Tip Pooling: Are You Doing it Right?
It's common for restaurants to
require tipped employees to contribute a portion of their tips into a
pool which is then split among other employees. This is perfectly valid
under the federal Fair Labor Standards Act's tip-credit provisions, but
only if you follow certain limitations such as how much is contributed
and who all will share in the pool. That's the issue facing The Grotto
in Houston, where several disgruntled ex-waiters have filed a federal
lawsuit claiming back pay under an improper tip pool arrangement.
Beltran, et. al. v. Landry's Restaurants, Inc d/b/a/ The Grotto.
How Much Money Can Be Put In?
In
the first place, tipped employees cannot be required to contribute more
of their tips to a pool than is "customary and reasonable" in the
locality in which they work. As an enforcement position, the U.S. Wage
and Hour Division will not challenge pool contributions equal to 15% or
less of an employee's tips. If the proportion is greater than 15%, then
you might well be called upon to show (if you can) that the higher
amount is in fact customary and reasonable in your particular
community. This problem can sometimes happen where, for example, an
employer requires a contribution based on a percentage of an employee's
sales instead of using a percentage of his or her tips.
Also,
only the tip amount in excess of the tips used for the tip credit may
be taken for a pool. As an illustration, if you are taking the maximum
tip credit of $3.02 per hour (based on the current minimum wage of
$5.15), a tipped employee who receives only exactly enough in tips to
cover that credit cannot be required to contribute to the tip pool. If
employees are nevertheless made to contribute to the tip pool, then
they have not been paid the required minimum wage.
Who Can Swim In This Pool?
Another
limitation is that tipped employees cannot be required to share their
tips with workers who do not customarily and regularly receive tips.
The U.S. Wage and Hour Division has said that wait-staff, bellhops,
counter personnel who serve customers, bus employees, and service
bartenders are among the kinds of employees who are permissible pool
participants. But the Division has also taken the position that
dishwashers, cooks, janitors, and laundry-room attendants are not the
kinds of employees who can be permitted to participate in tip-pooling
arrangements.
In the Landry's case, the waiters allege
that they were required to contribute $3.50 of their tips to the person
in the kitchen who cut and prepared the dessert pastries, and another
$3.50 to the person in the kitchen who prepared coffee. Since these are
not employees who have any interaction with patrons, and do not
"customarily and regularly" receive tips, the waiters are claiming a
"clear violation of the FLSA." Even close cases are usually construed
in favor of employees, and adversely to restaurants. For example, a
similar case in the U.S. Court of Appeals for the Sixth Circuit
(covering the states of Kentucky, Michigan, Ohio, and Tennessee) ruled
that a tip pool should not have included waiters and waitresses
whose work had been limited to salad preparation and related tasks.
These employees had no personal contact with patrons and instead worked
outside of their view, and the employees' duties were, as the court put
it, restricted to things "traditionally classified as food preparation
or kitchen support work...." Therefore, the court said, the tip pool
was invalid, and the employees who had been required to contribute tips
to it were due enough in back wages to bring them up to the full
minimum wage for all their hours worked.
Sometimes tipped
employees decide on their own to share their tips with co-workers who
are not tipped employees and who do not participate in a tip pool. Or,
tipped employees might voluntarily decide to share a larger proportion
of their tips than their employer could require them to contribute to a
tip pool. If they do this freely, not under any formal arrangement, and
independently of and without any pressure or coercion from their
employer, then this does not invalidate the tip credit or a tip pool.
However, you cannot use any of those pooled tips to cover any tip
credit.
Adding It All Up
While the amounts
in questions might sound small at first, they add up quickly. The
financial exposure presented by allowing ineligible employees to share
in a tip pool can be serious indeed. In addition to reimbursing
employees for lost wages and money improperly contributed to the pool,
plaintiffs are entitled to an identical amount as "liquidated damages"
plus costs and attorney's fees on top of that! Still not a huge amount
if you're dealing with a single employee, but most of these cases,
including the Landry's lawsuit, are brought as collective
actions, meaning there is a whole class of plaintiffs which includes
both past and present employees.
As with all wage-hour issues,
small mistakes - even perfectly innocent ones - can lead to large
consequences. Be sure to seek competent advice if you're not 100% sure
of your own pay practices.
Michael Mitchell is a lawyer with Fisher &
Phillips LLP, a nationally recognized firm representing management in
labor and employment matters. He can be reached at 504-529-3830 and mmitchell@laborlawyers.com. This information provided is general and educational and not legal advice. For additional information go to www.hospitalitylawyer.com.