Shark Bait, Dipping a Toe Into The Tip Pool
Employers in the hospitality industry need to be
aware that the "tip pool" has become the latest trend in litigation
under the Fair Labor Standards Act ("FLSA"). Most recently, Chili's
Grill & Bar found itself embroiled in a class action lawsuit in
Houston, Texas, in which employees allege that Chili's wrongly
distributed tips to Quality Assurance workers and Expediters. Because
they are often filed as class actions, these lawsuits can be very
costly, both in terms of potential liability and attorneys' fees.
Through this article, we hope to assist restaurants and other service
establishments in managing and distributing their tip pools so as to
avoid potentially expensive litigation.
Background
Tipped
employees-those who work in an occupation in which they regularly
receive more than $30 per month in tips-are subject to unique federal
minimum wage standards. Notwithstanding the current minimum wage of
$5.15, the FLSA provides that tipped employees may be paid an hourly
rate of only $2.13. Thus, the employer receives a "tip credit" for the
$3.02 difference between the employee's actual hourly wage and the
federal minimum wage. To take advantage of the lower rate for tipped
employees, the employer must ensure that its tipped employees' total
compensation (hourly rates plus tips) exceeds the $5.15 hourly rate.
The Tip Pool
As
a general matter, tipped employees must receive all of the tips they
receive during their shifts. Individual tipped employees may either
keep their own tips, or they may be required by the employer to share
or "pool" their tips with other "tipped employees."
The tip pool has become a common feature in restaurants. It accomplishes a number of objectives:
1)
It provides a fair distribution to employees, such as busboys and
bartenders, who customarily receive smaller tips than servers.
2)
It fairly compensates servers who are assigned slow sections of the
restaurant or who have the misfortune of serving low tipping parties.
3)
It allows the employer to identify certain employees (eg., busboys) as
"tipped employees" who would otherwise not customarily reach the $30
per month threshold, thereby allowing the employer to pay its busboys
$2.13 per hour rather than the standard minimum wage of $5.15.
In administering the tip pool, however, it is important to remember that only those employees who "customarily receive tips" may share in the tip pool.
If non-tipped employees share in the tip pool, the employer will lose
the "tip credit" and will be required to pay the federal minimum wage
of $5.15 per hour to both tipped employees and non-tipped employees.
The
allegation that the employer has forfeited the "tip credit" by
requiring servers to share tips improperly with non-tipped employees
has become the source of much litigation. In these cases, whether an
employee is a "tipped employee" or a "non-tipped employee" becomes the
central factual dispute. To be a tipped employee, an employee must be
engaged in an occupation in which he or she customarily and regularly
receives tips. Only occupations requiring significant customer contact
can be considered a "tipped employee." Therefore, the central issue in
this type of litigation often becomes the amount of customer contact
the employees has.
Various cases involving the tip pool credit
lend insight on which employees have sufficient customer contact to
share in the tip pool. Examples of employees who generally may share in the tip pool include: Servers, Bus Persons, Bartenders, Hosts/Hostesses, Greeters, Maitre d's, Captains, Sommeliers.
Employees who do not typically receive tips because of their minimal customer interaction cannot take money from the tip pool. Examples of such employees include:
Managerial employees, Cooks and other kitchen staff, Dishwashers,
Off-Hour Employees (eg., overnight janitors or security guards),
Non-Service/Back Room Bartenders.
A non-tipped employee's receipt of tip pool funds may cause the employer to forfeit the tip credit.
Customary and Reasonable Tip Out
The
DOL states in its Regulations that in order to maintain the tip credit,
an employer's tip-out requirement must be "customary and reasonable."
The DOL considers a tip out requirement of as much as 15% of an
employee's tips to be "customary and reasonable" by definition. The
Regulations on this issue have been questioned by the courts.
Nevertheless, withholding more than 15% of a server's tips as part of a
tip pool arrangement may raise the ire of the Department and instigate
an investigation. Accordingly, it is recommended that the "tip-out"
requirement not exceed 15% of a tipped employee's tips.
Notice
To
receive the tip credit, the DOL requires that an employer inform its
tipped employees that their tips will credited towards meeting the
minimum wage requirement. The necessary notice may be provided in a
number of ways: either through an employee handbook, a posting
alongside the mandatory minimum wage poster on the employee bulletin
board, or a separate memorandum given to each individual tipped
employee. Regardless of the method used, such notice should be in
writing and in such a place that the employer can demonstrate that the
tipped employee saw it during his or her employment. We would also
recommend that the notice inform tipped employees of which job
classifications will share in the tip pool (assuming, of course, that
only "tipped employees" are permitted to share in the tip pool
consistent with the provisions of the FLSA!). This additional notice
will prevent the type of uncertainty and misunderstandings that often
can lead to a DOL complaint or a class action lawsuit.
Conclusion
If
it is found that managerial or other non-tipped employees share in the
tip pool, the employer will lose the tip credit and be required
retroactively to pay each tipped employee the federal minimum wage of
$5.15 per hour. The hourly difference of $3.02 between the minimum wage
and the tipped employee rate can quickly add up, and is more than
enough to attract the interest of both the DOL and plaintiffs'
employment lawyers.
Thomas E. Reddin is a partner with Godwin Pappas.
He focuses his practice on representing corporate clients in employment
and labor relations. With more than 21 years experience in handling
complex litigation and employment matters for leading local, regional
and national companies, Tom is recognized as one of the preeminent
specialists in the field of labor and employment law. He can be reached
at 214-939-4821 or treddin@godwinpappas.com.
James Parker is an associate with Godwin Pappas
and represents corporate clients in a variety of employment related
matters, including lawsuits under federal and state antidiscrimination
laws, the Fair Labor Standards Act, ERISA, and the Family and Medical
Leave Act. He can be reached at 214-939-4442 or jparker@godwinpappas.com.
This information provided is general and educational and not legal advice. For additional information go to www.hospitalitylawyer.com.