Ms. Pate Marlin

Hospitality Law

Tipped Employees - Compliance Tips

By Lesley Pate Marlin, Attorney, Venable LLP

Litigation under the Fair Labor Standards Act (“FLSA”) has long been a favorite of plaintiffs' employment attorneys. Claims under the FLSA are expensive and difficult for employers to defend and offer plaintiffs and their attorneys the possibility of attorneys' fees as well as the potential for significant liquidated damages. Claimed attorneys’ fees often significantly exceed the damages awarded to employees. One area of the Fair Labor Standards Act which is seen increased litigation recently is claims by tipped employees.

Under the FLSA, when an employee customarily and regularly receives more than $30 per month in tips, the employer may take a tip credit toward the employee’s minimum wage. The current federal minimum wage is $7.25. The maximum tip credit an employer can currently claim toward satisfying its minimum wage obligations under the FLSA is $5.12 per hour. Many states have separate minimum wage standards under which the allowable tip credit which an employer may claim is different than under federal law. For example, some states such as Alaska, California, and Minnesota do not allow an employer to take any tip credit. Other states, such as Arizona, Colorado and Maryland allow tip credits but at a lower rate than under federal law. The penalties under state laws for failure to meet minimum wage obligations can be even more onerous than those under the FLSA.

Tip Credit Does Not Increase for Overtime Hours

Unlike the hourly wage that must be paid to non-exempt employees (including tipped employees), the tip credit does not increase for overtime hours. Thus, under the FLSA, an employer may not take a larger tip credit for an overtime hour than for a straight time hour and the employer may not increase the tip credit claimed for overtime hours by time and a half. For example, if the employer was claiming a $5.12 tip credit for straight time hours, the employer could not claim a $7.68 tip credit for overtime hours. This is true even if an employer claims a tip credit lower than the maximum allowable for non-overtime hours (such as $3.41 per hour), the employer cannot increase the tipped credit claimed for overtime hours to the maximum allowable tip credit ($5.12 per hour).

Employees Should Be Informed That the Employer Is Taking The Tip Credit

To take advantage of a tip credit, the FLSA requires that employees be aware of the credit being taken. Although the law does not dictate a precise form of notification, the failure to document that employees are aware of the credit being taken can lead to litigation. The Department of Labor, for example, has recently published new rules providing an employer must furnish the following information to a tipped employee in order to take advantage of the tip credit:

• The cash wage being paid to the employee by the employer (under federal law at least $2.13 per hour; higher in many states);

• The amount claimed by the employer is a trip credit (under the FLSA a maximum of $5.12 per hour; lower in many states);

• A statement that the tip credit cannot exceed the amount of tips actually received by the tipped employee;

• A statement that all tips received by the tipped employee must be kept by the tipped employee unless the employee is part of an acceptable tip pooling arrangement;

• An explanation of any applicable tip pooling arrangement;

• A statement that the tip credit will apply only when a tipped employee has been informed of the tip credit information described above.

While the Department of Labor allows an employer to provide oral notice of these provisions, the employer should not attempt to rely on oral notice. The employer should provide notice in writing to employees, in an employment application, handbook, or separate form, and may even wish to obtain a receipt from the employee acknowledging that the employee has received the information. While the validity of the Department of Labor’s notice requirement is open to question, litigation over the failure to provide such notice has increased recently and litigation over this issue is likely to continue to increase. For those employers taking the full tip credit, a lawsuit from a large group of tipped employees seeking back wages for two to three years for the tip credit taken could obviously be extremely costly for an employer both in potential back wages and attorneys’ fees regardless of whether the Department of Labor’s notice requirement is valid.

Tip Pooling

Under a tip pooling arrangement, employees share some portion of tips received with other employees. Initially, under the FLSA tips may be shared only with other employees who customarily receive tips. In a restaurant, tips may be shared among wait staff and those who directly assist wait staff, such as bussers or service bartenders. Tips may not be shared with kitchen staff because kitchen staff are not viewed as customarily receiving tips.

An owner of an establishment may not participate in a tip pooling arrangement even if the owner is engaging in work which customarily results in the receipt of tips. The same rule potentially applies to a managerial employee who exercises a significant degree of control over the employment relationship because such managerial employees may be viewed under the FLSA as having the same responsibility and liability as the employer. While many managers should not be viewed as having the same responsibility and liability as the employer under the FLSA, managerial employees should not participate in any tip pooling arrangement without careful scrutiny. If a managerial employee improperly participates in a tip pooling arrangements, the employer risks the tip credit for up to the three prior years being invalidated and being responsible for full minimum wage for that period.

Further, the Department of Labor limits the amount which a tipped employee can be required to contribute to a tip pooling arrangement to that which is “customary and reasonable.” The Department of Labor has defined “customary and reasonable to be no more than 15 percent of an employee’s tips (after any tips are returned to the employee from the tip pool). While courts have upheld higher amounts as customary and reasonable, requiring a contribution higher than 15 percent to a tip pooling arrangement is risky given high litigation costs and the Department of Labor’s position.

What Counts as a Tip?

A tip is any amount voluntarily provided to an employee from a customer. Tips belong to the employee and must be kept by the employee unless there is an acceptable tip pooling arrangement in place. However, in order to constitute a tip the amount must have been provided voluntarily by the customer. A service charge, such as an 18% surcharge on a customer’s bill does not count as a tip. However, the portion of the surcharge distributed to the employee may be used to satisfy an employer’s minimum wage obligations. Thus, if a tipped employee works an eight hour shift and receives no tips but receives $100.00 from surcharges on customers’ bills, the employer has satisfied its minimum wage obligations. Because the employer’s obligation under the FLSA to non-exempt employees is to pay the minimum wage and any applicable overtime, the employer has satisfied its obligation even though the employee received no tips whatsoever during the shift.

Additionally, because a service charge does not constitute a tip, the employer may distribute the service charge in the manner it sees fit without violating the FLSA including distribution to employees who do not customarily receive tips. However, the employer should ensure that any such distribution is in compliance with state law.

What Should Be Done?

If an employer has poor records (or no records) of having provided tipped employees with the information necessary to take a tip credit (the amount claimed as a tip credit, etc.) in writing, the employer should re-issue the information and keep careful records of the re-issuance. Procedures should be implemented to ensure that all new employees receive the necessary information and proper records are kept. Further, an audit of the practices related to tipped employees should be conducted to ensure that the actual practices do not conflict with the current state of the law including establishing that no improper tip pooling arrangements exist and that the employer is in compliance with both state and federal law. Finally, an employer should establish and distribute a policy for reporting any violations of wage and hour law which allows an employee to bypass his or her supervisory chain. Such policies not only serve to provide a mechanism for resolving wage and hour issues internally without the expense of litigation, but may also provide a valuable defense which limits the damages available to an employee in wage and hour litigation.

Lesley Pate Marlin concentrates her practice at Venable LLP on labor and employment counseling and litigation where she represents employers in a variety of industries, including hospitality, hotels, restaurants, and entertainment. She conducts training for employers on equal employment opportunity compliance, sexual harassment, disability or religious accommodation, FMLA, performance reviews, and employment law developments. Ms. Marlin defends employers in federal and state courts, as well as in arbitration and before administrative agencies. Ms. Marlin is actively involved in the legal profession and the community. For more information, please visit http://www.venable.com/lesley-pate-marlin Ms. Pate Marlin can be contacted at 202-344-8033 or lpmarlin@venable.com Extended Bio...

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