Full-service restaurants typically rely on the tip credit available under federal and state wage and hour laws to compensate wait staff.

Taking a Dive into the Deep End of the Tip Pool

With Fair Labor Standards Act litigation on the rise, operators should carefully review their tip pool before diving in headfirst.

Fair Labor Standards Act (FLSA) litigation is on the rise, especially in the food service industry. This is, in part, because of mistakes made when compensating tipped employees. Full-service restaurants typically rely on the tip credit available under federal and state wage and hour laws to compensate wait staff. While most restaurateurs are familiar with how the tip credit works and the various requirements for taking advantage of the tip credit, some may be less familiar with the requirements regarding tip pooling arrangements. Recent litigation trends underscore the importance of carefully reviewing your tip pool before diving in headfirst.

Does Our Entire Staff Get to Swim?

Not everyone who works at your restaurant is allowed to participate in a valid tip pool. Under the FLSA, only employees who customarily and regularly receive tips are permitted, which could include waiters/waitresses, bussers, and service bartenders. Employees such as dishwashers, chefs, cooks, janitors, or maintenance employees are not allowed to participate and including such workers invalidates the tip pool. However, a tipped employee may voluntarily choose to share tips with a non-tipped employee, so long as that tip-sharing is not coerced by the employer. Additionally, never include owners or those in supervisory or managerial positions in your tip pool. Doing so has resulted in some $100 million plus verdicts.

Other Pool Rules in Effect.

In addition to determining who can participate in the tip pool, restaurants must notify the employees who participate in the tip pool of any required contribution amount. Therefore, while there is no maximum allowable contribution amount or percentage, you must inform each employee who participates in the tip pool what amount they can expect to contribute, and the amount should not be more than what is customary and reasonable. Additionally, you may only take a tip credit against wages for the amount of tips each employee ultimately receives after making contributions to the tip pool, and you may not retain any of the employees’ tips for any other purpose. And, of course, employees in a tip pool must make at least minimum wage.

Leaving the Shallow End.

Recent litigation indicates plaintiffs’ attorneys are eager to attack tip pools, arguing that restaurants with invalid tip pool arrangements violate the FLSA requirement that tipped employees must be allowed to retain their tips. In a recent class action lawsuit involving full-service seafood restaurants in St. Augustine, Florida, the servers voted to tip kitchen employees at a set rate per dinner. Despite the fact that 55 servers submitted affidavits stating that participating in the kitchen tip pool was voluntary (and, therefore, not unlawful under the FLSA), the servers who filed the lawsuit testified they believed contributions to the tip pool were mandatory.

The plaintiffs also introduced evidence they were told by managers the tip pool was mandatory, the managers would correct tip allocations if they failed to allocate tips to the kitchen tip pool, and two assistant managers were not aware whether the kitchen tip pool was mandatory.  Due to the factual disputes in this case, the court allowed the case to proceed to a jury trial to determine whether the tip pool was, in fact, voluntary. This case illustrates the importance of restricting a tip pool to tipped employees and the risks of including non-tipped workers even if voluntary. If you plan to take that risk, be sure to clearly communicate (in writing) that a tip pool including non-tipped workers is voluntary.

Employers Taking a Dip.

In another recent case, two former servers filed a class action lawsuit against a steakhouse alleging the restaurant violated the FLSA and state law by unlawfully retaining tips from the pool for itself and by paying tip-pool proceeds to ineligible employees. Specifically, for private events, the steakhouse charged a 20 percent service charge, which was divided among the servers who worked the private event, the tip pool, and a private dining event coordinator.

The steakhouse argued that its private dining service agreement stated that 18 percent of its fee was a banquet gratuity, which would be distributed to wait staff, and 2 percent was an administrative fee to cover the expenses for planning and hosting the function (which was paid to the private dining event coordinator). The steakhouse argued the administrative fee was not a tip and was never part of the tip pool. Plaintiffs argued the 2 percent administrative fee was actually part of the tip pool and was unlawfully distributed to a non-tipped employee. Due to the factual dispute regarding how the administrative fee was allocated, the court allowed this claim to proceed to a jury trial.

What if Our Tip Pool is Under Water?

If your tip pool does not meet the FLSA or state law requirements, and one of your tipped employees challenges the tip pool by filing a lawsuit or complaint, you could lose the benefit of the tipped credit with respect to tipped employees who participated in the invalid tip pool. You should check with your regular employment attorney to determine the rules for tip pools under your state’s laws. Some states have rules and restrictions that differ from or are more restrictive than the federal tip pooling requirements.

If you get it wrong, under the FLSA, you could be required to pay the difference between the tipped wage and the minimum wage for your tipped employees for up to three years preceding the lawsuit, plus liquidated damages, attorneys’ fees, and costs. Even for a small restaurant with only one location, the potential damages can add up to a very significant number quickly. Therefore, you should review how your tip pool works to ensure it is valid under both federal and state law to avoid falling prey to the sharks circling the tip pool waters. 

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