Restaurants Are Prime Targets For FLSA Lawsuits: 6 Tips For Employers Who Rely On Tip Credit PilieroMazza PLLC


The COVID-19 pandemic has been particularly difficult for the food and beverage industry. With home orders, operational capacity restrictions and indoor catering limits imposed on restaurants and bars in most countries throughout 2020 and into 2021, the impact has been significant. The hospitality industry has lost hundreds of billions of dollars in anticipated revenue; beloved local restaurants have closed their doors temporarily or permanently; and millions of restaurant workers either lost their jobs or left the hospitality industry altogether. Now that the number of fully vaccinated individuals is increasing every day, state and local governments are starting to consider easing restrictions on social distancing and operational capacity, and the public is becoming more comfortable dining out. and socialize, the hospitality industry can slowly move towards recovery. As the food and beverage industry rebuilds itself, restaurants and bars need to be aware of their obligations to employees under the Fair Labor Standards Act (FLSA); even minor errors in employee compensation practices, including the use of tip credit, can result in significant liability and financial disaster.

Anyone who works in the food and beverage industry probably knows how waiters and bartenders are typically paid by the restaurants and bars that employ them. Under federal and most state laws, employers can pay waiters and other employees for tips well below the standard minimum wage – currently $ 2.13 an hour under federal law – provided that the employer make up the difference with tips earned and paid to the employee. This practice is called taking “tip credit”, meaning that an employer can credit tips received by the employee against the employer’s obligation to pay the federal and state minimum wage at the same time. full. What many people – including savvy worker employers – don’t realize is that an employer must meet certain requirements under the FLSA before they can take tip credit.

Tip credit is a nuanced and complicated concept with many pitfalls for employers. Failure to meet these requirements can completely invalidate the tip credit and expose the employer to federal FLSA or state litigation over wages and hours and significant unpaid wage claims, liquidated damages. and attorney fees, even when employees ultimately received more. than the minimum wage required at federal and state level. Given the complexity of the law and regulations implementing tip credit, restaurants and bars are particularly vulnerable to implementation errors and the resulting litigation from aggrieved employees.

Here are our tips to help employers meet their tip credit obligations:

  1. Employees should be made aware of how their rate of pay is calculated using tip credit. The law that allows employers to pay tip employees a lower hourly wage requires these workers to be informed in advance of their salary structure. Specifically, an employer must notify tips that: (a) the employer intends to use tip credit and treat tips as part of the employer’s minimum wage obligations; b) if the amount of tips plus the hourly wage does not match or exceed the applicable minimum wage, the employer must make up the difference. The notice requirement can be accomplished by providing verbal instruction, posting a prominent and detailed notice in a common area where employees visit frequently, or by including a statement in an employee manual. Importantly, it is usually not enough to simply list an hourly rate and the amount of tips earned during the pay period on an employee’s paycheck. To ensure tip credit is available to an employer, we recommend that the tip credit notice be posted prominently at the restaurant in a busy common area; notice is given both orally and in writing to new employees upon hiring, with employees signing a tip acknowledgment form; and the notice is included in an employee handbook provided to each employee. It is important to note that, even if an employer always pays tips more than the applicable minimum wage, they can still be penalized for not providing this notice.
  2. Tips should be properly allocated to knowledgeable employees. In order to receive tip credit, an employer must ensure that an employee with a tip keeps all tips earned by that employee. Managers and owners cannot retain any of an employee’s tips, nor can an employee be required to cover a customer’s unpaid bill, make up the difference if a cash register runs out, reimburse the restaurant for broken dishes or to contribute a portion of their tips to a worker who usually does not receive a tip. To ensure that an employer is eligible for the tip credit, they must: Establish strict rules on the allocation of tips to give adequate tips to employees; train the employee responsible for calculating and distributing tips; and keep detailed records of tips entering the restaurant or bar versus tips paid to knowledgeable employees.
  3. Beware of the tip pool. The only exception to the rule that tip employees must keep all earned tips is when an employer uses a valid tip pool. A tip pool is where all the employees who have tips combine the tips they received during a given shift, and the total amount of tips received from the team is then distributed among all of them. employees tips according to a predefined formula. For a tip reserve to be valid and meet FLSA requirements, only employees who regularly receive tips, that is, employees “in a profession in which [they] usually and regularly receive[] more than $ 30 per month in tips[,]”Can be included. In many cases, tip pools that include kitchen workers, managers, dishwashers, or housekeeping staff will be considered invalid. However, the validity of the tip pool should be considered on a case-by-case basis. To protect tip credit, employers should impose clear rules for any tip pool, notify all employees aware of the rules verbally and in writing, and closely monitor tip pool distribution to ensure this is done. correctly and in accordance with the law. .
  4. Pay attention to overtime. By itself, the nature of the food and beverage industry demands flexibility both for the restaurant or bar itself and for its employees. As a result, savvy employees can work more than forty hours in a given week, for example, by taking extra shifts, swapping shifts with a colleague, or working late to take care of a table. customers staying at the restaurant after hours. An employee who tips, like other non-exempt employees, is entitled to receive overtime pay equal to one and a half times the “regular rate at which he is employed.” Simple calculations would tell you that the employer should multiply the employee’s regular tip rate of $ 2.13 an hour by 1.5 and pay $ 3.20 for overtime (provided the employee’s tips are employee reach the regular overtime rate of $ 10.88 per hour); but, simple calculations would be wrong. Under the FLSA, the maximum tip credit an employer can take is regular minimum wage ($ 7.25) less cash wages paid ($ 2.13), or $ 5.12. This maximum tip credit also applies to overtime, which means an employer must pay an overtime rate of $ 5.76 per hour ($ 10.88 minus $ 5.12). Employers must ensure that they meet the required rates of pay for regular and overtime hours and keep detailed records of the exact hours worked by employees to ensure compliance with tip credit rules.
  5. Be aware of federal, state and local obligations. The laws, restrictions, and calculations discussed in this blog represent considerations necessary to comply with the FLSA, a federal law. But each state, and even some local municipalities, have their own wage payment statutes, with varying obligations for employers. For example, minimum wage requirements can vary widely. Although the federal minimum wage is $ 7.25 an hour and all states must pay non-exempt workers at least that amount, the District of Columbia minimum wage, as of January 1, 2021, is $ 15. time. An employer may comply with FLSA tip credit requirements while not meeting applicable state-level tip credit requirements. To obtain tip credit, employers must familiarize themselves with all applicable laws and regulations and ensure that they comply with them and keep abreast of salary payment requirements which change often.
  6. Understanding the sanctions. Finally, employers need to understand the ramifications of not meeting tip credit requirements. When an employer violates the tip credit rules, they may be liable for back wages equal to the total amount of tip credit taken (i.e., $ 5.12 per hour, for each hour of tip credit). job). And, under the FLSA, an employer who does not comply with applicable laws and regulations can be held liable not only for those wage arrears, but also for an equal amount of liquidated damages, plus attorney’s fees. . Many states impose tougher penalties on employers who violate wage payment obligations. For example, the District of Columbia Wage Payment and Collection Law allows aggrieved employees to recover a total of four times overdue wages, plus attorney fees, from an employer. The penalties for non-compliance are severe and employers must be vigilant in complying with all applicable laws. Even a minor error can result in substantial liability.

By following this advice, restaurant and bar employers will be in an excellent position to stay on the right side of the law and avoid the harsh penalties imposed under the FLSA and pay and hour laws.


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