Hospitality employers nationwide continue to be hit with class action lawsuits alleging failure to properly pay/distribute tips, as well as failure to correctly characterize service charges and automatic gratuities. These lawsuits have the potential to result in verdicts or settlement amounts more costly than virtually any other employment-related matter. As a result, it is important to periodically review what is or is not permissible under the law is it relates to tips, service charges, and automatic gratuities.
Most employers are familiar with the basic premise that a tip is a voluntary amount a guest leaves for an employee over the amount due for the goods sold or services rendered, while a service charge is an amount agreed-upon in advance by a venue for services provided, often in connection with large pre-planned events. However, service charges are treated differently than tips for tax and other purposes, and automatic gratuities add an extra complicated layer in this analysis. A brief synopsis of the differences of these terms from a legal perspective is set forth below:
Since 2010, the law has been in flux as to whether certain restaurant employees may or may not be allowed to participate in tip pools, particularly in states located in the jurisdiction of the U.S. Court of Appeals for the Ninth Circuit (these states include Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington). However, a recent ruling from the Ninth Circuit has clarified this issue, and it is now clear that restaurants and hotels cannot require servers to pool and/or share tips with non-tipped kitchen and other back of the house staff such as dishwashers, chefs or cooks who do not customarily and regularly receive tips, even if the restaurant does not utilize the tip credit. To fully appreciate this decision, it is necessary to re-visit the recent history of uncertainty surrounding this rule.
The primary issue is whether tip-credit restrictions can be imposed on employers who do not take a tip credit. While employers can require servers to participate in a tip pool with others who customarily and regularly receive tips even if they take a tip credit, the Fair Labor Standards Act (“FLSA”) is silent as to whether employers who do not take a tip credit can require servers to participate in a tip pool with kitchen employees. Based on this premise, the Ninth Circuit held in 2010 in Cumbie v. Woody Woo, Inc., that an employer could require servers to pool tips to share with non-tipped kitchen and other back of the house staff who did not customarily and regularly receive tips, as long as (i) the servers were paid at least minimum wage; and (ii) the employer did not take a tip credit. The Ninth Circuit concluded that nothing in the text of the FLSA restricted employee tip pooling arrangements when no tip credit was taken. Continue reading
It is no secret that during the last few years, we have seen a surge in class action lawsuits alleging a variety of improper tip practices against restaurants and other employers in the hospitality industry. These lawsuits are typically brought under both the federal Fair Labor Standards Act (“FLSA”), which governs which employees are eligible to share in tips, as well as analogous state and local laws. These laws are extremely nuanced and complex, with violations often resulting in significant liability.
For these and other reasons, on October 14, 2015, Danny Meyer’s Union Square Hospitality Group announced that starting in November, it will begin eliminating tips at each of its thirteen full-service venues, and implement a new program called “Hospitality Included.” While several high-end restaurants in New York City and Los Angeles have already eliminated tipping the past few years, this new program is extremely significant, as it is the first time a major American restaurant group will institute a zero-gratuity policy. You can read more about Danny Meyer’s program here.