Allan R. Holmes: High Dollar Claims against Restaurant Employers

The epidemic of Federal Fair Labor Standards Act (FLSA) cases against restaurants continues unabated. Many private lawyers are using social media to attract “tip credit wage” plaintiffs – employees who are paid by employers using the tip credit wage permitted by Section 3(m) of the FLSA. Some web postings even offer estimates of recoveries – $60,000 per employee with all attorneys’ fees to be paid by the defendant.

There are any number of issues that can lead to employer vulnerability to these types of suits, and the best approach for any employer is a thorough compliance audit conducted by lawyers who understand the intricacies of the FLSA. This brief article is no substitute for such an audit, and is not offered as a substitute for legal advice.

That said, it may be of some benefit to identify three problems that are favorites of employee lawyers because they are easy to exploit and often lead to significant judgments. The “good news” about these three FLSA problems is that they can be fixed. The typical suit begins with one or two employees, but the case is then conditionally certified as a collective action – a form of class action – and all similarly situated employees [often all servers and bartenders] are invited to join the litigation as plaintiffs. A Charleston restaurant paid $1,000,000 to settle such a case just last year.
One of the most common claims alleges that the employer failed to give the notice required for use of the tip credit wage. Although the FLSA allows this notice to be given orally, it is quite often the case that plaintiffs will claim no notice was given, and this can lead to a jury issue. Thus, the best practice is to give the required notice in writing, and have employees acknowledge receipt.

The relevant Wage & Hour Division FLSA regulation requires that an employer must provide the following information before using the FLSA Section 3(m) tip credit:
1) the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;
2) the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);
3) that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;
4) that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and
5) that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

Obviously, the actual written notice to each employee must be individualized to reflect the cash wage which is being paid to that particular employee, and any tip out requirement should be specified. In South Carolina, the S.C. Payment of Wages Act requires a written notice of wages to employees, and it makes sense to incorporate a proper FLSA notice into that required notice.

A second all too common claim that results in significant employer liability rests on the inclusion of ineligible employees in the employer’s tip pool. The employer cannot legally use the tip credit wage if the employer sponsors a tip pooling arrangement which is not “limited to employees who customarily and regularly receive tips”. The “employer” is ineligible for inclusion in the tip pool, and any employee with managerial authority is likely to be considered the “employer” for purposes of the tip pool. “Back of the house” employees are not eligible for inclusion, and even if the new regulation proposed by the Trump administration goes into effect, employers using the tip credit wage will NOT be allowed to include back of the house employees in the tip pool. [The new regulation would ONLY affect employers who are paying a full minimum wage without using the tip credit]. Whether an employee is “back of the house” or “front of the house” is not determined by the employer’s payroll designation. Rather, the determination is most often made on the basis of whether the employee is visible to patrons of the restaurant and directly participating in the front of the house service function. Thus, servers, hostesses, food runners and server assistants are usually eligible to participate, but sous chefs, dishwashers, and other employees who spend their time in the kitchen area out of the sight of patrons are ineligible. Explaining the test fully is beyond the scope of this article, and, unfortunately, often beyond the understanding of some judges. The key point is that an employer should make absolutely certain that anyone included in the tip pool is eligible to be there. On this point, we recommend that the employer obtain competent legal advice.

A third common basis for FLSA lawsuits derives from employer’s use of the tip credit wage for employees who spend more than 20% of their time in any workweek doing work that is ancillary to the tipped employees’ occupation, or for employees engaged in any work which is not properly considered a part of the tipped employees’ occupation. An employer is not permitted to take a tip credit against its minimum wage obligations in either of the following circumstances: (1) when it requires its tipped employees to perform non-tipped work that is unrelated to the employee’s tipped occupation; or (2) when it requires its tipped employees to perform nontipped work that, although related to the employee’s tipped occupation, exceeds twenty percent (20%) of the employee’s time worked during a workweek.

An example of “related work” might be a bartender cutting fruit and gathering ice in preparation for a work shift, or a server wiping down tables before and after seating guests. “Unrelated” work for a server or bartender would be such things as cleaning bathrooms, running errands, or washing dishes.

Plaintiffs’ lawyers find pursuit of the 20% claim most inviting when there are significant gaps between when tip credit employees report for work, and when they are scheduled to begin their tipped activities. Gaps between the end of tipped activities and the leaving for work are also likely to attract claims. As an example, consider a server who works a 40 hour workweek of 5 equal shifts. If the server is required to report for work every day at 3 p.m., but dinner service begins at 5 p.m., it’s difficult to explain why the 20% limit hasn’t been exceeded by this gap that takes up 25% of the 40 hours the server worked. FLSA complaints against restaurants continue to increase daily, and employers who ignore these cases and their underlying causes are taking risks that they could easily avoid.