Under the Fair Labor Standards Act (“FLSA”), employers are required to pay their employees the federal minimum wage. In the restaurant industry, however, there is a “tipped” employee exception that allows employers to take a credit against the minimum wage for employees who regularly receive tips. Applying this exception, it is common for servers and bartenders in the restaurant industry to receive a wage rate approximately $3.02 less than the required minimum wage. Typically, the application of a “tip credit” to reduce the employee’s minimum wage rate is acceptable under the FLSA.
Many restaurants also employ policies under which tipped employees participate in a “tip pool,” thereby allowing the restaurant to distribute small portions of the tips received by servers and bartenders to those who help them perform their job functions (i.e., bartenders and busboys). “Tip pools” are generally considered appropriate under the FLSA so long as the persons benefiting from the “tip pool” also regularly receive tips and have significant customer interaction.
In the last few years, plaintiffs across the country have begun filing FLSA claims challenging “tip pools” in the restaurant industry. In these cases, servers and bartenders are being required to contribute to “tip pools” benefiting employees who have little to no customer interaction (i.e., food preparers, cooks and dishwashers). Upon review, courts typically invalidate these tip pool including employees minimal customer interaction. Generally, a determination that the restaurant has failed to pay its servers and bartenders adequately under the FLSA follows because reliance on the “tip credit” is inappropriate for restaurants utilizing an invalid tip pool. The net result is that, if a restaurant utilizes an improper tip pool, it is potentially liable in the amount of $3.02 to all servers for all hours worked in the preceding three years, plus double damages for the violation of the FLSA and attorney’s fees and costs. Such a result can create extremely significant liabilities for restaurants.
Because these cases appear to becoming popular among the plaintiff’s bar, we suspect that such cases will continue to be on the rise for the next several years. Accordingly, restaurants that currently utilize a “tip pool” should take proactive measures to ensure that their “tip pool” is valid. If you have any questions, Clark Partington’s Employment Law team stands ready to address your concerns. Our team has successfully resolved this type of case on a regular basis. Please do not hesitate to contact us to discuss the appropriate procedures for avoiding future liability or limiting any liability that may already exist.