Wage & Hour Defense Blog : Wage & Hour Lawyer & Attorney : Epstein Becker Green Law Firm : DOL Enforcement, FLSA Coverage

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

 

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By 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.

Reply to this blog post for a discount to EBG’s CLE Hospitality Client Briefing

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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.
 

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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.

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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.

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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. 
 

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