Tips, Tip Credit, Tip Pooling

A Full Menu of Potential Legal Issues for Hospitality Owner/OperatorsIn the new issue of Take 5, our colleagues examine important and evolving issues confronting owners, operators, and employers in the hospitality industry:

Read the full Take 5 online or download the PDF.

A featured story on Employment Law This Week is the Ninth Circuit’s backing of the Department of Labor’s rule on “tip pooling.”

In 2011, the Department of Labor issued a rule that barred restaurant and hospitality employers from including kitchen staff in “tip pools,” which are sometimes used to meet an employer’s minimum wage requirements. The DOL ruled that kitchen staff should be excluded from pools even if the tips are not required to meet minimum wage obligations. Two district court decisions held that the department does not have the authority to regulate this practice outside of the minimum wage issue, but the Ninth Circuit recently reversed those decisions and upheld the department’s rule.

View the episode below or read more about this case in an earlier post on this blog.

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.)

Many hospitality employers use “tip pools” to divide customer tips among staff.  Those “tip pools” normally provide for tips to be divided among “front of the house” employees who are involved in serving customers – servers, bartenders, etc. Some employers have extended the “tip pools” to include “back of the house” employees – dishwashers, cooks, etc. – particularly where they are not using a “tip credit.” 

In 2011, the Department of Labor (“DOL”) issued a rule prohibiting employers from including kitchen staff in “tip pools” – even where no “tip credit” was being taken.  Two separate district courts held that the DOL did not have authority to issue such a rule where no “tip credit” was taken, relying on the Ninth Circuit’s ruling in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).

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 reversed those two district court decisions, holding 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.

The National Restaurant Association, a co-plaintiff in the case, has already indicated that it may seek review of the decision by a full panel of the Ninth Circuit.  And it is certainly possible that the decision will be reviewed by the United States Supreme Court.  But unless and until the decision is reversed, restaurant employers in the Ninth Circuit – which encompasses Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington –would be wise to review their “tip pooling” practices promptly with counsel.

              

 

Wage & Hour Guide for Employers AppWe’d like to share some news with hospitality employers: Epstein Becker Green has released a new version of its Wage & Hour Guide for Employers app, available without charge for Apple, Android, and BlackBerry devices.

Following is from our colleague Michael Kun, co-creator of the app and leader of our Wage and Hour group:

We have just updated the app, and the update is a significant one.

While the app originally included summaries of federal wage-hour laws and those for several states and the District of Columbia, the app now includes wage-hour summaries for all 50 states, as well as D.C. and Puerto Rico.

Now, more than ever, we can say that the app truly makes nationwide wage-hour information available in seconds. At a time when wage-hour litigation and agency investigations are at an all-time high, we believe the app offers an invaluable resource for employers, human resources personnel, and in-house counsel.

Key features of the updated app include:

  • New summaries of wage and hour laws and regulations are included, including 53 jurisdictions (federal, all 50 states, the District of Columbia, and Puerto Rico)
  • Available without charge for iPhoneiPad, Android, and BlackBerry devices
  • Direct feeds of EBG’s Wage & Hour Defense Blog and @ebglaw on Twitter
  • Easy sharing of content via email and social media
  • Rich media library of publications from EBG’s Wage and Hour practice
  • Expanded directory of EBG’s Wage and Hour attorneys

If you haven’t done so already, we hope you will download the free app soon.  To do so, you can use these links for iPhoneiPad, Android, and BlackBerry.

Our colleague Jeffrey Ruzal at Epstein Becker Green recently wrote a Take 5 newsletter focused on the hospitality industry: “Tip-Related Claims Will Continue to Be Served Up as the Lawsuit du Jour Against the Hospitality Industry in 2015.”

Following is an excerpt:

The hospitality industry is particularly fertile ground for a wide variety of wage and hour issues, which continue to plague management through steadily increasing federal and state department of labor investigations and enforcement actions and the seemingly endless onslaught of private wage and hour lawsuits filed by an overzealous plaintiffs’ bar. Tip credit claims are government regulators’ and plaintiffs’ favorite, and there are no signs that such claims will abate in the coming year.

Employers may take a credit against the prevailing minimum hourly wage earned by employees performing tip-earning duties, such as servers, bartenders, bussers, hosts, housekeeping personnel, and bell staff. Before taking a tip credit, however, employers must comply with very specific federal and state tip credit laws, rules, and regulations, which form the basis of the various tip credit lawsuits commonly filed against employers in the hospitality industry.

Because of the prevalence of tip credit lawsuits in the hospitality industry, this edition of Take 5 will address five of the most common tip-related wage and hour issues that are often the focus of litigation. They are as follows:

  1. Properly Providing Tip Credit Notice
  2. Correctly Applying the Tip Credit Allowance
  3. Properly Computing Tipped Employees’ Overtime Pay
  4. Ensuring That Tipped Employees Actually Perform Tipped Work
  5. Complying with Tip Pooling or Sharing Requirements

Read the full Take 5 here.

Kara Maciel, a Member of the Firm in the Labor and Employment, Litigation, and Health Care and Life Sciences practices, in the Washington, DC, office, was quoted in an article titled “For Fine Dining Sector, Tip Pools Can Be Legal Trap.” (Read the full version – subscription required.)

Following is an excerpt:

As a wave of lawsuits hits restaurants over tip pool violations, fine dining establishments packed with sommeliers, mixologists and other high-end specialists that tend to take on some managerial duties face the greatest risks of becoming targets for litigation or Department of Labor audits, attorneys say. …

“It’s always an open question whether someone like a maitre d’ or sommelier or expediter should be included in the tip pool,” said Kara M. Maciel, a labor and employment litigator with Epstein Becker & Green PC.

And the stakes for being wrong on this can be high, since if a tip pool is found to violate federal or state laws, it could invalidate the tip credit that the restaurant took or was banking on for that period of time, Maciel says. …

The same goes with catering hall banquet captains, who might be tasked with taking care of brides and grooms on their big days but who also often supervise staff, according to Maciel.

Our colleague Kara Maciel, the editor of Hospitality Labor and Employment Law Blog, was quoted in an article titled "Six Tips on Not Getting Tripped Up by FLSA’s Tipped Employee Rules" that was recently published in Thompson’s HR Compliance Expert.

Following is an excerpt:

Employers need to make sure they are following both federal Fair Labor Standards Act requirements and state laws regarding tipped employees, said Kara Maciel of the firm Epstein Becker Green during a recent seminar focused on tipped employees. …

However, every state has its own set of rules regarding tipped workers and employers must make sure they also are compliant with those local requirements. States such as Hawaii, Massachusetts and New York are particularly challenging and in some cases have seen increased litigation over tip practices in recent years, Maciel noted. …

Click here to read more.

Our colleagues Kara M. Maciel and Jordan B. Schwartz will be joined by special guest, David Sherwyn of Cornell University’s School of Hotel Administration in hosting a roundtable and webinar on May 29 (1:00 p.m. ET).  This interactive simulcast event will discuss strategies and tactics that employers can implement to stay ahead of the curve and ensure compliance with many of the most pressing wage and hour issues plaguing the hospitality industry.

Topics will include:

  • Using the tip credit to your advantage: tip credit, tip pooling, and service charges
  • Creating valid tip pooling arrangement and the impact of Woody Woo
  • Understanding the IRS’s rule enforcement of automatic gratuities as service charges
  • Debating the pros and cons of eliminating tips and increasing hourly pay
  • The subtleties of recent tip cases and settlements

Click here to read more about the roundtable and webinar. To register for the webinar, please click here.

For additional information, please contact Kiirsten Lederer at (212) 351-4668 or klederer@ebglaw.com.

 

By Kara Maciel

Our national hospitality practice frequently advises restaurant owners and operators on whether it is legal for employers to pass credit card swipe fees onto employees or even to guests, and the short answer is, yes, in most states. But whether an employer wants to actually pass along this charge and risk alienating their staff or their customers is another question.

With respect to consumers, in the majority of states, passing credit card swipe fees along in a customer surcharge became lawful in 2013. Only ten states prohibit it: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, Texas and Utah. If a restaurant decides to add a surcharge to the bill to recoup the credit card swipe fee, it is important the that the fee not exceed the percentage charged by the credit card company, the fee is posted clearly on the guest check prior to paying the bill, and it cannot be used for debit card purchases.

With respect to employees, the credit card swipe fee may only be passed along to servers and applied to the tipped portion of the bill. For example, if a bill is $100 plus a $20 tip, the swipe fee on the $100 (e.g., 3 percent or $3) must be paid by the restaurant. However, when paying out the server, you can allocate $19.40 since you can charge the server 3 percent or 60 cents to recover the swipe fee on the gratuity. As with guests, an employer may not charge the server more than credit card swipe fee, and the reduced amount in tips cannot cause the employee to earn less than the minimum wage. And again, you must always check state and local law as some states prohibit deductions from credit card tips for processing fees, such as California, Colorado, Nevada, New Mexico, Oregon, and Washington, among others.

But even if legal, is it practical or good business sense to pass along processing fees to employees and customers? Is it industry practice in your market to pass along these fees, or do you risk angering an important stakeholder in your profit margin – your employees and customers? Surcharges could be perceived as owners taking more money out of the pockets of employees and customers and companies could risk losing the business to another restaurant down the street. Unless the practice becomes an industry standard, it is likely that adding a surcharge or deducting the swipe fee from tips could do more harm than good.

By Brian W. Steinbach

Since 2008, the District of Columbia’s Accrued Sick and Safe Leave Act (“ASSLA”) has required D.C. employers to provide employees with paid leave (i) to care for themselves or their family members, and (ii) for work absences associated with domestic violence or abuse. Specifically, ASSLA provides covered workers with the ability to earn and take from up to three to up to seven days of covered paid leave each year, depending on the size of the employer.

On January 2, 2014, Mayor Vincent C. Gray signed the Earned Sick and Safe Leave Amendment Act of 2013 (“Amendment”), which significantly amends ASSLA. Among other things, the Amendment eliminates the prior exclusion of tipped restaurant wait staff and bartenders and adds a new provision requiring that restaurant and bar employees, for whom the tip credit is claimed, be provided with at least one hour of covered paid leave for every 43 hours worked, up to a maximum of five days per calendar year, regardless of the size of the employer. (This is the same level as is currently required for employers with 25-99 employees.) However, these employees need only be paid the regular District minimum wage while on leave, without taking into consideration the amount of tips that they may have received if working.

For a more detailed description of the Amendment, please review our recent client alert