The Wage and Hour Division of the United States Department of Labor (“DOL”) has recently intensified its focus on the restaurant industry’s compliance with the Fair Labor Standards Act (“FLSA”). The DOL’s efforts seem to be particularly focused on restaurants’ tipping policies. Such initiatives have already been implemented in multiple jurisdictions, including Florida, Georgia, Illinois, Massachusetts, Utah and Southern California, with additional areas expected in the future.
As the DOL continues to prioritize its enforcement of the FLSA in the restaurant industry, restaurant employers should ensure that their policies, procedures and practices concerning the tip credit are compliant with the FLSA. First, restaurant employers should pay careful attention to the notice requirements regarding the tip credit and tip pooling. Second, restaurant employers should make sure that tipped employees are not tipping out more than 15% of their tips as part of a tip pool. Third, restaurant employers should not allow exempt managers to participate in tip pools. If a restaurant fails to abide by these three rules, the restaurant risks loss of the tip credit. Without the tip credit, the DOL takes the view that the restaurant owes each tipped employee the difference between the applicable minimum wage ($7.25 per hour under federal law) and the sub-minimum wage paid to tipped employees (as low as $2.13 per hour under federal law) for every hour worked for two or three years. For a restaurant w
ith only ten full-time servers, this number easily exceeds $100,000.
Notice of Tip Credit
Recently, Philip Flood, the Assistant District Director of the Wisconsin Wage and Hour Division, addressed the Wisconsin State Bar's Labor & Employment Section. Mr. Flood opined that the DOL was likely to ramp up investigation of wage and hour violations in the hospitality industries - particularly employers’ compliance with the notice requirements of the tip credit. The DOL requires that employers with tipped employees provide tipped employees with notice of the following:
1) The cash wage that the employer is paying to the tipped employee (NOTE: under current federal minimum wage law this can be no less than $2.13 per hour, but state laws may require a higher amount).
2) The amount by which the wage of the tipped employee is increased on account of the tip credit claimed by the employer. Under current federal law this amount may not exceed the lower of $5.12 per hour or the value of the tips actually received by the employee (NOTE: state laws may impose stricter limits on this amount).
3) That all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips.
4) That the tip credit will not apply to any employee who has not been informed of these requirements.
The regulations also require employers to notify employees of any required tip pool contribution. Although not required, it is strongly recommended that the notices be in writing to avoid later disputes about whether the employees actually received the notice. Best practice would also include getting the employee’s signature acknowledging receipt. We can provide you with compliant forms.
Valid Tip Pools
An employer may require tipped employees to participate in and contribute to tip pool arrangements, so long as the tip pool complies with the FLSA, and as long as the employer informs the employee of the FLSA’s tip pooling provisions. DOL regulations require that tip pool participants must consist of employees who customarily and regularly receive tips; this does not include, for example dishwashers, janitors, and chefs. Furthermore, tip pool participants cannot be management employees.
The FLSA does not address the contribution amount to an employee tip pool. The DOL’s 2011 regulations now specify that “Section 3(m) of the FLSA does not impose a maximum contribution percentage on valid mandatory tip pools.” This sentence replaced the DOL’s previous interpretation, which set a limit of 15 percent. Still, restaurant employers should not permit tipped employees to tip out more than 15 percent of their tips. DOL investigators are still taking the position that employers lose the tip credit if the servers tip out more than 15 percent of their tips. Restaurants must also carefully consider applicable state law on the subject of tip pooling, as some states impose stricter requirements, and some states prohibit employer-mandated tip pooling entirely.
Other Violations Found
Another common violation found in DOL investigations recently is restaurants making deductions from tipped employees wages/tips for customer walkouts, breakages, and cash register shortages. The DOL takes the view that if a restaurant withholds any wages/tips from a tipped employee (even one cent), the employer loses the ability to use tip credit for that employee for that week. The DOL takes the position that in any week in which an employee is charged for a walkout, breakage, or cash shortage, the restaurant owes the employee the difference between the applicable minimum wage and the sub-minimum direct wage paid to the tipped employee. In other words, the DOL requires the restaurant to treat the employee as if he or she did not earn any tips at all.