It’s no secret that restaurants have come under increased pressure regarding their payment practices in recent years. The pressure has come from both the Department of Labor and restaurant employees. In 2011, the Department of Labor found Fair Labor Standard Act (FLSA) violations amounting to $22 million.
It’s not just happening in other parts of the country, but at home, too. Charleston restaurants have seen a rise in lawsuits from former employees. Defendants include many well-known restaurants on the peninsula, West Ashley, Mt. Pleasant, and other surrounding areas. One of the reasons for the increase in lawsuits over wage violations is that the federal and state statute provide treble damages (or, three times) and attorneys fees (translation: plantiff’s attorneys love these cases). All of this increased focus on restaurants has many owners and managers wondering what steps need to be taken to ensure compliance. If you’re wondering, too, read on. I will survey the statutory and case law to reveal what the law says about tipping pools and the tip credit provision.
Minimum Wage and the Fair Labor Standard Act
The Fair Labor Standard Act (FLSA) was enacted to regulate minimum wage, overtime pay, record keeping, and child labor. Although there’s a threshold requirement that a business must be engaged in interstate commerce to fall under the FLSA, virtually any business in today’s economy engages in interstate commerce. FLSA sets the minimum wage at $7.25.
Tip Credit Provision
The “tip credit” provision allows an employer to pay a “tipped employee” $2.13 hourly wage while using tips received by the employee to meet the $7.25 hourly minimum wage requirement. Of course, we have to define “tip” and “tipped employee.” A tip is a “sum of money presented by a customer as a gift or gratuity in recognition of some service performed for him or her.” A mandatory service charge is not considered a tip. For example, service charges that are mandatory for parties of 10 or more, for private parties, and for catered events are not considered “tips” for the purposes of the tip credit provision or a tip pool. A “tipped employee” is one who engages in an occupation that “customarily and regularly” receives at least $30 per month in tips.
To take advantage of the tip credit provision, employers must notify employees of the tip credit provisions. In South Carolina, this can be included in the information given to employees at the time of hire that is required by the South Carolina Wage Payment Act.
Tip pooling is a system that allows employees to pool their tips together and redistribute them. In some jurisdictions, the pooling arrangement must be completely voluntary and instituted by the employees. There is also a question over whether a tip pool can be mandatory. However, the FLSA does not prohibit mandatory pools. There is some support for prohibiting employees from mandatory pooling with employees that are not traditionally tipped. Additionally, there is no case law in South Carolina regarding mandatory pooling.
Recently, Starbucks was required to pay over $105 million as a result of invalid tipping procedures. More recently, Firemen’s Hospitality Group paid out almost $4 million as a result of unlawful managerial participation in tipping pools, among other things. Additionally, courts have allowed employees in similar situations to opt in to the lawsuit. These high profile cases make it even easier for plaintiffs to win a wage and hour claim for an invalid tip pool.
Customarily Tipped Employees
Employers commonly run into tip pooling problems when determining who participates in the pool. The test for determining whether an employee may participate turns on whether that position is one that “customarily and regularly receives tips.” Namely, waiters, waitresses, bellhops, busboy, and service bartenders are all customarily tipped and are considered permissible participants. Chefs, janitors, dishwashers, and laundry room attendants are not.
Courts have used various measures for determining the criteria for tipped employees. For example, in Kilgore v. Outback, the court allowed hosts to be included in the tipping pool because of their regular interaction with the customers. Even though the hosts did not contribute to the tip pool, the court reasoned that they could participate because they may contribute to customer service while being prohibited from accepting tips made them unable to contribute to the pool. Reasoning for participation in the pool has varied from who interacts with the customers to who contributes to customer service to who is traditionally tipped. The case law does not provide a clear set of criteria for determining participants, but it is likely a safe bet to include employees that interact with customers and are traditionally tipped.
One rule is quite clear, however: managers and supervisors should never take from the tip pool. Even when managers assist in plating the food, they still may not participate in the tip pool. Remember that Starbucks dolled out over $105 million for supervisors unlawfully taking from tip pools because even though they made and served coffee, they acted as supervisors, directing other employees, setting schedules and performing other managerial work. On the same note, bands should not be paid from the tip pool and broken or damaged property should not be recovered from the tip pool. The tip pool is to be distributed only to the “customarily and regularly tipped employees.”
Another problem area concerns dual employees, or employees that serve in both a tipped and non-tipped employment capacity. For example, an employer may have a waiter that also spends time cleaning, setting tables, toasting bread, making coffee, and occasionally washing dishes. In this scenario, all of the employee’s time may be treated as a tipped employee as long as the employees time spent on non-tipped tasks does not exceed 20% of their worked time. In other words, incidental and miscellaneous work does not have to be separately tracked unless it becomes significant and routine requirement of their employment. If an employee splits their worked time equally between tipped and nontipped work, then the employer will have to track those times separately and will have to pay the employee at least $7.25 hourly for the nontipped work time instead using the tip credit.
Calculating Overtime for Tipped Employees
Tipped employees are also subject to overtime pay that requires one and a half times their rate of pay. However, for tipped employees, the calculation must be based on one and a half times $7.25 hourly rather than $2.13 hourly (if they are paid that in direct wages). So, for an employee paid $2.13 hourly, the overtime wage increases to $10.88.
Things to Remember
- Give Notice of the Tip Credit Provision
- Only Customarily Tipped Employees Included – No managers or supervisors!
- Dual Employees that perform nontipped work more than 20% must be paid hourly for nontipped time without use of the tip credit
- Overtime must be paid based on $7.25, not $2.13
About the Author
Wesley Henderson is an attorney at Henderson and Henderson. He focuses on providing general counsel to medium and small businesses. Feel free to contact him.
 29 U.S.C. § 206(a)(1)
 29 U.S.C. § 203(m)
 29 C.F.R. § 531.52
 29 C.F.R. § 531.56
 Courts have found notice sufficient by a file folder containing relevant information, written materials, and a prominently displayed poster. [*combine with requirements of SC Wage Payment act initial info req’d].
 29 U.S.C. § 203(m)
 Bonham v. Copper Cellar Corp 476 F. Supp 98 (E.D. Tenn. 1979).
 Kilgore v. Outback
 Field Operations Handbook, 30d00(e)