Update on Tip and Service Charge Litigation
By John R. Hunt Attorney, Stokes Wagner Hunt Martez & Terrell, ALC | December 21, 2014
The past year has witnessed a continued surge in the number of federal wage and hour cases filed against businesses throughout the United States, including those in the hospitality industry. At the same time, the U.S. Department of Labor has engaged in enforcement initiatives directed at hotels, restaurants and bars. All of this has occurred against a backdrop of proposed regulatory reform that could affect the way in which hotel and restaurant operators compensate their employees. This article reviews some of the more important developments in these areas.
Over the course of the past twenty years, the federal courts have experienced an unprecedented increase in the number of cases filed under the Fair Labor Standards Act, the federal law that establishes the minimum wage and requires premium pay for overtime work. According to a report by the U.S. Government Accountability Office ("GAO"), the number of federal lawsuits alleging violations of the FLSA mushroomed by over 500 percent during the past two decades: from a modest 1,327 filed in 1991 to 8,148 filed this kind of litigation. It is estimated that by the end of 2014, the total number of new federal wage and hour cases filed against all types of employers will exceed 8,000, just as it did in 2013.(1)
Although practically any business can find itself on the wrong side of an FLSA case, employers in the hospitality industry have been a favorite target of plaintiffs. The GAO estimates that 23 percent of all FLSA cases named hotels, restaurants and bars as defendants. Moreover, the GAO determined that approximately 40% of all FLSA cases were filed in New York and Florida. As a result, hotels and restaurants in those states can be particularly susceptible to wage and hour claims.(2)
The kinds of claims asserted against hotels and restaurants continue to encompass a variety of FLSA violations. These include claims that employers failed to pay overtime, required employees to work off the clock, improperly deducted time for meal breaks that were not taken and misclassified employees as exempt from overtime. A large number of cases also involve claims that center on the payment of tips and the proper composition of tip pools. The allegations in such cases can range from the outright confiscation of tips by management to the inclusion of ineligible employees in a tip pool. The following cases reflect the types of FLSA claims that restaurants and hotels recently have faced.
In Stewart v. CUS Nashville (3), the plaintiffs worked for Coyote Ugly restaurants as bartenders and waitresses. They contended that the defendant had required them to participate in a tip pool that also included security guards. The plaintiffs urged that they were entitled to a judgment in their favor because a security guard is not a position that "customarily and regularly" receives tips. On the other hand, the defendant argued that its security guards interacted with customers to such a degree that tips were appropriate. The defendant pointed to testimony that the guards attempted to "sell" the restaurant to passersbys on the street, helped female patrons enter and leave and encouraged customers to order drinks. In view of this dispute over the facts, the court held that the case must proceed to trial.
In Rubio v. Fuji Sushi & Teppani(4), the plaintiff servers claimed that the defendant's Orlando, Florida restaurant pooled their tips and then distributed them to tipped and traditionally non-tipped employees. The plaintiffs also contended that the defendant used some of the tip pool to pay for expenses. The court concluded that the defendant had improperly taken a tip credit because the pool included kitchen chefs, who had minimal interaction with customers. The court granted partial summary judgment to the plaintiff servers on this issue.