Tip Credits, Tip Pooling Continue to be Hot Issues in FLSA Litigation

The hospitality industry is ground zero for many of the hottest wage and hour issues under the FLSA and state laws, both in lawsuits filed by plaintiffs’ attorneys and in federal and state department of labor investigations. Tip credit and tip pooling claims are high on the list, as a recent Fifth Circuit decision demonstrates.

Reversing a district court’s grant of summary judgment, the Fifth Circuit found that the lower court should have considered that a restaurant’s “coffeman” worked from a station in the kitchen, meaning that a reasonable jury could have found his level of customer interaction was so minor, at best, that he was more similar to a cook or a dishwasher than he was to a waiter or a busboy.

FLSA Tip Credits and Tip Pooling

This case presented a similar fact pattern to other FLSA tip credit and tip pooling cases in the hospitality industry.  Under federal and most state laws, employers who employ workers who receive tips face the same minimum wage obligations as other employers (in other words, there is no “tipped minimum wage”).  What the “tipped minimum wage” refers to is the ability of employers of tipped workers to take a credit toward their minimum wage obligations for tips received by an employee.  Typically, employers can only avail themselves of that credit if the employee retains all of the tips received.  29 U.S.C. Section 203(m) provides a limited exception by permitting employers to require employees to participate in “the pooling of tips among employees who customarily and regularly receive tips.”

In restaurants, tip pooling is therefore generally reserved to the “front of the house,” such as waiters/servers, bussers, and bartenders. “Back of the house” employees such as dishwashers, cooks, chefs and janitors do not customarily receive tips, and their participation in the tip pool can invalidate the arrangement for all participating employees. Of course, management cannot retain any portion of the tips, either.  It is these specific federal and state tip credit laws, rules, and regulations that form the basis of the multitude of tip credit lawsuits filed against hospitality employers.

The Opinion: Montano v. Montrose Restaurant Associates

In this recent case, the plaintiffs were waiters at a high end Houston restaurant who had to share tips (as dictated by the restaurant) among the shift captain, the front and back waiters, the busser, the bartender, and the coffeeman.  Except for the coffeeman, who received a fixed ten dollars from each station each shift, each of the other participants received a percentage of the tips from the shift (Note to employers: if your plan includes the old Sesame Street game “One of these things is not like the other,” that should be a red flag). The plaintiffs claimed that the coffeman, who worked in the back of the house and did not serve customers could not qualify as someone who “customarily and regularly receive[d] tips” as required by Section 203(m).

Clearly, the coffeeman customarily and regularly received tips because the restaurant required the other front of the house workers to share with him.  However, the Fifth Circuit considered a more involved question that the district court did not: whether the coffeeman would customarily and regularly receive tips if waiters were not required to include him in the tip pool.

The appeals court’s analysis was instructive in how to build a proper tip pooling arrangement.  First, the court considered Department of Labor rules and guidance. The DOL’s Field Operations Handbook was unhelpful in this regard, since it simply listed categories of workers as tipped or non-tipped without explanation (and coffeeman was not among either group).  The DOL’s opinion letters proved somewhat more helpful, explaining that one’s status as an employee who “customarily and regularly receives tips” is “determined on the basis of his or her activities,” not on a job title.  Ultimately, the court focused on the DOL opinion letters’ requirement that a tipped employee to have more than de minimis interaction with customers who leave undesignated tips.  The court held that a court or jury must consider whether the employee performed any customer service functions, regardless of his or her back or front of the house position.

Based on the record, the coffeeman spent “most” of his time in the kitchen making coffee. He had little, if any, interaction with customers.  Instead, he simply took orders from waiters and fill drink orders based on their instructions.  The court found that a reasonable fact finder could determine that the coffeeman did not “customarily and regularly receive tips.”  Left unexplored was the definition of “customer service” and how much direct interaction would be required to qualify as a tipped employee.  As a troubled concurrence pointed out, customers often tip housekeepers, who have little if any direct interaction with customers.

Upshot for Employers

We could spend a week of posts on properly creating tip pools and taking tip credits, or more (and maybe we will!), but for now, employers should understand that tip credits and tip pooling arrangements are among the most complex parts of the FLSA and state laws.  According to the Handbook (and most courts who have interpreted it), employers may not take a tip credit against wages for tipped employees who spend more than 20 percent of their time performing duties other than tip-earning duties.  Some states have even more stringent requirements.  Federal regulations also provide that where employees are employed in two distinct occupations, the tip credit is unavailable for the non-tip-earning job.

In general, the best practice for hospitality workers is to segregate non-tip-related work from tipped employees, particularly those employees participating in a tip pooling arrangement.  If that is not possible, employers must carefully track the amount of incidental work performed by tipped employees, whether by hand, by job coding at the time clock, separate time sheets, or some combination thereof, to ensure that no tipped employee spends one individual spends more than 20 percent of any one shift performing such incidental duties.