Mr. Courtnell

Hospitality Law

Don’t Drown In Your “Tip Pool": Complying With Minimum Wage Laws For Tipped Employees

By Paul Courtnell, Director, Leisure & Resorts Group, Gunster LLP

Co-authored by Joseph Santoro, Partner, Gunster

The New Year brought the hotel industry to its lowest level in decades. The occupancy for hotels nationwide was at 45.1% in January, the lowest percentage since a leading industry analyst starting tracking the number 23 years ago, the Los Angeles Times reported in April. Facing difficult economic conditions, some hoteliers are looking for creative ways to stay out the red by reducing expenses, including labor costs. For example, some hotels have expanded the use of “tip pools” which, if done properly, can provide hotels with a federally sanctioned way to reduce payroll expenses and provide job security for more of their employees.

What are “tip pools”? In short, tip pooling is a mechanism where employers can require certain employees to contribute a portion of their direct tips (up to a maximum of 15%) into a “pool” so that they can be equally distributed to other employees who contribute to the customers’ experience, but who do not receive the benefit of getting substantial tips directly from customers. For example, hosts, hostess, and busboys in a hotel restaurant may interact with customers and contribute to the overall customer service experience, but are not frequently the recipient of customers’ gratuities. An employer can establish a mandatory tip pool and include these employees so that they can share in a portion of the tips given by customers.

In addition to promoting fairness in the distribution of tips for all service employees, an employer may be able to offset some of its labor costs. The Fair Labor Standards Act (FLSA) requires employers to provide a minimum wage to nonexempt employees of $7.25 an hour. However, for employees that “customarily and regularly” receive at least $20 per month in tips, employers can take a “tip credit” which allows them to legally pay covered employees less than the minimum wage. The idea being that, as long as the tips equal the difference between what the employer pays and the applicable minimum wage, the worker’s total compensation satisfies the FLSA’s minimum wage requirements. Accordingly, by adopting a “tip pool” employers can potentially expand the number of employees who receive sufficient tips to satisfy the tip credit requirements and take a tip credit for those employees, thereby reducing overall labor costs.

So what’s the catch? Federal law is very strict regarding the type of employees for which a “tip credit” may be taken, as well as, what is required for an employer to operate a qualified tip pool. Including employees who are not qualified as participants in a tip pool (for example a tip pool that includes management employees or others who do not meet the eligibility requirements) can invalidate the tip pool and lead to liability for unpaid minimum wages, penalties, and costly litigation. If a tip pool is invalid, an employer may not use any portion of the tips received by the employee to satisfy the FLSA’s minimum wage requirement and may not take a tip credit for the employee, regardless of how much money the employee receives in tips.

To be eligible to take a tip credit, employers must still pay a minimum statutory cash wage. That wage is at least one-half of the existing applicable minimum wage rate — or roughly $3.63 an hour. Also, the amount of the employee’s actual tips must equal at least the difference between the employer-provided cash wages and the minimum wage in effect at the time. So, for an employer paying the statutory cash wage minimum, employee tips must be at least $3.62 an hour.

To qualify for a tip credit, the affected employee must be a “tipped employee” which means that they must be “engaged in an occupation in which [they] customarily and regularly receive more than $20 a month in tips.” To determine if an employee qualifies as a “tipped employee,” an employer must consider 1) the type of occupation engaged in by the employee; 2) the frequency in which the employee is tipped; and 3) the amount of the tips the employee actually receives on a monthly basis. The most nebulous of the three is the “customarily and regularly” requirement. Federal regulations define this term as signifying a “frequency which must be greater than occasional, but which may be less than consistent.” For instance, a bartender or a waiter who regularly receive more than $20 a month will qualify; but employees who only occasionally receive more than $20 a month during special times of the year, such as Christmas or New Years, will not. Moreover, an employee who normally meets the minimum standard, but fails to do so in a particular month due to sickness, seasonal work fluctuations, or the like would still qualify for “tipped employee” status.

To be included in a tip pool, the FLSA does not require that the employee meet the $20 per month minimum. The requirements for employees to participate in the tip pools are slightly less burdensome; those employees need only meet the “customarily and regularly” prerequisite. There is no minimum amount that an employee must receive in tips to merely participate in a tip pool. However, if the employer wants to take a tip credit for that employee, they must at least receive a minimum of $20 per month in tips.

But what happens if an employee who does not normally receive tips of $20 per month in direct tips, by virtue of her participation in the tip pool alone, now receives $20 per month in shared tips? Can the employer take a tip credit for this employee even though they only meet the requirement due to their participation in a tip pool? Federal rules and legal precedent support the idea that employees can meet the “customarily and regularly” requirement merely by participating in the tip pool itself. Employers can likely take a tip credit for employees who would not otherwise qualify if it were not for their participation in a tip pool.

Some courts, however, have struggled with a potential circular logic deriving from this situation—i.e., that an employee can meet the “customarily and regularly” requirement and qualify for a tip credit, merely by being a participant in a tip pool. In other words, an employer can turn any employee into one that “customarily and regularly” receives tips simply by placing them in a tip pool, and then take a tip credit for that employee. As a result, some courts have imposed an additional burden. For instance, some courts have concluded that an employer may need to demonstrate that those employees whose tips are derived solely from the tip pool have “more than minimal” customer interaction and perform “important customer service functions.” These courts reason that an employee who has significant customer interaction and performs important customer service functions is the type of employee that Congress intended to be included in tip pooling arrangements because they perform part of the service that leads to the tip in the first place, even though they may be the direct recipient of the tip from the customer. This additional requirement, however, has not been universally adopted. At least one court has held that “Nothing in the statute specifically requires that an employee who shares in a tip pool interact directly with customers.”

This additional requirement does not coincide with some of the job functions that Congress specifically contemplated for the tip credit benefit. In a Senate report on the 1974 amendments to the FLSA, the Senate gave examples of employees such as “waiters, bellhops, waitresses, countermen, busboys, and service bartenders” as those types of employees that regularly received tips and could participate in tip pools. It also identified “janitors, dishwashers, chefs and laundry room attendants” as employees that do not customarily and regularly receive tips and cannot be included. However, it does not appear from the examples given by the Senate that significant customer interaction is required. For instance, busboys have very little customer interaction and usually clear restaurant tables after customers finish their meals and have left the restaurant. Yet, Congress specifically contemplated them as the type of employee that could participate in a tip pool and for whom a tip credit could be taken.

Finally, to be eligible to take a tip credit toward satisfying the federal minimum wage, employees must be notified of the law by their employer. Employers must inform the employee that the employer intends to treat the employees’ tips as satisfying part of the employer’s minimum wage obligations. However, employers are not required to explain the tip credit to employees.

While tip pools and tip credits can help reduce labor costs for hoteliers, they should not be adopted without careful consideration of the rules and without the assistance of qualified employment counsel. However, by meeting the law’s requirements, hotels can utilize federal rules on tip credits and tip pools to reduce their payroll expense during these rough economic times. Finally, employers should be familiar with the local rules and legal precedent before initiating any changes in existing pay practices. Some states, such as California, Florida, and New York, have a minimum wage requirement that exceed the requirements of federal law, and any tip pool agreement will also need to comply with state and local laws.

This article was co-authored by Joseph Santoro. Mr Santoro is an equity partner in the West Palm Beach, Florida office of the law firm Gunster. Mr. Santoro is the Co-Chair of the Firm’s Labor and Employment Practice Group. He concentrates his practice in labor and employment counseling and litigation, representing management in state and federal courts on a wide range of issues from sexual harassment/discrimination to minimum wage and overtime claims to disputes regarding executive employment agreements. Mr. Santoro earned his undergraduate degree from the University of Central Florida and his Juris Doctor degree from Nova Southeastern University.

Paul Courtnell Jr. is a senior partner at Gunster, Attorneys at Law with eight offices in Florida. He developed The Leisure and Resorts Group and serves as Director. The Group provides specialized legal and consulting services to the hospitality, recreational and resort development industries. Mr. Courtnell earned his undergraduate degree from Ohio State University in 1965 and his Juris Doctor degree from the University of Florida School of Law in 1973, both with honors. Mr. Courtnell can be contacted at 561-650.0517 or pcourtnell@gunster.com Extended Bio...

HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.