Restaurants have reacted to the COVID-19 crisis and state and local shutdown orders by shedding staff and limiting operations to delivery, takeout, and drive thru. Both approaches implicate tip pool compliance issues. Restaurants should take proactive steps now to guard against class action litigation for unlawful tip pools once the crisis passes.
KNOW STATE LAW
Federal tip-pooling law can differ dramatically from state law, and restaurants must comply with whatever law is more protective of the employee. In addition, many state laws are unique and have conflicting requirements. The first step in compliance and lawsuit avoidance is to understand what law applies and what those legal requirements entail.
Under federal law, employers can require employees to participate in a tip pool or otherwise share their tips with other employees. But federal law prohibits employers from keeping any portion of the tips or from including supervisors or managers in the tip pool. Employers that do not take a tip credit and pay employees the full minimum wage may establish a tip pool that includes back-of-house employees, while employers that do take a tip credit must limit the tip pool to employees who customarily and regularly receive tips.
State laws can be much different, both in terms of whether a tip pool may be required, and, if so, who the employer may require to participate. In some states, tip pools must be limited to employees who directly provide customer service, or assist others in providing direct service—generally, front-of-house servers, server assistants, and other wait staff. Other states allow employer-mandated tip pools with certain exceptions, like contribution limits or employee majority-rule requirements. And in other states, employers cannot require tip pools at all; the employees themselves must agree to and implement the pool. In many of these states, the employer cannot participate in the pool beyond holding the pooled money for later distribution.
DETERMINE HOW TO TREAT TIPS RECEIVED BY MANAGER-SERVERS
As restaurants have thinned their staffs, managers are taking a more active role in daily operations by providing direct service to customers—e.g., making deliveries or giving take-out orders—and, consequently, are more likely to receive tips directly from customers. In addition, there may be no non-managerial employees working who could benefit from a tip pool (which generally must exclude managers), or few working who would benefit disproportionately.
Finally, customers are being generous during these difficult times, often offering substantial tips in gratitude for the workers they view as operating on the pandemic’s front lines. Restaurants need to determine under these circumstances how to treat tips received by managers.
Restaurants should first decide if it is still reasonable to mandate and operate a tip pool, if that’s a decision available to the restaurant under state law. If few direct service employees are working and managers are receiving substantial tips, then it may not make sense to pool tips and distribute to a very few service employees.
If there is no tip pool, it also may not feel right to allow managers to accept substantial tips while service employees are sitting at home out of work. Restaurants may consider ways to provide charitable contributions to unemployed or furloughed employees, but should be mindful of wage and tax implications in doing so.
Finally, if all non-managerial staff have been furloughed or laid off, then the legal risk is largely diminished. An improper mandatory tip pool, or a tip pool that improperly includes managers, creates risk of litigation only if there is a potential plaintiff able to bring the lawsuit. But if no service employees are working or employed, then there are no employees who are being shorted tips, and therefore no one to make a claim.
TAKE REMEDIAL MEASURES, IF NECESSARY
Despite a restaurant’s best efforts, potential liability may still exist for tip pool violations during these changing times. Restaurants can clean their books of this potential liability and risk of litigation, once operations get back to normal, by asking employees to accept remuneration in exchange for releasing potential claims. This process of requesting and obtaining releases entails its own risks, so restaurants should take care.
Restaurants must balance the goal of avoiding tip-pooling litigation against their aim of fostering a team-based approach to customer service. The preventive measures described above can help restaurants ensure they can focus on recovering from the COVID-19 crisis rather than on defending lawsuits.
Joel O’Malley is a shareholder at Nilan Johnson Lewis in Minneapolis. He represents clients on all types of employment claims before administrative agencies, in state and federal courts, and before arbitration tribunals. He handles individual and class litigation throughout the country. In his role, Joel offers practical advice to clients and human resources professionals on how to navigate the ever-changing and complex landscape of local, state and federal employment laws. Joel can be reached at jomalley@nilanjohnson.com.
