Today’s blog post concerns the pending court case concerning tip pooling practices in restaurants and a basic overview of the existing laws and regulations surrounding tip pooling. With the rising cost of rent and food coupled with the already thin margins that inherent in restaurants, tip pooling has become a popular way for restaurants to continue to pay less to their front of house employees. However, some restaurants are looking to incorporate their back of house employees into this system.
Oregon Restaurant Association v. Perez
The U.S. Department of Labor’s (“DOL”) tip-pooling rule, which bars restaurants from requiring their front of house staff to share tips with employees in the back of the house, has been source of confusion and hardship. Some restaurant owners have argued that by prohibiting tip pooling with the kitchen staff has caused a depression in the wages kitchen workers as well as caused them to increase the cost of their menu items to offset the cost to themselves. Some restaurants have taken another path to pass the to pay higher wages to back-of-house employees, accomplished by adding a line to bills allowing customers to tip the back of the house directly, or through the replacement of tips with mandatory “service fees” to be split among the service staff.
In January 2016, the National Restaurant Association (the NRA or maybe let’s just call them the Association) asked the U.S. Supreme Court to review the DOL rule that prohibits tip pools, the sharing of tips among “front of the house” staff and back of the house staff and whether the DOL has the authority under the Fair Labor Standards Act (“FLSA”) to regulate tip pooling practices. In this ruling, the Association hopes to settle what has been a circuit split one the regulation of tip pooling practices.
In the case of Oregon Restaurant Association v. Perez, the Ninth Circuit Court of Appeals deemed that employers could not force employees into a tip-pooling system with employees who do not regularly earn tipped wages. Oregon Restaurant Association v. Perez., was filed after the DOL issued new regulations that barred tip pools from including kitchen staff in response to the Ninth Circuit 2010 decision in Cumbie v. Woody Woo, Inc., which upheld the right to run a tip pool that includes kitchen employees in certain circumstances.
In the meantime, restaurants throughout the country have begun to rethink their approaches to tipping, while others have opted to keep tip pools as is while the issue is pending, despite running the risk of a lawsuit.Unless the ruling is overturned by the Supreme Court, many restaurants and hospitality businesses in the Western U.S. will have to reconfigure how they disperse tips. If that is the case, restaurants using a tip pool will need to ensure that none of their back-of-the-house staff – line cooks, dishwashers, expeditors, or any other staff that may not fall within the FLSA’s definition of “customarily and regularly tipped employees”— partake in sharing the tip pool.
Of course, for many restaurants, excluding a large portion of staff from the opportunity to earn tips could be disastrous for morale, and restaurant owners are considering their alternatives. Others have abandoned the tipping system altogether and are instead charging customers a mandatory service fee.
Tip Pooling Law Basics
The Wages and the Fair Labor Standards Act (“FLSA”) provides for tip pooling—employees’ contributing their tips to a general pool which is then shared by other employees. Management can require employees to participate in a tip pool; but, if it does so, it must inform the employees of the FLSA’s tip pooling provisions.
Tipped employees are defined as those who customarily and regularly receive more than $30 per month in tips. Those tips are considered to be the property of the employee. This means that the employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee “tip credit” or in furtherance of a valid tip pool.
Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit. Section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage.
Thus, the maximum tip credit that an employer can currently claim under the FLSA section 3(m) is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13). Under certain circumstances, an employer may be able to claim an additional overtime tip credit against its overtime obligations.
The employer must provide the following information to a tipped employee before the employer may use the FLSA 3(m) tip credit:
the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
Employers electing to use the tip credit provision must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee's tips combined with the employer's direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage of $7.25 per hour, the employer must make up the difference.
It is important to remember that a tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit. FLSA prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. Although tips are the sole property of the tipped employee, an employer is not precluded from implementing a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips.
The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employee's' tips for any other purpose.
Service Charges: A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer's gross receipts. Sums distributed to employees from service charges cannot be counted as tips received, but may be used to satisfy the employer's minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.
Credit Cards: Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage. For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA.
However, this charge on the tip may not reduce the employee's wage below the required minimum wage. The amount due the employee must be paid no later than the regular payday and may not be held while the employer is awaiting reimbursement from the credit card company.