utilize the tip credit under the Fair Labor Standard Act (FLSA).
Most experienced restaurateurs are familiar with the tip credit, which is a minimum wage exemption under the FLSA. Under federal law, an employer may take a tip credit towards its minimum wage obligation for “tipped employees” - those engaged in an occupation that customarily pays more than $30 a month in tips. As long as the tips received by the employee equal the difference between his or her hourly wage and the applicable minimum wage requirement, employers may claim the tip credit and must inform the employee the hourly wage he or she receives is less than the minimum wage.
The federal minimum wage is $7.25 per hour, but employers may pay a wage as low as $2.12 per hour so long as an employee’s tips equal $5.13 per hour for each hour worked. Some county and states have higher minimum wage requirements for tipped employees and employers must ensure that their tipped employees receive in tips, at a minimum, the difference between the applicable state or local minimum wage and the lower applicable state or minimum wage permissible for tipped employees. For example, in Montgomery County, Maryland, the minimum wage is $11.50 an hour for each hour worked, and employers can pay a wage as low as $4.00 per hour to tipped employees as long as an employee’s tips equal $7.50 an hour for each hour worked. In the District of Columbia, the minimum wage is $11.50 for each hour worked, and employers can pay a wage as low as $2.12 per hour (mirroring the federal requirement) as long as an employee’s tips equal at least $9.38 an hour for each hour worked.
When claiming the tip credit, employers should also keep in mind the following:
- If the employee’s tips plus the employer’s reduced hourly wage payment do not equal the applicable minimum wage, the employer must pay the employee the difference to meet its wage obligations under the FLSA.
- Tips are the sole property of the tipped employee regardless of whether the employer takes the tip credit.
- Service charges (such as imposing a compulsory charge for parties) are not considered tips, but are considered wages by the IRS. Employers must properly report to the IRS and local tax authorities the service charges distributed to employees as income, and report any portion of service charges that are retained by the business (if allowed) as gross receipts.
- Employers must clearly inform the employees of the tip credit regulations and cannot assume that the earning statement on an employee’s pay stub qualifies as sufficient notice. In Dorsey v. TGT Consulting, LLC, the Greene Turtle Franchise Corporation’s practice of notifying its employees of their tipped status through the employees’ earning statements was found to be insufficient to meet the notice requirements of the FLSA. Furthermore, some states and local jurisdictions, including the District of Columbia, require employers to provide wage notifications to employees regarding their rate of pay. For more information about wage notifications, please read "DC Employers Should Comply Now with New Wage Theft Act to Avoid Severe Financial and Criminal Penalties."
- While employees carry the primary responsibility for tracking and reporting tips, employers need to be careful about how they allocate any tips or service charges. Recently, the Federal Court of Appeals for the 9th Circuit remanded a class-action suit back to the trial court forcing the employer, Starbucks, to defend against claims by baristas that the company illegally allocated 50 cents per hour in wages to each tipped employee, regardless of whether the tipped employee actually received such a tip or not. As a result of this “phantom” tip the baristas allege they were paid less than the minimum wage.
Tip pooling is a common practice for coffee shops, hotel operations, and restaurants where all tips received are pooled and distributed among tipped employees. In order for the employer to take a tip credit for tip pools, only tipped employees may participate in the tip pool. Recently there have been many high-profile lawsuits, including claims against Starbucks, Hooters, and Red Robin franchisees alleging that employees with managerial duties were illegally included in tip pools.
The FLSA bars “employers” from participating in the tip pool, which includes “any person acting directly or indirectly in the interest of an employer in relation to an employee,” such as corporate officers and managers. The legal landscape becomes murky when deciding whether shift managers, sommeliers, or mixologists, who have some managerial duties over other tipped employees, should be included in the tip pool.
Some courts, including the U.S. District Court for the District of Columbia, apply an "economic realities” test to determine the level and degree of managerial control that would render a tipped employee ineligible for the tip pool. Factors courts have taken into account include determining whether the employee (1) has the authority to hire and fire the employees; (2) supervises and controls employee work schedules or conditions of employment; (3) determines the rate and method of payment; and (4) maintains employment records.
Locally, fine dining restaurant Marcel’s prevailed in a wage suit before the U.S. District Court for the District of Columbia that alleged that the participation of its maître d’ in the tip pool invalidated it since the maître d’ supervised the dining floor and assigned seating sections to servers. In applying the economic realities test, the court found the maître d’ did not have sufficient supervisory capacity to be considered an employer, and therefore could participate in the tip pool. In contrast, the U.S. District Court for the District of Maryland found in Mould v. NJG Food Serv. Inc. that the employer’s mandatory tip pool, which included kitchen staff and regulated how servers reported their tips for tax purposes, violated the FLSA and the Maryland Wage and Hour Law because it improperly included food preparation and kitchen support staff who are not employees who “customarily and regularly receive tips.” As a result of the improper tip pool arrangement, the employer was ineligible to take the tip credit and was liable for unpaid wages to its servers.
When operating a mandatory tip pool, employers also should keep in mind the following:
- When an employee is employed in both a tipped and nontipped position at the establishment (such as an employee who is employed as a back of the house line cook and also occasionally serves tables), the tip credit is only available for the hours the employee spent in the tipped position.
- The employers may only take a tip credit for the amount of tips each employee ultimately receives from the tip pool.
- Employer may not take money from a tip pool to cover patrons’ unpaid checks, an employee’s breakage fees, or other business costs and losses.
- Before allowing a tipped employee who has some supervisory duties, such as a mixologist or restaurant captain, to participate in the tip pool, an employer should determine whether the tipped employee’s duties would render the mployee an “employer” under the FLSA, and therefore ineligible for the tip pool.