The Wage and Hour Litigation Blog

Co-authored by Arthur J. Rooney and Jeremy W. Stewart

When should a tipped employee no longer be treated as a tipped employee?  Plaintiffs’ lawyers argue that restaurants cannot utilize the tip credit, or pay tipped employees a sub-minimum wage, if tipped employees perform any “non-tipped” duties, such as washing dishes or taking out the trash.  Earlier this week, a District Court in the Northern District of Indiana rejected this argument.  (See here)  Specifically, the court dismissed a former server’s claim that the FLSA was violated by restaurants paying servers, bartenders, and hosts a sub-minimum wage while they performed non-tipped duties.  This decision could be far reaching because restaurants across the country are being hit with similar class or collective action lawsuits.  

The FLSA’s tip credit provision allows employers to pay tipped employees a sub-minimum wage as long as the employer:  (1) pays a cash wage of at least $2.13 per hour; (2) informs its employees of the FLSA’s tip credit provisions; (3) permits its employees to retain all their tips (w/ some exceptions); and (4) ensures that the cash wage plus the tip credit equal at least the minimum wage each week.  The rub is that the FLSA does not permit an employer to utilize the tip credit for all time worked by employees, just for time spent in a tipped occupation.  An example the regulations use is the hotel worker who is both a maintenance man and a waiter.  In this dual job scenario, the tip credit can be taken for the time the worker spends as a waiter, but not as a maintenance person.  There is no clear demarcation between when waiter becomes the maintenance person, but the DOL takes the position that if a tipped employee spends “substantial time” (more than 20%) performing related, but non-tipped duties referred to as “general preparation work or maintenance,” then the entire tip credit is lost.  The problem for employers is no authority explaining what duties constitute “general preparation work or maintenance.” 

Here, the plaintiff alleged that servers, bartenders and hosts were improperly denied minimum wage for time spent performing allegedly non-tipped duties such as dishwashing, food preparation, kitchen and bathroom cleaning, trash removal and other similar duties.  The Court reasoned that plaintiff’s bare claim that employees must be paid a minimum wage for performing these duties is “based on a faulty legal conclusion” that duties like these are those of a separate and distinct non-tipped occupation.  While leaving open the possibility that employees may, at times, be entitled to minimum wage for these duties, the district court stated that “[s]ervers, bartenders, and hosts - who directly related with customers - are not also employed in the second occupation of a dishwasher, cook, or janitor simply because an unspecified amount of time during their shift is spent performing duties that may be performed by individuals in those occupations.”  In other words, some overlap between tipped in non-tipped duties, however they are defined, is ok.

Because it was not before it, the district court refused to decide if the 20% formulation set forth in the DOL Handbook is entitled to controlling deference, but cautioned plaintiff that an order of dismissal would be imminent if she did nothing more than amend her complaint to include an allegation that the defendants required her to spend more than 20% of her time on duties that did not generate tips or that were outside her tipped occupation.  Rather, she must provide factual support for any such claims, such as the non-tip producing duties she performed, how many minutes or hours they took to perform, and place that time in the context of the hours worked during the entire shift.  

This decision potentially raises the bar as to the level of specificity that must be pled to support a tip credit claim.  Moreover, the decision underscores why tip credit cases are not susceptible to collective or class action treatment.  Because there is no clear line between tipped and non-tipped duties, tip credit claims must be determined on an individual-by-individual basis. 

Authored by Alex Passantino

On February 29, 2012, the Deputy Administrator of the Wage and Hour Division (WHD) of the U.S. Department of Labor issued Field Assistance Bulletin (“FAB”) [*] 2012-2, in which she sets forth WHD’s enforcement policy with respect to the 2011 tip credit regulations.  Readers of this blog will recall that in April 2011 WHD published a final rule addressing a number of issues under the FLSA.  Among the topics in the rulemaking were several issues related to tip credit, including a detailed description of the disclosures an employer must provide to a tipped employee, the maximum contribution an employee can be required to make to a tip pool, and the ownership of tips.

It is the final point -- the ownership of tips -- that is discussed in the FAB.  Specifically, the FAB makes clear that WHD

will enforce nationwide the 2011 final rule explaining that a tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit, and that the employer is prohibited from using an employee's tips, whether or not it has taken a tip credit, except as a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. 

WHD will seek to enforce this position in the states making up the Ninth Circuit -- Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington -- notwithstanding that court’s decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).  In Woody Woo, the employer did not avail itself of the tip credit (which was prohibited by state law), but required that the tipped employees participate in a tip pool with employees who are not typically permitted in a mandatory tip pool (e.g., cooks and dishwashers).  The Ninth Circuit held that the limitations on an employer’s ability to use an employee’s tips are limited to those situations in which an employer takes the tip credit.  Specifically, the court concluded that the FLSA "imposes conditions on taking a tip credit and does not state freestanding requirements pertaining to all tipped employees."

In the 2011 final rule, WHD expressly rejected the holding of Woody Woo and revised the regulations to state:

Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee's tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.

29 C.F.R. 531.52.

In the FAB, WHD makes clear that this is its position across the country.  Because Woody Woo was decided prior to the publication of the final rule in 2011, WHD now concludes that it is not precluded from enforcing the rule everywhere, including the Ninth Circuit.

Notably, the FAB fails to remind field enforcement personnel (and the public) of a critical piece of the puzzle.  That piece was discussed in detail in the 2008 proposed rule and briefly in the 2011 final rule.  Notwithstanding the repeated statements by WHD that “tips are the property of the employee,” nothing in the FLSA creates an independent property right that can be enforced by WHD or in private litigation.  WHD has authority to enforce the minimum wage and overtime provisions of the FLSA, and, unless an employee’s tips are being used in a manner that results in a violation of one of those provisions, the FLSA does not provide a remedy.  As WHD noted in the preamble to the 2011 final rule:

Thus, if an employer pays the employee a direct wage in excess of the minimum wage--and thus did not claim a credit against any portion of the employee's tips and did not utilize the employee's tips in any way--the employer would be able to make deductions but only from the cash wage amount paid directly by the employer and only to the extent that the deductions did not reduce the employer's direct wage payment to an amount below the minimum wage.

Ultimately, the rules and regulations surrounding tipped employees are often difficult to apply, especially when they are combined with concurrently-applicable state laws.  Employers -- particularly those in the Ninth Circuit -- should take this opportunity to review their practices with respect to tipped employees and ensure that they are in compliance.

 [*]  A FAB is an internal -- but publicly released -- document in which the National Office of WHD explains a change, clarification, or application of an enforcement policy or practice to WHD’s field enforcement personnel.

Co-authored by Brett Bartlett, Fritz Smith and Kevin Young

On June 8, the United States District Court for the Northern District of Georgia dismissed with prejudice a putative class action filed on behalf of individuals who worked for Levy Restaurants as luxury suite attendants at the Georgia Dome, Philips Arena, and the Atlanta Motor Speedway.  The seven named plaintiffs asserted four common law causes of action – breach of contract, breach of third-party beneficiary contract, unjust enrichment/quantum meruit, and conversion – based on their assertion that Levy wrongfully retained a 20 percent service charge on all in-suite food and beverage purchases.  At the heart of their protest was Levy’s representation to suite owners and patrons, through posted policies and language on menus, that such charges were “shared in the form of higher wages for all suite employees.”  

Shortly after removing the case to the Northern District of Georgia, Levy, on behalf of itself and its parent company, Compass Group USA, Inc., filed a motion to dismiss.  In granting the motion, the Court agreed that each of the plaintiffs’ four claims failed to provide a legal basis for relief.  First, with respect to the breach of contract claim, Levy argued that there was no contract with the plaintiffs regarding the service charge, as the policies and menus were provided and directed to suite owners and patrons, not the plaintiffs.  The Court agreed, explaining that the plaintiffs’ “awareness of the policy [did] not transform an agreement between [Levy] and suite owners/patrons to one between [Levy] and plaintiffs.”

Second, Levy argued that the plaintiffs’ third-party beneficiary contract claim failed because its written statements providing that the charge would be “shared in the form of higher wages” did not equate to a promise to suite owners and patrons that the charge itself would be paid to the plaintiffs.  Again, the Court agreed, noting further that “the plaintiffs [were] not seeking to enforce a promise to share the service charge through an increase in their hourly wage,” but rather were “claim[ing] entitlement to the entire service charge.”

Third, with respect to the unjust enrichment claim, Levy argued that the claim failed because the plaintiffs did not allege that they conferred a benefit on Levy for which they were not reasonably compensated.  The Court agreed here as well, specifically noting that the plaintiffs did not allege that they were not paid for all of the hours they worked.   

Finally, Levy argued that the conversion claim failed under well established authority that such a claim is reserved for where the aggrieved has been deprived of specific property to which it was entitled, not a mere failure to pay money under a contract.  The Court agreed, adding that the plaintiffs, with their contract claims having failed, had no valid theory of ownership over the disputed funds.

All in all, the Court’s June 8th order represents a significant win not only for these defendants, but also for the hospitality industry generally.  Similar service charge practices have, in recent years, attracted the attention of a handful of creative plaintiffs' attorneys across the country, who have advanced novel arguments like those in this case for the position that wait staff, room service attendants, suite attendants, banquet servers, and other employees who share in service charges (including sky caps) are entitled to retain the service charges paid by customers to their employers.  Some states provide statutory guidance that governs the distribution of service charges to such employees.  For those states that do not provide guidance, where common law claims may be advanced like those brought against Levy in Georgia, this decision may help to leverage what most members of this industry would believe to be a common sense result:  Service charges are not to be kept by the employees; they are amounts to be used by the employer for the purpose of ensuring better services for its customers.