When an employer pays the minimum wage (or more) instead of taking the tip credit, who owns any tips – the employer or the employee? In Marlow v. The New Food Guy, Inc., No. 16-1134 (10th Cir. June 30, 2017), the United States Court of Appeals for the Tenth Circuit held they belong to the employer, who presumably can then either keep them or distribute them in whole or part to employees as it sees fit. This directly conflicts with the Ninth Circuit’s decision last year in Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.3d 1080, 1086-89 (9th Cir. 2016), pet for cert. filed, No. 16-920 (Jan. 19, 2017) and likely sets up a showdown this fall in the U.S. Supreme Court.

The plaintiff in Marlow, who was paid $12 per hour, alleged her employer was obligated to turn over to her a share of all tips paid by catering customers. The Tenth Circuit first held that the statutory language of 29 U.S.C. §203(m), which allows employers the option of paying a reduced hourly wage of $2.13 so long as employees receive enough tips to bring them to the current federal minimum of $7.25, does not apply when the employer pays the full minimum wage, and thus the plaintiff had no claim to any tips. In this regard the Court followed the 2010 decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010), as well as a number of cited district court cases.

Crucially, the Court went on to hold that the U.S. Department of Labor (DOL) had no authority to promulgate its post-Woody Woo regulation, 76 Fed. Reg. 18,855 (April 5, 2011), amending 29 C.F.R. §531.52, which, contrary to Woody Woo, states that tips are the property of the employee whether or not the employer takes the tip credit under section 2013(m). In so doing, it held that although agencies may promulgate rules to fill “ambiguities” or “gaps” in statutes, they cannot regulate when there is no ambiguity or gap that the agency was authorized to fill. It then found (1) there were no “ambiguities” in the statute that needed to be filled, as the statute clearly only applied when an employer sought to use the tip credit; (2) there were no undefined terms in the statute; and (3) there was no statutory directive to regulate the ownership of tips when the employer is not taking the tip credit. In so doing, the Tenth Circuit expressly rejected the Ninth Circuit’s decision last year in Oregon Restaurant, which held that the DOL had the discretion to issue the regulation precisely because the statute was silent on the subject.

Notably, the Supreme Court has four times extended the time for DOL to file its opposition to the petition for certiorari in Oregon Restaurant, most recently on June 30 granting an extension until September 8, 2017. It appears the current DOL may not yet be not sure what position to take as to the validity of its Obama-era regulation. Marlow’s direct conflict with Oregon Restaurant increases the likelihood that either DOL may choose not to defend the regulation or that the Supreme Court will grant review to resolve the conflict when it returns in October.

Tips Do Not Count Towards the Minimum Wage Unless a Worker Qualified as a “Tipped Employe"In Romero v. Top-Tier Colorado LLC, the Tenth Circuit Court of Appeals ruled that tips received by a restaurant server for hours in which she did not qualify as a tipped employee were not “wages” under the FLSA, and therefore should not be considered in determining whether she was paid the minimum wage.

Tipped Employees & the FLSA

The FLSA provides that employers may take a “tip credit” and pay employees as little as $2.13 per hour if: (i) the tip credit is applied to employees who customarily and regularly receive tips; (ii) the employee’s wages and tips are at least equal to the minimum wage, and (iii) all tips received by a tipped employee are retained by the employee or pooled with the tips of other tipped employees.

In Romero, the Tenth Circuit noted that an employee may hold both tipped and non-tipped jobs for the same employer.  In those cases, the employee is entitled to the full minimum wage while performing the job that does not generate tips.

Moreover, the Circuit Court cited to the directive in the Wage Hour Division’s Field Operations Handbook stating that, if a tipped employee spends more than 20% of his or her time performing related-but-nontipped work, then the employer may not take the tip credit for the amount of time the employee spends performing those duties.

The Plaintiff’s Claims

The plaintiff in Romero worked as a server at the defendants’ restaurant.  The defendants paid her a cash wage of $4.98 an hour, and took a tip credit to cover the gap between the cash wage rate and the federal minimum wage.

The plaintiff contended that she also worked in nontipped jobs for the defendants, and that she spent more than 20% of her workweek performing related-but-nontipped work. Therefore, she concluded she was entitled to a cash wage of at least $7.25 per hour during certain hours, and filed a lawsuit in the U.S. District Court for the District of Colorado claiming violations of the federal minimum wage.

The defendants’ moved to dismiss the complaint because plaintiff did not allege that her total weekly earnings, when divided by the number of hours worked, ever fell below the federal minimum wage rate. The District Court reasoned that a minimum wage violation is determined by dividing an employee’s total pay in a workweek by the total number of hours worked that week.  Because the plaintiff did not allege facts that would establish such a violation, the District Court granted the defendants’ motion and dismissed the complaint.

In light of that reasoning, the District Court never considered whether the plaintiff was properly considered a tipped employee.

When are Tips Considered “Wages” Paid by the Employer?

The Tenth Circuit Court of Appeals reversed the judgment of the District Court. The Tenth Circuit “assumed” that the district court correctly stated that an employer satisfies the FLSA’s minimum wage requirements so long as, after the total wage paid to each employee during any given week is divided by the total time that employee worked that week, the resulting average hourly wage is $7.25 per hour or more.

But the Tenth Circuit held that the existence of a minimum wage violation depends on the “wages” paid by an employer to an employee. The Court stated that tips are “wages” paid by an employer only when the tips are received by a worker who qualifies as a tipped employee under the FLSA.

Accordingly, the Tenth Circuit reversed the District Court’s dismissal of the plaintiff’s complaint. The Tenth Circuit directed the District Court to reconsider its ruling by examining the threshold question of whether the tips received by the plaintiff were “wages” for purposes of the minimum wage requirements of the FLSA.

What is the Impact of an Improper Tip Credit?

Assume, for example, that the plaintiff worked 40 hours in a given week, was paid cash wages of $199.20 (or $4.98 per hour) and received tips of $90.80.

If the evidence demonstrates that the plaintiff was a tipped employee at all times, she was paid wages of $290.00 (or $7.25 per hour) and the defendants did not violate the federal minimum wage.

However, the evidence could demonstrate that the plaintiff performed so much related-but-nontipped work that she did not qualify as a tipped employee at any time. As explained by the Tenth Circuit, the plaintiff’s tips would not count as wages and therefore she was paid $90.80 below the minimum wage.  The defendants could then be liable to her for that amount (as well as potential liquidated damages and attorneys’ fees).

The Tenth Circuit’s decision is consistent with the rulings of other circuit courts. Therefore, employers who are taking tip credits therefore must pay close attention to the specific requirements of the FLSA, and should not consider themselves insulated from liability merely by the fact that their tipped employees are earning more than the minimum wage.

Julie Badel
Julie Badel

Addressing an unusual set of facts, the U.S. District Court for the Northern District of Georgia has dismissed a suit challenging an employer’s practice of retaining tips that customers give to valets. The plaintiff in Malivuk v. Ameripark, No. 1:15:cv-2570 WSD (N.D. Ga. 2016), alleged that she was promised an hourly wage plus tips but that her employer, who provided valet parking services, retained a portion of the tips.

The defendant moved to dismiss the case because the plaintiff did not allege that the company took a tip credit against the minimum wage or in any other way did not pay the minimum wage. The court agreed and dismissed the case, relying on section 203(m) of the FLSA, which provides that an employer must pay a cash wage but if that wage is less than the federal minimum wage, it can make up the difference with the employee’s tips.  If the cash wages plus the tips are not sufficient to amount to the minimum wage, the employer must increase the cash wages so the employee is paid the minimum.

In its ruling, the court declined to follow a recent Ninth Circuit case, Oregon Restaurant and Lodging Ass’n v. Perez, 816 F.23d 1080 (9th Cir. 2016), that upheld a DOL regulation that most courts have rejected.  This regulation, 29 C.F.R. §531.52, provides that tips are the property of the employee, whether or not the employer takes a tip credit.  The Ameripark court reasoned that if Congress wanted to articulate the principal that tips are the property of the employee, absent a valid tip pool, it could have done so without reference to the tip credit, and it concluded that the DOL regulation violates the plain language of section 203(m).

Conclusion

Although it would seem that employers in industries where employees customarily receive tips normally take a tip credit unless otherwise prohibited by state or local laws, Ameripark suggests that if an employer does not take a tip credit, it may retain a portion of the employees’ tips—at least in the jurisdiction of this federal court.  Of course, other courts may hold to the contrary.  Employers considering adopting such an approach would be wise to review whether the courts in their jurisdictions have weighed in on this subject, or whether such a practice could give rise to other types of claims.  And while the practice might be attractive to employers in some industries where employees receive significant tips, restaurant employers in particular might find it hard to recruit and retain servers to work once they are told that the restaurant will be keeping a portion of the tips.

Michael Kun, co-editor of this blog, has a post on the Hospitality Labor and Employment Law Blog that will be of interest to many of our readers: “Ninth Circuit Approves DOL Rule Prohibiting ‘Tip Pooling’ for Kitchen Employees Even Where No ‘Tip Credit’ Is Taken.”

Following is an excerpt:

The Fair Labor Standards Act (“FLSA”) permits employers to use “tip credits” to satisfy minimum wage obligations to tipped employees.  Some employers use those “tip credits” to satisfy the minimum wage obligations; some do not.  (And in some states, like California, they cannot do so without running afoul of state minimum wage laws.) …

On February 23, 2016, in Oregon Restaurant & Lodging Assoc. v. Perez, No. 13-25765 (9th Cir. Feb. 23, 2016), a divided Ninth Circuit Court of Appeals … [held] that the DOL in fact has the authority to regulate the “tip pooling” practices of employers even when they do not take tip credits — including prohibiting employers from including kitchen employees in “tip pools.” While confirming that the FLSA permits the use of “tip credits” to fulfill minimum wage requirements, the Court concluded that the DOL was acting within its authority in concluding that employers that establish “tip pools” may only do so when the persons who are included are persons who normally receive tips – and that, as kitchen staff do not normally receive tips, they cannot be included in “tip pools.”

The decision not only appears to be inconsistent with the Ninth Circuit’s own Cumbie decision, but with other courts that have reviewed this same issue. …

Read the full post here.

By: Kara Maciel and Jordan Schwartz

As discussed in prior blogs, due to confusion surrounding FLSA tip pool requirements, the U.S. Department of Labor (“DOL”) Wage and Hour Division enacted a strict rule in 2011 related to proper tip pooling and service charge practices. This rule was met with swift legal challenges, and earlier this week the U.S. District Court for the District of Oregon 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 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 court, 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.

The DOL initially announced that in accordance with the Woody Woo decision, it would permit employers in the Ninth Circuit to impose mandatory tip pooling on employees who did not customarily and regularly receive tips. However, on April 5, 2011, the DOL issued regulations that directly conflicted with the holding in Woody Woo. At that time, it was unclear whether the DOL would enforce the new regulations against employers in the Ninth Circuit. In early 2012, the DOL clarified its position on tip pooling by fully rejecting the Ninth Circuit’s decision 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 rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.

Shortly after the DOL’s final rule, hospitality groups, including the Oregon Restaurant and Lodging Association, the Washington Restaurant Association, and the Alaska CHARR, filed a lawsuit against the DOL challenging the agency’s regulations that exclude back-of-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 court granted the plaintiffs’ summary judgment motion, holding that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The 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. Quoting the Ninth Circuit’s opinion in Woody Woo, the court explained that “[a] statute that provides that a person must do X in order to achieve Y does not mandate that a person must do X, period.”

The 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 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.

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.
 

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.

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.