It’s rare that the restaurant industry’s challenges become the subject of a petition before the Supreme Court of the United States. However, in January, the National Restaurant Association (“NRA”) led the petition to overturn a 2011 Department of Labor (“DOL”) ruling under the federal Fair Labor Standards Act (“FLSA”) that prohibits sharing tips with “back-of-house” staff such as chefs, cooks, dish washers and cleaners. The DOL ruled that only employees who “customarily and regularly” receive tips from customers could participate in any pooling of tips collected, such employees being generally “front-of-house” staff such as wait staff, servers, bus-boys/girls and bartenders.
The NRA argues in its petition that this ruling is essentially bureaucratic overreach by the DOL (i.e. that it has no powers to disallow what the FLSA has not expressly forbidden). The NRA and its fellow petitioners assert that employers should have full discretion to decide who can be included in any tip pool as the FLSA does not explicitly forbid them from doing so.
The petition before the Supreme Court is the culmination of cases before various state courts (and the influential 9th Circuit Court of Appeals). Beyond the legal arguments, however, remains implications for the operational and financial impact on restaurant businesses throughout the country. The terrain of tipping can be tricky, creating potential compliance landmines for employers. This article seeks to clarify some of the obscurity that has come about. It also offers suggestions on how you can avoid inadvertently violating legal requirements that might result in hefty fines and expensive legal fees for you and your business.
Part of The Legal Tangle: “Tip Credit” And Minimum Wage Obligations
What are tip credits? In Illinois – as well as several other states - employers can pay an employee a wage up to 40% below the minimum wage when the employee is a “tipped” employee (i.e. someone who receives at least $30 a month in tips), so long as the difference is made up in tips. The consequence of this is that tip credits have an impact on minimum wage obligations, but also impact the “bottom line” of a restaurant or hospitality business by allowing employers to allocate less to hourly labor overhead.
The DOL, however, has a different point of view. Under the FLSA, tip credits do not apply to tip pools. The DOL considers this a crucial distinction. If tip credits could be applied to tip pools, then employers would essentially save money by shifting tips from front-of-house (“tipped”) employees to make up the difference owed to back-of-house employees when less than the minimum wage is paid. To the DOL, a tip pool is valid only if participants are tipped employees.
Consequently, what is seen by some employers as a way of including back-of-house employees in the tips from appreciative customers is regarded by the DOL as a way of circumventing minimum wage obligations to these same employees. The DOL sees it as an issue about statutory obligations on wage payment, and not about regulating the distribution of tips.
A Common Scenario
Until the Supreme Court decides on the NRA petition, employers with tipped employees should be careful about how tips are distributed and to whom. Recently, a client presented me with an interesting scenario regarding a floor manager’s participation in a tip pool. The floor manager’s duties included both front-of-house and back-of-house responsibilities and she was also excluded from receiving overtime pay. In addition, even as she received tips totaling more than the statutory threshold of $30 which would make her a tipped employee, the fact that she also had managerial responsibilities made it possible for her to be classified as the employer (by extension). She had control over scheduling, job assignments and administrative duties. Exemption from overtime plus the nature of her responsibilities made it likely that she would be categorized as more of an employer than an employee under the FLSA, disqualifying her from the tip pool since only employees can receive tips.
In such a scenario, it’s likely that the floor manager’s participation in a tip pool would violate the FLSA and the Illinois Minimum Wage Law. This, however, is a separate issue from the question of overtime exemption. One cannot have it both ways: the FLSA requires that for an employee to be exempt from overtime, her salary must be over the FLSA threshold of $23,600 but tips cannot be used to make up any shortfall between the contracted salary and this threshold. For the client, paying the floor manager $20,000 would disqualify her from the exemption. The best solution would be to increase her salary to at least the FLSA threshold.
For my client and many restaurant owners, the cost savings in not having to pay overtime may not be sufficient to outweigh the loss of a good floor manager whose managerial role is key to the smooth operation of the restaurant, but who may decide to resign if her base salary falls far below expectations given that she cannot participate in the tip pool. Equally important is that in such a scenario, the floor manager’s participation in the tip pool would invalidate the tip pool, which would mean the client would not be able to exercise the use of tip credits towards the tip employees’ minimum wage requirements (currently $10.50 in Chicago). Using tip credits in this case would be yet another violation.
What You Can Do In The Meantime
As with all things legal, details count. The above scenario speaks to the importance of clarity in employees’ duties. Taking into account the FLSA, DOL rulings and Illinois law, I would recommend that you do the following:
- Be sure all employee job descriptions are in writing and provided to your employees.
- Make sure that all job descriptions clearly put employees into either tipped or non-tipped employees per statutory definitions, and also whether they are overtime exempt employees (i.e. whose role is predominantly managerial or supervisory with hire, fire, disciplining or scheduling abilities) or non-exempt employees whose total compensation (salary and tips) must meet minimum wage requirements.
- Be clear about your tip pool and who participates according to categorization. Keep detailed records about the collection and distribution of pooled tips.
- Ensure that all service charges (for large parties or groups of customers) are treated as revenue, not as tips. Tip credit does not apply to such charges, which must be distributed to employees as taxable income.
It remains unclear how the Supreme Court will rule in the National Restaurant Association’s petition if it decides to hear the case. It’s also unclear if it would give a clear opinion on whether tip pooling can include back-of-house staff that work in the kitchen. Until clear and final judicial guidance on the murkier issues surrounding tip pooling is provided, the above best practices should keep you properly compliant with legal requirements.
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