Service Charges/Gratuities

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Co-authored by Howard M. Wexler and Robert S. Whitman

Seyfarth Synopsis: Governor Andrew Cuomo has directed the Commissioner of Labor to schedule public hearings to address the possibility of eliminating the tip credit. A tip credit allows an employer to pay less than minimum wage to employees who receive the bulk of their pay in customer tips.

As we say goodbye to 2017, New York employers should also start preparing to say goodbye to minimum wage tip credits.

Governor Andrew Cuomo has directed the Commissioner of Labor to schedule public hearings to address the possibility of eliminating the tip credit. A tip credit allows an employer to pay less than minimum wage to employees who receive the bulk of their pay in customer tips.

As we reported in 2015, the then-Commissioner issued a report questioning the continuation of the minimum wage tip credit. Governor Cuomo appears to be in favor of the elimination of tip credits; he called for the public hearings “to ensure that no workers are more susceptible to exploitation because they rely on tips to survive.” While the Governor has not made any specific proposal, it is likely that, even if the tip credit goes away, employees could still be tipped, and participate in tip pooling/sharing arrangements, but they would have to be paid at least the standard minimum wage that non-tipped employees receive.

As with the minimum wage for all employees across the state, the minimum wage for tipped employees across the state is set to increase on December 31. The Department of Labor has summarized the revisions applicable to the tipped minimum wage for hospitality employers, employers in “miscellaneous industries,” and employers in the “building service industry.” Employers should consult these summaries to determine how much they can deduct for the appropriate minimum wage tip credit as the amount varies based on the industry, job classification, location of the employee and size of the employer.

Co-authored by Noah Finkel and Cheryl Luce

Seyfarth Synopsis: On Monday, the DOL issued a Notice of Proposed Rulemaking announcing rescission of a rule that regulates tip pooling by employers who do not take the tip credit.

The DOL has issued a Notice of Proposed Rulemaking regarding the tip pooling regulations of the Fair Labor Standards Act. The FLSA allows employers to take a tip credit toward their minimum wage obligations, and employee tips may be pooled together, but pooling of tips is allowed only “among employees who customarily and regularly receive tips.” 29 U.S.C. § 203(m). The DOL took the tip pooling law a step further in 2011 when it promulgated a regulation that prohibits employers from operating tip pools even when they do not take the tip credit. The regulation states: “Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.” 29 C.F.R. § 531.52.

The DOL’s tip pooling rule has been unpopular with courts—and for good reason, as we have previously noted. Indeed, several federal courts have found that it is overbroad and invalid, excluding the Ninth Circuit. In the Notice of Proposed Rulemaking, the DOL agrees with the holdings of most courts and, while not outright stamping the rule as “overbroad” or beyond the DOL’s authority, states that the DOL is concerned “about the scope of its current tip regulations” and “is also seriously concerned that it incorrectly construed the statute in promulgating the tip regulations that apply to” employers who do not take the tip credit. The DOL’s about-face is also motivated by policy concerns. The Notice explains that removing the rule “provides such employers and employees greater flexibility in determining the pay policies for tipped and non-tipped workers [and] allows them to reduce wage disparities among employees who all contribute to the customers’ experience and to incentivize all employees to improve that experience regardless of their position.” Finally, the DOL notes that the increase in state laws prohibiting tip credits and the volume of litigation over this issue contributed to its decision to put the rule on the chopping block.

The end of the rule does not come as a surprise as both the DOL and courts have sounded the death knell this year. On July 20, 2017, the DOL issued a nonenforcement policy to not enforce the rule with respect to employees who are paid at least minimum wage. Additionally, the National Restaurant Association filed a petition for certiorari with the Supreme Court asking for review of the Ninth Circuit’s decision, which is still pending.

The DOL announced that if the rule is finalized as proposed, the rule would qualify as an “EO 13771 deregulatory action” under the Trump administration’s “two-for-one” executive order that requires federal agencies to cut two existing regulations for every new regulation they implement. Once the proposal is published in the Federal Register, interested parties will have the opportunity to provide comments regarding the Department’s proposal within 30 days. Only after these steps is the rule made final.

Co-authored by Abigail Cahak and Noah Finkel

Seyfarth Synopsis: The Ninth Circuit has created a circuit split by rejecting the DOL’s interpretation of FLSA regulations on use of the tip credit to pay regularly tipped employees, finding that the interpretation is both inconsistent with the regulation and attempts to create a de facto new regulation.

The Ninth Circuit Court of Appeals issued an important and restaurant-friendly decision rejecting the Department of Labor’s interpretation of FLSA regulations on the use of the tip credit when paying regularly tipped employees.

In Marsh v. J. Alexander’s, the Ninth Circuit addressed a number of actions brought by servers and bartenders who alleged that their employers improperly used the tip credit and thus failed to pay them the required minimum wage. Relying on DOL interpretive guidance, the plaintiffs asserted that their non-tip generating duties took up more than 20% of their work hours, that they were employed in dual occupations, and that they were thus owed the regular minimum wage for that time. The district court dismissed the case, holding that Marsh had not alleged a dual occupation and that deference to the DOL guidance underpinning his theory of the case was unwarranted. Marsh appealed.

Under the FLSA’s regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” Yet, current DOL guidance imposes time and duty-based limitations not present in the regulations: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating. The guidance goes on to state that an employer also may not take the tip credit for time spent on duties not related to the tipped occupation because such an employee is “effectively employed in dual jobs.” That guidance had been followed by the Eighth Circuit Court of Appeals and several lower courts. It created a feeding frenzy among some plaintiffs’ lawyers, causing restaurant employers to ask servers and bartenders to track their time spent on various activities down to the minute, or risk facing a collective action lawsuit in which they have to try to rebut a servers’ claims that they had spent excessive time on activities that arguably were not tip producing.

The Ninth Circuit, however, concluded in Marsh that the DOL’s guidance was both inconsistent with the FLSA regulations and attempted to create a de facto new regulation such that it did not merit deference. In particular, the court noted the regulations’ focus on dual occupations or jobs as contrasted with the DOL guidance: “[i]nstead of providing further guidance on what constitutes a distinct job, [the DOL] takes an entirely different approach; it . . . disallows tip credits on a minute-by-minute basis based on the type and quantity of tasks performed. Because the dual jobs regulation is concerned with when an employee has two jobs, not with differentiating between tasks within a job, the [DOL’s] approach is inapposite and inconsistent with the dual jobs regulation.” Moreover, the DOL guidance “creates an alternative regulatory approach with new substantive rules . . . [and] ‘is de facto a new regulation’ masquerading as an interpretation.”

In so holding, the Ninth Circuit broke with the Eighth Circuit’s 2011 decision in Fast v. Applebee’s International, Inc. and explicitly rejected the Eighth Circuit’s analysis in that case. We previously blogged about the Fast decision here.

Marsh creates a circuit split and is particularly notable coming from the frequently employee-friendly Ninth Circuit. There remains, however, contrary authority in many parts of the country, and the decision has no bearing on state laws, some of which may nonetheless follow the DOL’s reasoning. It’s also likely that this Ninth Circuit panel does not have the last word on this issue. This opinion could receive further review by the full Ninth Circuit or by the Supreme Court, and if the Supreme Court does not resolve the circuit split, other appellate courts are likely to weigh in. Regardless, the decision points out the absurdities of the DOL’s current position and demonstrates the need for guidance on the issue from the DOL once its’ appointees are in place.

Co-authored by Cheryl Luce and Noah Finkel

Seyfarth Synopsis:  An unpopular DOL regulation that prohibits employers from retaining customer tips received another blow this summer. The Tenth Circuit joined the Fourth Circuit and several district courts in holding that the FLSA does not require employers to turn over customers’ tips to employees so long as those employees are paid at least minimum wage. And parting ways with the Ninth Circuit, the court also struck down a DOL rule regulating tips even when employers do not take a tip credit.

In Marlow v. The New Food Guy, Inc., a unanimous Tenth Circuit panel (decided by two judges instead of three due to Justice Gorsuch’s ascension) held that an employer that pays its employees at least minimum wage does not violate the FLSA by retaining customer tips. The Tenth Circuit first found that the catering company, Relish, complied with the FLSA by paying the employee $12 an hour, which is above minimum wage, and held that Section 203(m) of the FLSA, which regulates tips when tips are used to satisfy the minimum hourly wage, does not apply in this case.

The Tenth Circuit also rejected a DOL regulation promulgated in 2011 that states: “Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.” 29 C.F.R. § 531.52. The Ninth Circuit upheld this regulation in Oregon Restaurant & Lodging Association v. Perez, but the regulation has been rejected by several district courts. In this case, the Tenth Circuit concluded that the DOL tip rule exceeds the DOL’s discretion, which it can only exercise in instances of statutory silence or ambiguity. The Tenth Circuit found no silence or ambiguity in whether the FLSA regulates tips of employees who are paid at least minimum wage. The plain language of the FLSA “does not direct the DOL to regulate the ownership of tips when the employer is not taking the tip credit.”

In a footnote, the opinion picks up on a point that we have argued is fatal to the DOL’s tipping regulation: there’s no remedy for violating it. Even if an employer keeps customer tips, what can its employees recover under the FLSA? Nothing more than the minimum wage owed to them, which, if they receive cash wages of more than minimum wage, they already have received. The FLSA creates a private cause of action for violations of the minimum wage and overtime requirements. The FLSA does not create any remedies for withheld tips.

Now that a circuit split has emerged on whether the DOL tipping rule can stand, we will wait to see if Justice Gorsuch will finally have a chance to weigh in on the issue with his eight new colleagues.

 

Authored by Noah Finkel and Cheryl A. Luce

Seyfarth Synopsis: New decision from Northern District of Georgia rejects the DOL’s interpretation of the FLSA tip credit law. Holds that the FLSA does not regulate tips received by employees who are paid at least minimum wage.

Imagine that you are a restaurateur. You employ servers and bartenders who receive tips, but you pay them at least the minimum wage instead of the lower, minimum cash wage of $2.13 per hour. You are not taking a “tip credit” based on the tips your servers receive to bring them up to minimum wage. Instead, you’re directly paying the servers minimum wage (or more). If you reallocate the tips your servers receive, are you violating the FLSA?

Section 3(m) of the FLSA states that employees must retain all tips they receive if the employer takes a tip credit towards their minimum wage obligation. Prior to April 2011, courts held that Section 3(m) does not require employers to return tip money to employees if the employer does not take a tip credit. You, as the restaurateur, do not have to return tips your servers receive under the FLSA because you pay your them at least  minimum wage and the FLSA does not regulate your tip pool.

That was the case before the Department of Labor tried to regulate what the FLSA does not: tips received by employees who are paid at or above minimum wage. In April 2011, the DOL issued a rule that states, “Tips are the property of the employee whether or not the employer has taken the tip credit under Section 3(m) of the FLSA.” 29 C.F.R § 531.52. This DOL rule has been rejected by many district courts and the Court of Appeals for the Fourth Circuit, who agreed that the rule is not entitled to deference under Chevron or otherwise because the FLSA does not regulate tips of employees who are paid at least minimum wage. As we reported in February, however, the Court of Appeals for the Ninth Circuit went against the grain and upheld the rule in Oregon Restaurant and Lodging Association v. Perez. The Ninth Circuit concluded that because Section 3(m) is silent on whether employees who do not take a tip credit can reallocate tips received by employees, the DOL retained authority to regulate all tips, and the rule is reasonable and entitled to deference.

Recently, in Malivuk v. Ameripark, LLC, the plaintiff asked the Northern District of Georgia to adopt the Ninth Circuit’s approval of the DOL rule for valet attendants who received tips that were then reallocated by Ameripark to pay for overhead expenses. Ameripark argued that the DOL regulation is invalid under Chevron. The Northern District of Georgia agreed with Ameripark—and did not mince words in doing so. The court labeled the Ninth Circuit’s reasoning in Oregon Restaurant as “flawed” and stated, “The DOL Regulation violates the plain language of Section 203(m).”

Malivuk reaffirms that the DOL cannot exceed what the FLSA regulates. The FLSA regulates minimum wage and overtime pay, not wage payment like the laws of many states. If the DOL rule regulating tips received for employees who are paid at least minimum wage were to stay, it would fundamentally transform the FLSA into a wage payment law. The FLSA is not “silent” on how tips received by employees who are properly paid the minimum wage and overtime should be paid out; rather, the FLSA does not regulate these employees because it has no other remedies to offer them. The FLSA’s remedies are for payments below minimum wage and failure to pay overtime; it is not a wage payment law.

As the hospitality and other industries search for ways to share the tips collected by front-of-the-house employees like servers and bartenders with back-of-the-house employees like cooks, dishwashers, and janitors, the DOL’s far-reaching tip pool rule is an encroachment. Rulings like Malivuk allow employers to allocate tips in ways that suit their business needs.

 

Authored by Gerald L. Maatman, Jr. and Jennifer A. Riley

Seyfarth Synopsis: The U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises, in which the court rejected Plaintiff’s theory and affirmed a district court’s order granting summary judgment in favor of Defendants.

Many employers, particularly in the hospitality industry, pay tipped employees less than the minimum wage.  They do so anticipating that tipped employees will receive tips from customers that push employees’ income above minimum wage.  The FLSA and many state laws allow such a practice – often referred to as taking a “tip credit” – so long as employers meet certain conditions.

The vague nature of the statutes and regulations governing the tip credit, coupled with a lack of developed case law interpreting such statutes and regulations, has created fertile ground for litigation.  In particular, some plaintiffs’ wage & hour lawyers have sought to feast on unsuspecting restaurateurs who require tipped employees to perform side work – from wiping tables to cutting fruit to polishing brass.  Plaintiffs argue that such tasks invalidate the tip credit because they put servers, bartenders, and other tipped employees in a “dual job” or second occupation that employers must compensate at minimum wage.

Last week, the U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises (7th  Cir. July 18, 2016), in which the court rejected Plaintiff’s theory and affirmed a district court’s order granting summary judgment in favor of Defendants.

The Seventh Circuit held that Defendants properly took the tip credit for time servers spent performing side work duties and that Defendants properly informed servers of their intention to take the tip credit by distributing an employee handbook and displaying a DOL poster.  The decision represents a significant victory for hospitality industry employers, particularly the significant number that require servers to perform end-of-shift and beginning-of-shift side work duties at the tip credit rate of pay.

Factual Background

In 2010, Plaintiff-servers brought suit against Walker Brothers contending that the restaurants violated federal and state minimum wage laws in two ways:  (1) by incorrectly using the tip credit to pay servers less than minimum wage while requiring them to perform duties unrelated to their tipped occupation; and (2) by failing to inform the servers of their intent to apply the tip credit to the servers’ wages.

Walker Brothers owns six restaurants in the Chicago suburbs that operate under the name “The Original Pancake House.”  Upon hire, Walker Brothers provides servers with an employee handbook that states, among other things, that the restaurants apply a tip credit that reduces servers’ hourly wages 40% below minimum wage.  The restaurants also display DOL-approved posters explaining the tip credit in well-traveled areas.

In addition to serving customers, servers perform side work tasks that vary, among other things, by the station to which they are assigned.  Defendants required servers, for instance, to wash and cut strawberries, mushrooms, and lemons; mix applesauce and jams, restock bread bins and replenish dispensers of milk; fill ice buckets; brew tea and coffee; wipe toasters and tables; wipe down coffee burners and woodwork; dust picture frames; and occasionally polish brass.

After the district court granted class certification, the restaurants moved for summary judgment.  The district court granted their motion finding that the side work tasks were “incidental to the regular duties of the server (waiter/waitress)” and that Walker Brothers provided notice of the tip credit by giving servers an employee handbook and displaying posters approved by the Illinois DOL.

The Seventh Circuit’s Opinion

The Seventh Circuit affirmed the district court’s judgment in favor of Walker Brothers in all respects and, in doing so, rendered an important decision for the hospitality industry.  Most significantly, the Seventh Circuit found Plaintiff’s position that none of their side work was related tipped work as “untenable.”  It held that servers engaged in making coffee, cleaning tables, and several other activities that the DOL provided as examples of duties that could be performed by persons paid at the tip credit rate.  The court reasoned “[t]hat some of our plaintiffs’ tasks may be performed by untipped staff at other restaurants does not make them unrelated as a matter of law”; rather, the “right question” is whether the tasks are “related” or “incidental” to tipped duties.  The Seventh Circuit noted that the “most problematic” duties were “wiping down [coffee] burners and woodwork and dusting picture frames,” but because the DOL gave “cleaning and setting tables” and “occasionally washing dishes or glasses” as examples of related duties, it could not categorically exclude “clean up tasks” from the definition of duties related to a server’s tipped occupation.  In any event, the Seventh Circuit concluded that it need not decide what to make of wiping woodwork or dusting picture frames because, as the record showed, the time spent on such tasks was “negligible.”  The Seventh Circuit noted that the law “does not convert federal judges into time-study professionals and require every minute to be accounted for.”  Given the flexible standards imposed by the DOL, the possibility that a few minutes a day were devoted to keeping the restaurant “tidy” did not require the restaurants to pay the normal minimum wage for those minutes.

The court also rejected Plaintiff’s “notice” claim, holding that Walker Brothers was able to satisfy all elements of the notice requirements of the statute by combining different documents that it posted or provided to servers.

Implications For Employers

The Seventh Circuit’s decision in Schaefer is a significant victory for the restaurant industry.  Before the Seventh Circuit’s decision, few courts had addressed tip credit claims, and little favorable law existed to validate employers’ regular practice of using servers to perform incidental side work tasks.  As a result of this decision and a growing body of district court decisions favoring restaurant employers, restaurant employers may be able to breathe a little easier.

Authored by Alex Passantino

All around the country, tipping practices have been coming under scrutiny.  Restaurants increasingly have abandoned their use of tip credit — and tipping — partially due to a belief that a higher wage not tied to the fluctuations of tipping is better for morale and operations, and partially due to the complexities of dealing with wage and hour compliance issues for tipped employees.  For those in the latter camp, however, the Ninth Circuit, in Oregon Rest. and Lodging Ass’n et al. v. Perez et al., just decided that the Department of Labor may regulate tip pooling even when the employer does not use the FLSA’s tip credit.

As we have reported previously, restaurant trade associations in Washington and Oregon challenged the Department’s 2011 final rule amending the tip pool regulations.  In promulgating those regulations, the Department expressly rejected a prior Ninth Circuit case, Cumbie v. Woody Woo, Inc., and stated that tips are the property of the employee whether or not the employer has taken a tip credit and that a valid tip pool may only include “those employees who customarily and regularly receive tips.”  In Woody Woo, the Ninth Circuit found that Congress intended only to limit the use of tips by employees when the employer claims a tip credit.

Relying in large part on the Woody Woo decision, the trial court in Oregon held that the 2011 regulations were invalid.  According to the district judge,  the clear intent of section 3(m) of the FLSA was “only to limit the use of tips by employers when a tip credit is taken” and because “an employment practice does not violate the FLSA unless the FLSA prohibits it.”

On appeal, the divided Ninth Circuit panel distinguished the Woody Woo decision by noting that Woody Woo was decided on the statutory language alone — it contained no discussion of the proper measure of deference to agency regulations because, at the time of the decision, there were no agency regulations.  Thus, because the statute did not prohibit the practice, the practice was not restricted.  According to the panel’s majority, the 2011 regulations filled the statute’s “silence” on the issue of whether the FLSA restricts tip pooling practices absent taking a tip credit.

The panel then proceeded to analyze whether the Department’s interpretation of the statute was “reasonable.”  Relying on legislative history and the “purpose and structure of the FLSA,” the court decided that “the DOL’s interpretation is more closely aligned with Congressional intent, and at the very least, that the DOL’s interpretation is reasonable.”

The dissenting judge criticized the majority’s rejection of Woody Woo, which the dissent viewed as binding circuit precedent.  That precedent, the dissent reasoned, held that “section 203(m) did not impose statutory interference because the plain text of section 203(m) had only imposed a condition on employers who take a tip credit, rather than a blanket requirement on all employers regardless of whether they take a tip credit.”  This clear Congressional intent, according to the dissent, ends the inquiry.  No deference — Chevron­ or otherwise — is due to the Department’s interpretation.

Almost certainly, this will not mark the end of the road for this issue.  Undoubtedly, en banc review will be sought.  In the meantime, however, employers who do not take tip credit must understand that the Department of Labor’s position — now approved by one Circuit Court of Appeals — is that the regulatory limitations on tip pooling will apply.  Those employers who are moving away from tip credit should be clear that any “service charge” or “commission” or “labor surcharge” attached to a bill is not a tip, so as to protect the employer’s ability to use those fees in a way it deems appropriate, and not subject to any tip pooling rules.  Unfortunately, even providing clarity that certain charges are “not tips” may be insufficient under certain state laws, and employers should be careful to comply with those requirements as well.

Authored by Alex Passantino

‘Twas the week before Christmas, 2-0-1-5
When the poetry elves on the blog came alive.
Crafting their rhymes with a purpose so clear:
Presenting the wage-hour gems of the year.

In January, for new regs in this year our breath bated.
Then for six painful months, we speculated and waited.
And just as we geared up to celebrate Independence,
Out came a proposal that will create more defendants.

With a salary level that for 10 years has been flat,
They looked at New York’s and said “higher than that.”
More than double the old; and then they got clever …
The proposed sal’ry level will increase for forever.

Anticipated changes to duties caused quite a fuss
When DOL said “If you’ve got some ideas, just tell us.”
Of the Department’s proposal, employers were understandably wary,
So we wrote down some ideas on how to make it less scary.

Nearly 300 thousand comments they have to review,
It will be late into next year before they are through.

Next up on the list of your wage-hour joy,
Are the efforts to change what it means to employ:
Contractors. Joint employment. Fissured industry.
Interns. The “third way” and gig economy.

Economic reality. Right to control.
They’re integral to your business? Now you’re in a deep hole.
So many angles, it can drive you berserk.
As agencies and courts figure out what is “work.”

And if divergent decisions bring you a sense of elation,
Then please focus attention on class certification.
Approvals, denials, and some decerts, too.
No matter the side, there’s a case for you.

But as summer approached, there arose quite a stir,
A case that’d explain what the class cert rules were.
A Supreme explanation, o my-o, o me-o
We’d learn about class via Bouaphakeo.

They’ve argued, but there’s no decision, not yet,
And a limited ruling on records might be all that we get.
But the cases keep coming. Their numbers broke the charts.
Whether giant class actions or cases broken in parts.

And the response to those filings? The employers’ retort?
A wide range of ways to get them out of court.

Some cases get mooted. Some cases do not.
At Genesis’s open question, SCOTUS might take a shot.
Does an offer of judgment that’s not been accepted
Mean the plaintiff cannot proceed with his class as expected?

Increasingly used as a litigation life saver
Arbitration agreements with a class action waiver;
And when asked if state laws could class waivers prevent, yo,
The Supremes laid the smack-down to dear Sacramento.

With all of these options, it comes as a surprise then,
That one resolution keeps on getting the Heisman.
For reasons that many cannot understand,
To settle wage claims courts think they must hold your hand.

That’s our year in review, we whipped you right through it.
Next year? The new regs and a mad dash to review it.
But before 2015 joins the past’s ranks,
You keep on reading our blog, and for that we give thanks!

THANKS TO ALL OF OUR READERS. BEST WISHES FOR A HAPPY, HEALTHY, AND PROSPEROUS NEW YEAR!

Co-authored by Gerald L. Maatman, Jr. and Jennifer A. Riley

Restaurant servers are some of the few employees to whom employers can pay less than the minimum wage.  This is because they receive tips from customers that, so long as those tips are large enough, often push an employee’s income well above minimum wage.  The FLSA thus allows an employer to take a “tip credit” as to most restaurant servers, provided the employer dots its “i’s” and crosses its “t’s” in following the tip credit regulations.

The vague nature of some of those regulations, and the relatively undeveloped nature of the case law interpreting them, has allowed some plaintiff’s wage-hour lawyers to feast on unsuspecting restaurateurs in obtaining back wages and liquidated damages on behalf of servers, bartenders, and other tipped employees.

But late last month, a federal court judge in the Northern District of Illinois came up with a better recipe for analyzing the tip credit regulations.  In Schaefer v. Walker Bros. Enterprises, et al., Judge Norgle granted summary judgment against plaintiff-servers on their claims that the restaurants at which they work improperly failed to pay servers minimum wage while performing sidework tasks such as refilling, stocking, and chopping, and failed to provide proper notice of their intention to take the tip credit.

The decision in Schaefer represents a significant victory for restaurant employers, particularly the significant number that require their servers to perform end-of-shift and beginning-of-shift sidework duties at the tip credit rate of pay.

Factual Background

In 2010, plaintiff-servers brought suit against Walker Brothers contending that they violated federal and state minimum wage laws in two ways:  (1) by incorrectly using the tip credit to pay the servers an hourly rate less than minimum wage while requiring them to perform duties unrelated to their tipped occupation; and (2) by failing to inform the servers of their intent to apply the tip credit to the servers’ wages.

Walker Brothers own six restaurants in the Chicago suburbs that operate under the name “The Original Pancake House.”  Upon hire, Walker Brothers provides servers with an employee handbook that states, among other things, that they apply a tip credit that reduces servers’ hourly wages 40% below minimum wage.  They also display DOL-approved posters explaining the tip credit in well-traveled areas of all six restaurants.

In addition to serving customers, servers perform sidework tasks that vary by the station to which they are assigned and by other factors such as location, shift, and manager.  Before May 2011, servers regularly sliced produce like strawberries and mushrooms.  Before and after that time, servers also placed scoops of ice cream on customers’ waffles and stirred blueberries into fruit compote.  Some servers also performed duties like putting water in soup warmers, brewing iced tea, and occasionally dusting or polishing brass.

Servers predominantly performed side work at the beginning or ends of their shifts, but also replenished and restocked certain items throughout the day.  Servers did not perform maintenance or janitorial work, such as cleaning bathrooms, washing dishes, mopping or vacuuming floors, washing windows, or taking out garbage.

On September 19, 2013, the Court granted class certification on the servers’ claims.  The restaurant thereafter moved for summary judgment on the servers’ claims.

The Court’s Opinion

The Court extensively recounted the law relating to the tip credit as set forth in the regulations and the DOL Field Operations Handbook.  Employers may pay “tipped employees” a wage below the federally mandated minimum wage rate, so long as, with tips, they earn at least the minimum wage.  Employers can take the tip credit “only for hours worked by the employee in an occupation in which the employee qualifies as a ‘tipped employee.’”

When “an employee is employed in a dual job,” for example, when a “maintenance man in a hotel also serves as a waiter,” employers cannot take advantage of the tip credit when the employee performs tasks unrelated to his tipped occupation.   On the other hand, when employees perform duties “related” to their tipped occupation, such as when a waitress cleans and sets tables, toasts bread, and makes coffee, “employers may apply the tip credit and continue to pay employees below minimum wage.

The Court then issued three key holdings with respect to application of the tip credit.  First, it held that plaintiffs bear the burden of proving that they were not properly compensated.

Second, the Court held that, even viewed in the light most favorable to plaintiffs, the sidework tasks performed by servers were “incidental to the regular duties of the server (waiter/waitress) and generally assigned to the servers” and, therefore, fell within the DOL Handbook’s interpretation of the applicable regulation. In doing so, the Court also distinguished an earlier Northern District of Illinois case in which it was held that a different restaurant could not take a tip credit.  In that case, employees submitted declarations stating that they were assigned to clean bathrooms, wash dishes, scrub floors, pick up trash in the parking lot, take out garbage, and roll silverware.  In Schaefer, however, the servers admitted that they were not subjected to extensive cleaning duties.   The Court thus held:  “Where the related duties are performed intermittently and as part of the primary occupation,” such as the duties are here, “the duties are subject to the tip credit.”

Third, the Court held that summary judgment in favor of the restaurant was appropriate on the notice claims.  Defendants displayed posters approved by the Illinois Department of Labor in well-traveled areas of their restaurants and informed servers of the tip credit in multiple ways, including by giving servers an employee handbook.

Implications For Employers

The Court’s decision in Schaefer is a stunning victory for the restaurant industry.  Before the Court’s decision in Schaefer, few courts had addressed tip credit claims, and little favorable law existed to validate employers’ regular practice of using servers to perform incidental side work tasks.  As a result, restaurant employers can breathe a little easier in 2015.

Co-authored by John W. Egan and Nadia S. Bandukda

As we previously reported, the Second Circuit has been considering the validity of Starbucks’ tipping practices in light of the opinion from the New York Court of Appeals clarifying the prohibition in the New York Labor Law against participation in tip-pooling arrangements by employers and their “agents.”

With its certified questions answered, the Second Circuit has now upheld Starbucks’ policy allowing its shift supervisors to participate in tip pools.  In the decision, the Court observed that shift supervisors, like baristas, spend most of their time providing customers with food and drinks.  While acknowledging that they have some managerial responsibilities, the Court held that those responsibilities do not rise to the level of “meaningful or significant” authority over subordinates, which the New York court said was necessary to disqualify them from participating in the tip pool.  Specifically, the Second Circuit said that shift supervisors cannot issue formal employee discipline or create work schedules, even though they do designate break times during shifts and send baristas home who are not needed.  Accordingly, the Court affirmed summary judgment in favor of Starbucks.   

While the Court’s decision is a “Summary Order” and has limited precedential effect, it is nonetheless a favorable outcome for employers that administer tip pools.  For Starbucks, the decision means that this long-percolating dispute over distribution of its employees’ tips may finally be nearing the end of the brewing cycle.