Tipped Employees Under the FLSA

Our colleagues Kara Maciel and Jordan Schwartz, both of Epstein Becker Green, recently cowrote an article for PLC titled "Tipped Employees Under the FLSA."

Following is an excerpt:

Wage and hour lawsuits certainly are not new phenomena, but in recent years, service industry employees have increasingly made claims regarding tips and service charges. In particular, employers in states such as Massachusetts, New York and California have seen a surge in class actions involving compulsory tip pools and distributions of service charges to employees. Commonly targeted employers include large restaurant and coffee chains, as well as upscale eateries, many of which feature celebrity chefs.

The US Department of Labor (DOL) Wage and Hour Division (WHD) under the Obama Administration has taken an aggressive stance against wage and hour violations, leading to strict rules regarding proper tip pooling and service charge practices. As a result, many businesses with tipped employees, most notably in the food service and hospitality industry, face significant legal exposure arising from improper practices relating to the retention and distribution of tips and service charges.

To help employers comply with this complex and developing area of the law, this Note discusses and explains:

  • Federal law on tips and service charges and the interaction with state laws.
  • Who are considered tipped employees.
  • Disbursement of tips and service charges.
  • Tip pooling requirements.
  • States experiencing a high volume of class action litigation on this topic.
  • Best practices for compliance.

Download the full article, here, in PDF format.

Take 5 Views You Can Use: Wage and Hour Update

By: Kara M. Maciel

The following is a selection from the Firm's October Take 5 Views You Can Use which discusses recent developments in wage hour law.

  1. IRS Will Begin Taxing a Restaurant's Automatic Gratuities as Service Charges

Many restaurants include automatic gratuities on the checks of guests with large parties to ensure that servers get fair tips. This method allows the restaurant to calculate an amount into the total bill, but it takes away a customer's discretion in choosing whether and/or how much to tip the server. As a result of this removal of a customer's voluntary act, the Internal Revenue Service ("IRS") will begin classifying automatic gratuities as service charges, taxed like regular wages, beginning in January 2014.

This change is expected to be problematic for restaurants because the new treatment of automatic gratuities will complicate payroll accounting. Each restaurant will be required to factor automatic gratuities into the hourly wage of the employee, meaning the employee's regular rate of pay could vary from day to day, thus adding a potential complication to overtime payments. Furthermore, because restaurants pay Social Security and Medicaid taxes on the amount that its employees claim in tips, restaurants are eligible for an income-tax credit for some or all of these payments. Classifying automatic gratuities as service charges, however, would lower that possible income-tax credit.

Considering that the IRS's ruling could disadvantage servers as well, restaurants may now want to consider eliminating the use of automatic gratuities. Otherwise, employees could come under greater scrutiny in reporting their tips as a result of this ruling. Furthermore, these tips would be treated as wages, meaning upfront withholding of federal taxes and delayed access to tip earnings until payday.

Some restaurants, including several in New York City, have begun doing away with tips all together. These restaurants have replaced the practice of tipping with either a surcharge or increased food prices that include the cost of service. They can then afford to pay their servers a higher wage per hour in lieu of receiving tips. This is another way for restaurants to ensure that employees receive a sufficient wage, while simultaneously removing the regulatory burdens that a tip-system may impose.

  1. The New DOL Secretary, Tom Perez, Spells Out the WHD's Enforcement Agenda

On September 4, 2013, the new U.S. Secretary of Labor, Tom Perez, was sworn in. During his remarks, Secretary Perez outlined several priorities for the U.S. Department of Labor ("DOL"), including addressing pay equity for women, individuals with disabilities, and veterans; raising the minimum wage; and fixing the "broken" immigration system.

Most notably, and unsurprisingly, Secretary Perez emphasized the enforcement work of the Wage and Hour Division ("WHD"). Just last year, the WHD again obtained a record amount—$280 million—in back-pay for workers. Employers can expect to see continued aggressive enforcement efforts from the WHD in 2013 and 2014 on areas such as worker misclassification, overtime pay, and off-the-clock work. In fact, Secretary Perez stated in his swearing-in speech that "when we protect workers with sensible safety regulations, or when we address the fraud of worker misclassification, employers who play by the rules come out ahead." By increasing its investigative workforce by over 40 percent since 2008, the WHD has had more time and resources to undertake targeted investigation initiatives in addition to investigations resulting from complaints, and that trend should continue.

  1. DOL Investigates Health Care Provider and Obtains $4 Million Settlement for Overtime Payments

On September 16, 2013, the DOL announced that Harris Health System ("Harris"), a Houston health care provider of emergency, outpatient, and inpatient medical services, had agreed to pay more than $4 million in back wages and damages to approximately 4,500 current and former employees for violations of the overtime and recordkeeping provisions of the Fair Labor Standards Act ("FLSA"). The DOL made this announcement after the WHD completed a more than two-year investigation into the company's payment system, prompted by claims that employees were not being fully compensated.

Under the FLSA, employers typically must pay their non-exempt employees an overtime premium of time-and-one-half their regular rate of pay for all hours worked in excess of 40 hours in a workweek. Employers within the health care industry have special overtime rules. Notably, for all employers, an employee's "regular rate of pay" is not necessarily the same as his or her hourly rate of pay. Rather, an employee's "regular rate of pay" includes an employee's "total remuneration" for that week, which consists of both the employee's hourly rate as well as any non-discretionary forms of payment, such as commissions, bonuses, and incentive pay. The FLSA dictates that an employee's "regular rate" of pay is then determined by dividing the employee's total remuneration for the week by the number of hours worked that week.

The DOL's investigation concluded that Harris had failed to: (i) include incentive pay when determining its employees' regular rate of pay for overtime purposes, and (ii) maintain proper overtime records. As a result, Harris owed its employees a total of $2.06 million in back wages and another $2.06 million in liquidated damages.

Because an employee's "total remuneration" for a workweek may consist of various forms of compensation, employers must consistently evaluate and assess their payment structures and payroll systems to determine the payments that must be included in an employee's overtime calculations beyond just the hourly wage. Additionally, employers should conduct periodic audits to ensure that they are maintaining full and accurate records of all hours worked by every employee.

  1. Federal Court Strikes Down DOL Tip Pooling Rule

In 2011, the WHD enacted a strict final rule related to proper tip pooling and service charge practices. This final rule was met with swift legal challenges, and, this summer, the U.S. District Court for the District of Oregon ("District Court") concluded that the DOL had exceeded its authority when implementing its final rule. See Oregon Rest. and Lodging Assn. v. Solis, No. 3:12-cv-01261 (D. Or. June 7, 2013).

Inconsistent interpretations of the FLSA among various appellate courts have created confusion for both employers and courts regarding the applicability of valid tip pools. One of the most controversial interpretations of the FLSA occurred in early 2010, when the U.S. Court of Appeals for the Ninth Circuit held that an employer could require servers to pool their tips with non-tipped kitchen and other "back of the house staff," so long as a tip credit was not taken and the servers were paid minimum wage. See Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). According to the Ninth Circuit, nothing in the text of the FLSA restricted tip pooling arrangements when no tip credit was taken; therefore, because the employer did not take a tip credit, the tip pooling arrangement did not violate the FLSA.

In 2011, the DOL issued regulations that directly conflicted with the holding in Woody Woo. As a result, employers could no longer require mandatory tip pooling with back-of-the-house employees. In conjunction with this announcement, the DOL issued an advisory memo directing its field offices nationwide, including those within the Ninth Circuit, to enforce its final rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.

Shortly after the issuance of the DOL's final rule, hospitality groups filed a lawsuit against the DOL challenging the agency's regulations that exclude back-of-the-house restaurant workers from employer-mandated tip pools. The lawsuit sought to declare the DOL regulations unlawful and inapplicable to restaurants that pay employees who share the tips at least the federal or applicable state minimum wage with no tip credit. On June 10, 2013, the District Court granted the plaintiffs' summary judgment motion, holding that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The District Court stated that the language of Section 203(m) of the FLSA is clear and unambiguous; it only imposes conditions on employers that take a tip credit.

The District Court's decision may have a large impact on the tip pool discussion currently before courts across the country, especially if employers in the restaurant and hospitality industries begin to challenge the DOL's regulations. Given the District Court's implicit message encouraging legal challenges against the DOL, the status of the law regarding tip pooling is more uncertain than ever. Although the decision is a victory for employers in the restaurant and hospitality industry, given the aggressive nature of the DOL, employers in all circuits should still be extremely careful when instituting mandatory tip pool arrangements, regardless of whether a tip credit is being taken.

  1. Take Preventative Steps When Facing WHD Audits

In response to a WHD audit or inspection, here are several preventative and proactive measures that an employer can take to prepare itself prior to, during, and after the audit:

  • Prior to any notice of a WHD inspection, employers should develop and implement a comprehensive wage and hour program designed to prevent and resolve wage hour issues at an early stage. For example, employers should closely examine job descriptions to ensure that they reflect the work performed, review time-keeping systems, develop a formal employee grievance program for reporting and resolving wage and hour concerns, and confirm that all written time-keeping policies and procedures are current, accurate, and obeyed. Employers should also conduct regular self-audits with in-house or outside legal counsel (to protect the audit findings under the attorney-client privilege) and ensure that they address all recommendations immediately.
  • During a DOL investigation, employers should feel comfortable to assert their rights, including requesting 72 hours to comply with any investigative demand, requesting that interviews and on-site inspection take place at reasonable times, participating in the opening and closing conferences, protecting trade secrets and confidential business information, and escorting the investigator while he or she is at the workplace.
  • If an investigator wants to conduct a tour of an employer's facility, an employer representative should escort the investigator at all times while on-site. While an investigator may speak with hourly employees, the employer may object to any impromptu, on-site interview that lasts more than five minutes on the grounds that it disrupts normal business operations.
  • If the DOL issues a finding of back wages following an investigation, employers should consider several options. First, an employer can pay the amount without question and accept the DOL's findings. Second, an employer can resolve disputed findings and negotiate reduced amounts at an informal settlement conference with the investigator or his or her supervisor. Third, an employer can contest the findings and negotiate a formal settlement with the DOL's counsel. Finally, an employer may contest the findings, prepare a defense, and proceed to trial in court.

In addition, employers should review our WHD Investigation Checklist, which can help them ensure that they have thought through all essential wage and hour issues prior to becoming the target of a DOL investigation or private lawsuit.

Following these simple measures could significantly reduce an employer's exposure under the FLSA and similar state wage and hour laws.

Wage & Hour FAQ #1: How to Prepare for a Wage Hour Inspection

By: Kara M. Maciel

Earlier this month, we released our Wage and Hour Division Investigation Checklist for employers and have received a lot of great feedback with additional questions. Following up on that feedback, we will be regularly posting FAQs as a regular feature of our Wage & Hour Defense Blog.

In this post, we address a common issue that many employers are facing in light of increased government enforcement at the state and federal level from the Department of Labor.

QUESTION: “I am aware that my industry is being targeted by the DOL for audits and several of my competitors in the area are facing wage and hour investigations.  What should I be doing now to proactively prepare my company in the event we are next for an audit?”

ANSWER:  Even though your company may not be in the midst of an investigation, there are still several action items that you can implement to place your company is the best possible position to defend against any DOL investigation.  For example:

  • Check current 1099’s as well as all 1099’s going back several years and review the actual job duties of those persons paid as independent contractors to verify that they were not, in fact, employees.
  •  Examine all written job descriptions to ensure that they: (i) accurately reflect the work done, (ii) have been updated where necessary, and (iii) indeed justify the applicable exemptions.
  • Review time keeping systems to ensure that non-exempt employees are being paid for all work performed, including work pre- or post-shift and during meal breaks
  • Ensure that required payroll records and written policies and procedures are current, accurate, and compliant.

Training staff is another key component of protecting your company from costly wage and hour claims. Not only could all managers be familiar with the FLSA and state wage and hour laws, but all employees should understand their role in proper record keeping and overtime. Key managers and personnel should be aware of the DOL’s inspection rights and what the DOL can and cannot do while on your property.

Finally, developing a response team with legal counsel is critical to being prepared if an inspection official knocks on your door unannounced. The response team should be armed with information and protocols so they know how to address the DOL’s subpoenas, questions, document requests, and other investigative demands.

In subsequent FAQs, we will discuss in more detail who should participate in a response team and what information they need to have in the event of an unscheduled DOL audit. But, in the meantime, regular internal reviews and audits of your wage and hour practices and documentation is key to protecting against costly exposure from a government investigation.

* * * * * * * * * *

Be sure to check out our Wage and Hour Division Investigation Checklist for more helpful tips and advice about preparing for and managing a Wage Hour Inspection.

 

Texas Roadhouse, Inc. Settles Its Beef With Wait Staff For $5 Million

By Kara Maciel and Casey Cosentino

The restaurant and hospitality industries are no strangers to the tidal wave of wage and hour class action lawsuits. Restaurants and hotel operators located in states with employee-friendly laws like Massachusetts, New York, and California, are particularly vulnerable. This vulnerability was recently confirmed on April 30, 2012, when Texas Roadhouse, Inc. agreed to pay $5 million to settle a putative class action suit filed by wait staff employees from nine restaurants in Massachusetts.

In Crenshaw, et. al, v. Texas Roadhouse, Inc. (No. 11-10549-JLT), the plaintiffs alleged that Texas Roadhouse violated Massachusetts Tips Law by retaining and distributing proceeds from their gratuities to managers and other non-wait staff employees, including hosts/hostesses. Additionally, because the plaintiffs did not receive all of their gratuities, they asserted that Texas Roadhouse improperly claimed the tip credit against the minimum wage in violation of Massachusetts Minimum Wage Law. As such, Texas Roadhouse allegedly paid the plaintiffs less than minimum wage. The plaintiffs, therefore, argued that they were entitled to full minimum wage for all hours worked.

Under Massachusetts law, employees who receive at least $20 per month in gratuities may be paid $2.63 per hour (“tip credit”), provided that the gratuities and hourly pay rate when added together are equal to or greater than the state minimum wage of $8.00. If the employee does not receive the equivalent of the minimum hourly wage with his or her tips, the restaurant or hotel must pay the difference. Although restaurants and hotel operators are prohibited from retaining employees’ gratuities, they may distribute properly pooled tips. Accordingly, when the tip credit is claimed to satisfy the minimum wage, only employees who customarily and regularly receive tips are eligible to participate in the tip pool. These employees include wait staff employees (e.g., banquet servers and bussers); service employees (e.g. baggage handlers and bellhops); and bartenders. Conversely, employees not eligible for tip pool arrangements include kitchen staff, cooks, chefs, dishwashers, and janitors. Also, under no circumstances are employers, owners, managers, or supervisors permitted to share in the tip pool.  

The Texas Roadhouse settlement illustrates the importance of adhering to state and federal minimum wage laws. A violation of a tip pool arrangement can lead to high exposure for restaurants and hotels, not only with respect to money wrongfully withheld from employees, but also with potential tip credit violations. With the flood of class action suits, restaurants and hotel operators must continue to make compliance with wage and hour laws a top priority. As a best practice, restaurants and hotel operators should conduct regular self-audits of their wage and hour practices, in consultation with legal counsel. Identifying and correcting wage and hour mishaps before plaintiffs collectively seek action is the first defense to preventing class action suits and reducing legal liability.

Are Your Employees' Tips Subject To Garnishment?

By Matthew Sorensen

 

Wage garnishment can pose a number of potential problems for hospitality businesses. This is particularly true where the employee whose pay is subject to garnishment receives tips. 

Garnishment is a legal procedure in which an employee’s earnings must be withheld by an employer for the payment of a debt under a court order. When faced with a garnishment order involving a tipped employee, the employer must determine whether all or part of the employee’s tips must be included in the amounts withheld under the garnishment order. This question turns on whether or not the employee’s tips may be characterized as “earnings” under the applicable garnishment statute. A mistake by the employer could lead to significant liability. Many state and federal laws concerning garnishment contain provisions that allow for direct employer liability for failing to timely respond to or follow a garnishment order. On the other hand, federal and state wage and hour rules can create liability for wrongfully withholding an employee’s tips. A recent Tennessee Appellate court ruling provides some additional guidance in this area that will likely have broader application to hospitality businesses around the country. 

In Erlanger Medical Center v. Strong, the Tennessee Court of Appeals relied on guidance found in the U.S. Department of Labor’s Field Operations Manual and a Wage and Hour Opinion Letter to hold that tips are not “earnings” that may be garnished. Specifically, the Court noted that “garnishment is inherently a procedural device designed to reach and sequester earnings held by the garnishee (usually the employer).” The Court went on to note that tips paid to an employee by a customer (including those paid by means of a credit card) are not “earnings” that may be garnished because they do not pass to the employer (the garnishee). Rather, tips are direct payments from customers to employees and are the property of the tipped employee. 

This ruling is consistent with a recent decision by the Appellate Division of the New Jersey Superior Court which held that tips are not “earnings” subject to garnishment under New Jersey law. It is also bolstered by the U.S. Department of Labor’s 2011 amendments to its rules defining the general characteristics of “tips.” In those revised rules, the Department of Labor has stated that the Fair Labor Standards Act prohibits employers from using an employee’s tips for any reasons other than as a credit against the minimum wage or as part of a valid tip pool.

Although each state’s garnishment laws are different, many states have defined “earnings” that may be subject to garnishment in a manner that is similar to the Tennessee statute at issue in Erlanger Medical Center v. Strong. As such, the Tennessee Court of Appeals’ decision and the U.S. Department of Labor guidance documents on which it relied may serve as strong persuasive authority in other jurisdictions. Nevertheless, hospitality employers should remain mindful that some states, including Colorado, expressly include tips in their definitions of “earnings” subject to garnishment. 

When served with a garnishment order, hospitality employers should act promptly to determine their obligations under both state and federal law, particularly where the order involves a tipped employee. Garnishment orders often set out specific timelines for the employer to respond and comply. Failure to appropriately or timely respond to the order can put the employer on the hook for its employee’s debt. To avoid such undesirable consequences and ensure that no improper deductions or withholdings are made from an employee’s tips under applicable wage and hour laws, it is best practice to consult with an attorney immediately upon receipt of a garnishment order.

Minimize Your Risk of Invalidating the Tip Credit

By Douglas Weiner and Charles H. Wilson

In a recently reported case from the Eighth Circuit Court of Appeals, Applebee’s servers and bartenders alleged they spent a “substantial” amount of time performing non-tipped work, such as cleaning and maintenance, and, therefore, should be paid the minimum wage of $7.25 for the time spent performing non-tipped work, rather than the direct wage of $2.13 the FLSA allows employers to pay employees in tipped occupations See 29 U.S.C. § 203(m) and 29 U.S.C. § 203(t).

Applebee’s argued it properly applied a tip credit to the servers and bartenders’ direct wage earnings because they worked in tipped occupations, and received more than the minimum wage for all hours worked in direct wages paid by the employer plus the tips they received. Thus, a “dual job” analysis was not required, because cleaning and maintaining work areas are duties related and incidental to their tipped occupations of bartending and serving. See 29 C.F.R. § 531.56(e)

The Eighth Circuit rejected Applebee’s argument, holding there was a temporal limit to the amount of non-tipped work a tipped employee may perform to retain tip credit eligibility. Specifically, the Eighth Circuit observed that 29 C.F.R. § 531.56(e) provided employees may perform related duties in a tipped occupation that are not themselves tip producing “part of the time or occasionally.” In defining “part of the time” and “occasionally,” the Eighth Circuit affirmed the district court’s holding that Section 30d00(e) of the Department of Labor's Field Operations Handbook is entitled to deference for the requirement that where more than 20% of a tipped employee's time is spent on non tipped work, the employer cannot take the tip credit for that time, and must pay the full minimum wage for non-tipped work.

In the Hospitality industry, dual jobs may be found in many varieties. Examples include servers who perform duties as ice sculptors, pastry decorators, or floral arrangers, or runners and bussers who make salads, polish silverware, stock inventory or wash dishes.

STEPS TO MINIMIZE RISK

To avoid “dual job” claims from tipped employees, employers are well advised to keep accurate records of the time employees spend performing non-tipped duties. In a typical 6 hour shift, where the employer can demonstrate through time records that less than 1.2 hours was devoted to non tipped work, the employer’s use of the tip credit will ordinarily be upheld. Daily and weekly records allow the employer to prove the percent of time spent in tipped and non-tipped work. 

Another step to minimize “dual job” claims is to require all tipped employees to perform the same amount of incidental duties, rather than limiting the non-tipped work to designated individuals. Employers may also want to require that available non-tipped employees perform the non-tipped producing work.  

Here's a Tip: Follow the Rules for Reporting Tip Income

By Betsy Johnson

In light of the IRS’ increased efforts to root out and capture unreported income, one of our hospitality clients recently asked us to provide some clarification regarding: 1) the obligations of employees to report tip income; 2) the obligations of employers to report tip income; and 3) the risks of underreporting of the tip income of its employees.

Employee Obligations:  Pursuant to the Internal Revenue Code and regulations, employees are required to report as income all tips they retain. Nevertheless, the actual amount that employees report to the IRS is an individual matter between the employee and the IRS.  While the employer may have a policy that mandates that employees report all cash tips and provide employees with reports of tips that are distributed through credit cards, the employer should not report tips to the IRS on behalf of employees and should not advise employees regarding how much tip income they should report.

Section 6053(a) of the Code requires employees to furnish written statements to their employers reporting all tips received (credit card and cash) in each calendar month.  However, employees should be required to report their tips for every pay period so that the total wages and proper FICA withholding can be taken in each pay period.  The employees are responsible for reporting their tips to be reported to the IRS back to the employer on a form created by the employer or on the IRS Form 4070. A copy of Form 4070 can be obtained at www.irs.gov/pub/irs-pdf/p1244.pdf.

The IRS publishes a pamphlet for employees which explains how tips should be recorded and reported. A copy of the “Guide to Tip Income Reporting” for employees can be obtained at www.irs.gov/pub/irs-pdf/p3148.pdf.

Employer Obligations:  On an annual basis, employers must report tip income reported by employees on IRS Form 8027. A copy of IRS Form 8027, "Employer's Annual Information Return of Tip Income and Allocated Tips" can be obtained at www.irs.gov/pub/irs-pdf/f8027.pdf.  The IRS Form 8027 requires that employers report the gross amount of charge tips (tips paid by credit card) for all employees, tips reported by employees, total credit card receipts, and gross sales. The IRS publishes a pamphlet for employers which explains how tips should be tracked and reported. A copy of the “Guide to Tip Income Reporting” for employers can be obtained at www.irs.gov/pub/irs-pdf/p3144.pdf.

To promote tip reporting compliance, the IRS has established the Tip Reporting Alternative Commitment (TRAC) program.  An explanation of the TRAC program can be obtained at www.irs.gov/pub/irs-utl/foodtrac.pdf. Employers can voluntarily sign an agreement with the IRS to participate in the TRAC program. The TRAC program is part of the Tip Rate Determination/Education Program that the Internal Revenue Service implemented in 1993 to promote tip reporting compliance.   

The TRAC program allows employers to avoid liability for FICA contributions where employees underreport tip income. Pursuant to a TRAC agreement, employers agree to:

  • Educate the employees about tip reporting
  • Establish tip reporting procedures
  • Stay current with all employer tax payments and filing obligations

In return for these commitments, the IRS agrees that it will not access FICA taxes due as a result of tip under reporting unless the IRS first examines all of the employees who have under reported tips. The IRS will not initiate any tip audits of employers while the TRAC agreement is in place, but the IRS may continue to conduct individualized tip income examinations of current or former employees.

To satisfy the educational commitment, it is recommended that employers establish a written policy for tipped employees that explains their tip reporting obligations. In addition, employees should receive information regarding tip reporting during their orientation. 

The commitment to establish a procedure to encourage employees to report 100% of their tips can be met by providing employees with the IRS Form 4070 and a written or electronic tip statement on a regular or monthly basis which contains all tips attributable to each employee. The statement must include:

  • Employee’s name, address and SS number
  • Employer’s Name
  • Period Covered and Date Reported
  • Total Amount of Tips Received by the Employee
  • The Employee’s Signature

The procedure should allow employees to verify or correct the report provided by the employer. However, employers should not provide the IRS with a copy of the statement or report the tips recorded on these statements to the IRS on behalf of the employee.

In order to satisfy the commitment to stay current with tax obligations, employers should implement an internal audit and review process to ensure that employees are complying with the tip reporting policy and procedures. The reality is that employees will not report all of their tips and, as a practical matter, employers cannot force employees to do so. Nevertheless, employers should exercise their best efforts to “encourage” (i.e., nudge, nag and/or discipline) employees to comply with the tip reporting policy and rules.

 

Conclusion: The inaccurate reporting of tips by employees and employers can result in significant liability for unpaid taxes, interest and penalties for employers. In spite of these potential liabilities, employers should not implement a practice of reporting tips to the IRS on behalf of each employees. To do so, may be detrimental to employee morale and retention. In addition, employers who usurp employee control over how much tip income is reported run the risk of having employees seek advice and/or protection from outside sources, such as a union or an attorney. As such, employers must take care in developing and implementing tip reporting policies and practices.

 

More information regarding tipped employees can be found at: http://www.wagehourblog.com/admin/mt-xsearch.cgi?blog_id=828&search_key=keyword&search=tips

 

 

 

 

Are Your Tipped Employees Performing Dual Jobs?

http://brendangogarty.com/photosBy Doug Weiner

In a recently reported case, Applebee’s’ servers alleged they spent a “substantial” amount of time performing non-tipped work, such as cleaning and maintenance, and should be paid the minimum wage 29 U.S.C § 206(A)(1)(c) of $7.25 rather than the direct wage 29 U.S.C. § 203(m) of $2.13 the FLSA 29 U.S.C. § 203(t) allows 29 C.F.R. § 516.28 tipped employees. Fast v. Applebee's International, Inc.  

Applebee’s contends there is no “dual job”, 29 C.F.R. § 531.56(e) as the server’s primary duty is customer satisfaction, and cleaning and maintenance duties are related to the servers primary duty. The court held it was a question of law which duties were included in the definition of a “tipped occupation”, and questions of fact which duties employees actually performed, and the time spent performing them.

The court denied the restaurant’s motion for summary judgment, rejecting the argument that the duties of, for example, cleaning bathrooms are related to the duties of serving food. However, the court emphasized it was the servers’ burden to prove they had worked more than 20% of their time performing non tipped work. Myers v. Copper Cellar Corp., 192 F.3d 546 (6th Cir. 1999)

Certified for appeal to the Eighth Circuit is the district court's holding that Section 30d00(e) of the Department of Labor's Field Operations Handbook is persuasive authority for the holding that, where more than 20% of a tipped employee's time is spent on non tipped work, the employer cannot take the tip credit for that time, and must pay the full minimum wage committed to non-tipped work. 

As an example of how fact specific each case must be analyzed, EBG wage & hour litigator Mark Beutler, in a case involving skycaps, successfully persuaded a court that incidental duties, such as bringing the bags to security were related to the tipped duty of serving the customer. In that case, the court found that all of the skycaps’ duties constituted tipped work, so there was no application of the 20% rule. Pellon v. Business Representation Int'l, Inc., 528 F. Supp. 2d 1306 (S.D. Fla. 2007). The court also held that to segregate the various tasks performed by skycaps, for purposes of assessing whether they were germane or not to the job of skycap, would be infeasible and require constant surveillance. The Pellon decision was later affirmed by the Eleventh Circuit.   

Dual jobs may exist in many varieties. There may be servers who are asked to perform duties as ice sculpturs, or pastry decorators, or floral arrangers. There may be bussers who make salads or wash dishes between lunch and dinner. Employers are well advised to keep good records of the time employees spend performing each duty in a dual job circumstance. See 29 C.F.R. § 785.13 The court emphasized it was an employer’s duty to record the time spent in tipped and non-tipped work.  29 C.F.R. § 516.28 

Douglas Weiner formerly served the U.S. Department of Labor as Senior Trial Attorney for the New York Regional Solicitor’s office for many years. He now exclusively represents management in wage hour and other employment matters.

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Tip Pools and Mandatory Service Charges - Wage and Hour Class Actions Continue to Target Hospitality Employers

By Kara Maciel

Another luxury New York hotel is the latest target in a constant stream of wage and hour class actions against the hotel and restaurant industry challenging the industry’s practices relating to tip pools and service charges. At issue in the lawsuit filed in February 2010 is the common practice in the hotel and restaurant industry of charging private dining/banquet customers a mandatory service charge in lieu of the customer leaving a voluntary tip or gratuity on the day of the event. According to the plaintiffs’ complaint, a 21.5 percent service charge is added to the customer’s bill for the event, but only 15 percent of that amount is distributed to the waitstaff. The complaint asserts that customers are led to believe that the entire service charge is a gratuity to be paid to the employees who worked the event. The plaintiffs also complain about the hotel’s practice concerning “special banquet gratuities” that are received from customers and distributed to non-banquet employees, instead of to the waitstaff who worked the particular event. The plaintiffs claim to represent a class of more than 100 employees and seek more than $5 million in damages.

 

Mandatory service charges and their distribution among waitstaff have plagued the hospitality industry for years. Federal courts interpret the federal law differently and states have enacted their own statutes that place employers in constant uncertainty, depending on where they are located. Under the Federal Fair Labor Standards Act (FLSA), a mandatory service charge is not a “tip” because customers are not given the discretion to determine whether to pay it or how much to provide to the server. Accordingly, under federal law, a hotel may retain any or all of the service charge, and the hotel must decide whether to distribute some – or any – of the service charge to an employee, so long as the employee earns at least the minimum wage.

 

Some state laws, however, vary and require employers to distribute 100 percent of the mandatory service charge to the servers or other members of the waitstaff. In Massachusetts and New York, for example, no portion of the mandatory service charge may be distributed outside of the non-supervisory waitstaff if the customer reasonably believed that the charge constituted a gratuity. In the case mentioned above that was filed recently in New York, the plaintiffs are relying on a 2008 New York State Court of Appeals case, Samiento v. World Yacht, Inc., which concluded that when a mandatory service charge has been represented to the customer as compensation for the waitstaff in lieu of a tip or gratuity, that service charge must be distributed to the waitstaff. In New York, the statute of limitations extends six years, rather than the three years under the FLSA. The Massachusetts Tip Statute, which was amended in 2004 to clarify who is defined as “waitstaff,” similarly restricts any non-waitstaff personnel from sharing in the distribution of the mandatory service charge. In 2008, Massachusetts amended its statute to provide for mandatory treble damages for a violation of the wage and hour law.

 

Employers have received some good news from courts recently. In early February, employers in Massachusetts received a favorable opinion in Hernandez v. Hyatt Corp., when the Chief Judge of the Business Law Section determined that the 2008 amendment calling for mandatory treble damages only applies prospectively. On February 23, 2010, the U.S. Court of Appeals for the Ninth Circuit concluded that, under the FLSA, a restaurant is permitted to require its waitstaff to participate in a tip pool that redistributes some of the tips to the kitchen staff, so long as the employer does not use the tip credit to satisfy an employee’s minimum wage.

 

To avoid the customer confusion and exposure seen in these cases, banquet documentation given to customers should clearly delineate how much is billed for a mandatory service charge intended as compensation for employees and how much is billed as an “administrative fee” that the hotel retains to cover overhead and other costs. Moreover, hotels and restaurants should communicate to their employees how much the employees will receive of the mandatory service charge and who will share in that service charge. Hospitality employers in Massachusetts and New York should closely monitor judicial developments of their respective state’s laws to ensure compliance, as violations can lead to costly settlements and verdicts.

 

With the flood of class actions, hotel and restaurant employers must make compliance with federal and state wage and hour laws a top priority throughout the remainder of 2010. Conducting regular self-audits, in consultation with legal counsel, should be a best practice for all employers. Every investigation and lawsuit is unique and cannot be defended with a one-size-fits-all defense. Having, as part of your team, counsel who knows the hospitality industry and the unique challenges facing your hotel or restaurant will help keep companies out of court and exposure to a minimum.
 

Tip Pool May Include Employees Not Customarily Tipped If No Tip Credit is Taken

By Kathryn T. McGuigan and Douglas Weiner

In a landmark decision upholding the validity of the employer’s mandatory tip pool, on February 23, 2010, the U.S. Court of Appeals for the Ninth Circuit issued its opinion in Misty Cumbie v. Woody Woo, Inc. No. 08-35718. The court held that where the employer paid a direct wage of at least minimum wage to restaurant wait staff, requiring them to participate in a tip-pooling arrangement with other restaurant employees does not violate the Fair Labor Standards Act. (“FLSA”)..

The Oregon restaurant took no tip credit, rather paid its wait staff a direct hourly wage in excess of the applicable minimum wage requirement. In addition to their hourly wage, the servers received a portion of the daily tips, distributed to employees through a tip pool. The restaurant required the wait staff to participate in its tip pool that included all restaurant employees, except managers. The largest portion of the pool went to the kitchen staff, employees not customarily tipped in the restaurant industry. 

A server filed a class action lawsuit against the restaurant alleging that the tip-pooling arrangement violated the minimum wage, and tip provisions of the FLSA. In granting the restaurant’s motion to dismiss the case, the District Court found that there is nothing in the text of the FLSA that restricts employee tip pooling arrangements when no tip credit is taken, thus the restaurant’s tip pooling arrangement was valid. In a well reasoned opinion specially refuting the Secretary of Labor’s arguments submitted in an amicus brief, the Ninth Circuit affirmed citing the Supreme Court’s adage that an agreement is per se valid, “unless subject to statutory interference”.

The Cumbie Court held when an employer does not take a tip credit, it may lawfully require servers to participate in a tip pool with employees who are not customarily tipped. 

Although the court’s ruling appears reasonable and persuasive, it is not clear what the Department of Labor’s enforcement policy will be, or whether this court’s ruling will be adopted in other circuits. As this issue develops we will update this blog.

New York Judge Dismisses Tipping Lawsuit Against Starbucks Corp.

By Amy J. Traub

On December 16, 2009, Judge Laura Taylor Swain of the United States District Court for the Southern District of New York granted summary judgment to Starbucks Corp. (“Starbucks”) in a wage/hour lawsuit filed by former and current baristas of Starbucks’s coffee shops located in New York.

In their lawsuit, filed in April 2008, the New York baristas argued that Starbucks had violated state wage and hour laws by splitting tips intended for baristas with shift supervisors, handing out tips on a weekly basis instead of on a per-shift basis, and failing to distribute tips to baristas-in-training. The baristas further moved for class certification on behalf of all baristas who have worked at Starbucks coffee shops in New York in the past six years, estimating that the proposed class in New York could likely exceed 2,000 people and that the amount in controversy was more than $5 million.

In its motion for summary judgment, Starbucks argued that shift supervisors are part-time hourly-paid workers who provide the same customer service as baristas and do not act as supervisors or agents of the company in that they have no authority to interview, hire, transfer, evaluate, promote, discipline, fire, or determine pay for any other employee and do not otherwise perform the types of duties performed by a “supervisor” or “agent,” as those terms are defined by the New York State Labor Law. Therefore, argued Starbucks, shift supervisors should be entitled to inclusion in the tip pool. Judge Swain agreed, granting Starbucks’s motion and dismissing the baristas’ tip-splitting claims, reasoning that any additional duties performed by shift supervisors, such as opening and closing the store, depositing money in the safe, and overseeing the store when a manager is out, do not constitute the exercise of authority over the creation, terms, or conditions of the employment relationship with Starbucks.

Having granted summary judgment to Starbucks, the court then denied the plaintiffs’ motion for class certification.

The plaintiffs have appealed.

Minimum Wage Rises for Tipped Employees in Florida

By now, you are probably aware that the minimum wage under the federal Fair Labor Standards Act goes up to $7.25 on July 24, 2009. Employers with operations in Florida know that this is four cents more than the current Florida minimum wage of $7.21.  Florida employers must pay the higher of the two wages.

But what's the minimum wage for tipped employees in Florida as of July 24th?  The answer is not as simple as you might think, and you might be misled by reading the Florida Agency for Workforce Innovation web page on the minimum wage.  That web page states the new federal minimum wage, and also states that tipped employees must be paid a direct minimum wage of $4.19 as of January 1, 2009.  While that's not inaccurate as far as it goes, the AWI web page does not explain how much tipped employees must be paid in direct wages as of July 24, 2009.

First, some background.  Under the FLSA, employers are allowed to claim a “tip credit” toward satisfying state and federal minimum wage laws for their tipped employees. This means that tips are credited against, and satisfy a portion of, the employer’s obligation to pay the minimum wage.  Under the FLSA, if an employee retains all tips, and the employee customarily and regularly receives more than $30 a month in tips, an employer may pay a tipped employee not less than $2.13 an hour in direct wages if that amount plus the tips received equal at least the federal minimum wage. If an employee's tips combined with the employer's direct wages of at least $2.13 an hour do not equal the federal minimum hourly wage, the employer must make up the difference.  As the federal minimum wage increases, so does the federal tip credit; the direct wage that must be paid to the employee ($2.13) stays the same. (You can read an article I co-authored on FLSA tip credit and tip pooling rules here. )

Not so under Florida law.  The Florida Constitution  provides that "For tipped Employees meeting eligibility requirements for the tip credit under the FLSA, Employers may credit towards satisfaction of the Minimum Wage tips up to the amount of the allowable FLSA tip credit in 2003."  The FLSA tip credit in 2003 was $3.02, i.e. the difference between the minimum wage in 2003 ($5.15) and the reduced minimum wage ($2.13).  Therefore, under the Florida Constitution, the tip credit can be no more than $3.02.  So, in Florida, as the minimum wage increases, the $3.02 tip credit stays the same, and the direct wage that must be paid to the employee increases. As of January 1, 2009, the direct wage equals the Florida minimum wage ($7.21) minus the 2003 tip credit ($3.02), or $4.19.

As you can see, however, $4.19 is not enough as of of July 24, 2009, because under Florida law the maximum tip credit remains $3.02.  An employer that paid only $4.19, and took a tip credit of $3.02, would leave the employee four cents short of the federal minimum wage of $7.25.  So, as of July 24, 2009, Florida employers must pay their tipped employees a direct wage of no less than $4.23.