“TIP CREDIT” IS A DOUBLE-EDGED KNIFE FOR RESTAURANT EMPLOYERS

In the restaurant business, using the “tip credit” method of paying employees under the Fair Labor Standards Act (“FLSA”) is analogous to a kitchen worker chopping vegetables with an extremely sharp chef’s knife.  If handled properly, it’s an extremely useful tool for restaurants to manage high up-front labor costs.  If handled carelessly, it can result in expensive litigation and high-dollar liability. 

A national steakhouse chain recently agreed to pay $995,000 as part of a settlement to resolve claims it failed to properly pay servers and other employees who received tips. For smaller businesses with less resources, mistakes with tip credit can result in catastrophic liability.  Likewise, the continued use of tip credit by the restaurant industry and other hospitality businesses is under attack by the current U.S. Department of Labor.

The Basics

In most instances, employers are required to pay nonexempt workers at least the minimum wage of $7.25 per hour. However, the FLSA allows an employer to satisfy a portion of its minimum wage obligation to a “tipped employee” by taking a partial credit, known as a “tip credit,” toward the minimum wage based on the amount of tips an employee receives. 29 U.S.C. 203(m)(2)(A). This allows paying a subminimum wage, as low as $2.13 per hour, provided that the employer makes up the difference with tips earned by and paid to the employee. Under the FLSA a “tipped employee” is defined as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”

Compliance with tip credit can be complex and mistakes are common. Failure to abide by the extremely strict rules can invalidate the employer’s entitlement to the tip credit and make the restaurant liable for unpaid wage claims, liquidated damages and attorneys’ fees.  The basic requirements for restaurants to use the tip credit include:

•    The employer must notify workers in advance that: (a) the employer intends to utilize the tip credit and treat tips as satisfying part of the employer’s minimum wage obligations and (b) if the amount of tips plus hourly wages does not match or exceed the applicable minimum wage, the employer must make up the difference. The FLSA does not require this notice to be in writing, but it is a best practice to do so and have the employee agree by signing a form.

• Tipped employees must retain all tips earned by that employee. The restaurant or managers cannot receive any portion of the tips.

• Only employees who customarily receive tips, such as servers, may be paid utilizing the tip credit. Typically, back-of-house workers, such as cooks and dishwashers, cannot be paid using the tip credit.

• The exception to restaurant employees retaining all tips is if there is a valid tip pooling arrangement where all tips are combined and shared among all tipped employees according to a pre-determined formula. A tip pool will be considered invalid if non-eligible workers or managers are allowed to participate.

Hostility to Tip Credit from the U.S. Department of Labor

Compliance with the tip credit has recently become even more problematic. The Biden Administration’s DOL has reinstated the so-called “80/20” rule. Under the reinstated policy, when tipped employees spend at least 20% of their workweek performing duties that support their occupation but do not directly produce tips, their employers are required to pay them a direct cash wage of at least $7.25/hour for that work, instead of a direct cash wage of $2.13/hour, with the remainder made up by tips. Examples of work that is not tip producing might include a server preparing food for a salad bar or cleaning the kitchen or bathroom or a bartender cleaning the dining room. 

The current DOL has made clear its hostility to the tip credit method of payment and its intent to discourage its use, as well as its intent to vigorously investigate any allegations of noncompliance. For this reason, restaurants should make sure they are meeting all of the requirements and potentially consult with counsel on alternative payment methods.

Mandatory Service Charge v. Tip Credit?

A recent decision by the U.S. Court of Appeals for the Eleventh Circuit illustrates how some restaurants may be moving away from using the tip credit method versus a mandatory customer service charge that would go toward paying employee wages and potentially avoid the headaches of tip credit.  

In Compere v. Nusret Miami, an upscale Miami steakhouse added a mandatory 18% "service charge" to customers' bills. It directly collected these payments and redistributed them to certain employees on a pro rata basis to cover the restaurant’s minimum and overtime wage obligations. Unlike tips, the service charge payments never went directly to the wait staff. Employees sued the restaurant, claiming the service charge was in fact, actually a tip.  

The Eleventh Circuit ruled in the restaurant’s favor, finding that because it was a mandatory charge, unaffected by the customer’s discretion.  However, using this method also carries its own complicated requirements and wage issues, and while common in other countries, American restaurant customers do not generally favor mandatory service charges.

Please contact Mark Fijman  if you have questions or need compliance advice or guidance as to labor and employment issues in the restaurant or hospitality industry. 

Avoid These Employment Law “Kitchen Fires” to Protect Your Restaurant and Your Employees

 

With restaurants struggling to return to normal after more than two years of COVID-19 shutdowns and restrictions and employee shortages, the last thing any restaurant owner wants to deal with is a costly lawsuit brought by a either a current or former employee, or potentially worse, by the Equal employment Opportunity Commission (EEOC) or the U.S. Department of Labor.

In this series of articles, first published  as Phelps Dunbar Employment Law Insights, I outline potential employment law “kitchen fires” that restaurant owners should be aware of, and what steps they need to take to avoid lawsuits and the expense and business disruption they can bring.

According to the EEOC, the restaurant industry is the single largest source of sexual harassment claims in the U.S. And it accounts for more than one-third of all sexual harassment claims from women. Recent surveys show 90% of women and 70% of men working in restaurants have experienced some form of sexual harassment from either managers, co-workers or customers. On a regular basis, well-known restaurant companies and celebrity chefs are being hit with sexual harassment claims as well as high-dollar judgments. Part One of the series covers the laws against sexual harassment in the workplace, how to prevent it in a restaurant environment, and how proper policies and training can protect against liability.

Part Two looks at restaurant liability under the federal Fair Labor Standards Act (FLSA). This is the law that requires employers to pay at least minimum wage and time and a half for all hours worked over 40 in the workweek. The FLSA can be a complicated and confusing law, and it is common for employers to make mistakes. Lack of compliance in a restaurant setting with multiple employees can lead to collective actions, which could potentially bankrupt a business. Part Two also looks at recent changes to the “tip credit” method of paying employees, misclassifying employees as exempt “managers,” liability for employees “working off the clock,” child labor laws, and what to do when faced with a Department of Labor investigation.

Part Three examines the federal statutes against employment discrimination on the basis of race, national origin, sex and age, the risks of liability for “English only” policies, and the legal requirement for restaurants to make reasonable accommodations on the basis of religion and disability.

Part Four looks at other easily overlooked employment law kitchen fires, such as a restaurant’s failure to comply with the federal immigration law by correctly completing Form I-9’s for each employee, the potential liability in conducting background checks on potential employees, and how failing to openly display required employment law posters in your restaurant can be a costly and strategic mistake.

In addition to avoiding expensive legal problems, compliance with relevant employment laws might also help to address the restaurant headache of high employee turnover. This series addresses compliance with federal law, but many states have their own varying employment standards. Where appropriate, restaurants should engage counsel for assistance in complying with federal, state and local laws.

Please contact Mark Fijman or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice or guidance.