Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

While the FLSA governs the payment of minimum wage and overtime, it does not by its statutory language regulate the receipt of gratuities.  However, Section 3(m) of the FLSA (29 U.S.C. § 203(m)) requires that employees paid pursuant to the “tip credit” provision (i.e., paid less than the standard minimum wage of $7.25 due to receipt of gratuities), retain all of their tips or share them only with employees who are customarily and regularly tipped and who do not qualify as a “employer” under the FLSA (Some states impose this principle even if a tip credit is not taken, and the USDOL recently issued guidance indicating it is taking the same position, contrary to case law). Thus, participation in a “tip pool” (wherein members of the service staff pool all tips for a given day or shift and redistribute them according to a pre-determined formula) is limited to employees who hold a customarily and regularly tipped position, and who do not meet the test for an employer under the FLSA. In a new decision involving prominent Washington D.C. eatery Marcel’s, a Federal District Judge rejected plaintiffs’ claims that the maitre ‘d who participated in the Marcel’s tip pool did so in violation of the FLSA. Arencibia v. 2401 Rest. Corp., 2011 U.S. Dist. LEXIS 146979 (D.D.C. Dec. 21, 2011). 

Plaintiffs alleged that Adnane Keiblar, the Restaurant’s long-standing maitre ‘d, should have not received tips because, in addition to his regular functions as maitre d’ where he was “responsible for organizing reservations, supervising the floor, ensuring the staffs' uniforms are clean, and generally accommodating   the requests of guests, including seeing that ‘regulars’ are seated at the tables they request,” he also exercised managerial authority rendering him an “employer” under the FLSA. The Court rejected this assertion by analyzing the four principal factors identified by courts in making this analysis, namely whether the individual had the authority to: hire or fire employees; set employee schedules; set employee compensation; and maintain employment records. The court also rejected claims that the restaurant’s director of sales should not have participated in the Marcel’s pool (even though she in fact did not), because her “direct interaction with customers to arrange private events” rendered her a properly tipped employee. 

Hospitality industry employers have been besieged by lawsuits and extensive regulation, including numerous challenges in New York and many other states as to the tip pool participation of various service positions outside of the universally understood tipped positions of server, and bus boy. Arencibia joins several other recent decisions which have rejected the narrow reading plaintiffs urge, which would limit tip pool participation to a small handful of titles not reflective of the versatile diverse nature of the hospitality industry workforce, particularly within the fine dining community.   Employers must carefully analyze their tip pool participants under both federal and state law. At all times, the employer must ensure that state law permits tip pooling and also be able to support its position that each participant is both not a manager and regularly involved in customer service.

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The FLSA and state law often both regulate the distribution of tips. See here. Under the FLSA, an employer can require all “customarily tipped employees” to pool tips generally or require a specific “customarily tipped employee” to share tips with another “customarily tipped employee.”  Disputes often arise as to whether an employee is a “customarily tipped employee” – one who provides service to an establishment’s patrons – thereby permitting his or her inclusion in the tip pool. In a recent decision from federal court in Texas, Judge Xavier Rodriguez denied a plaintiff’s motion for summary judgment seeking a ruling that a service bartender—who prepared drinks which he then provided to defendant restaurant servers, not to patrons—should not have received a share of customer tips. Barrera v. MTC, Inc., 2011 U.S. Dist. LEXIS 83468 (W.D. Tex. July 29, 2011).

In Barrera, plaintiffs attacked Mi Tierra Restaurant’s requirement that servers “tip out” 2% of gross sales into a tip pool that was divided between bussers, hosts, counter servers and service bartenders. While the service bartenders were in sight of customers, customers could not order drinks directly and, correspondingly, the bartenders did not receive tips directly. While observing that “front of the house” employees often are the only employees who share in tip pools, the Court, based on an analysis of the legislative history of Section 203(m) of the FLSA (addressing the FLSA’s tip credit and the customarily tipped employee requirement) and an analysis of industry custom, held that it was a factual issue as to whether the service bartenders in could be considered “customarily and regularly” tipped. In denying summary judgment, the Court compared the service bartender position to that of busboy, a position authorized to receive tips by 29 C.F.R. § 531.54.

As the Barrera decision highlights, hospitality establishments with tipped employees may have a tipping practice which does not necessarily correspond to a universally acknowledged “industry custom.. In such situations, the establishment must be prepared to defend its practice. See Kilgore v. Outback Steakhouse of Florida, Inc., 160 F.3d 294 (6th Cir. 1998) (hostesses) and Myers v. Copper Cellar Corp., 102 F.3d 546 (6th Cir. 1999) (salad preparers). As wage and hour litigation continues in the hospitality industry, industry employers must continue to regularly review their practices for compliance with federal and applicable state law.

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As we previously discussed, the airline industry, like the hospitality industry, has been assailed with lawsuits alleging that tips from customers intended for certain employees—in this case, baggage handlers, a/k/a skycaps—have been misappropriated by the employer, in violation of state statutes and common law. In the airline industry, conflicting authority has emerged even within the same federal judicial district as to whether such claims are preempted by federal law. Compare Brown v. United Air Lines, Inc., 656 F. Supp. 2d 244, 249-51 (D. Mass. 2009)(preempted) with DiFiore v. Am. Airlines, Inc., 688 F. Supp. 2d 15 (D. Mass. 2009)(not preempted). Recently, the Court of Appeals for the First Circuit reversed the lower court’s DiFiore decision and vacated the jury’s award to Plaintiffs.based federal on preemption DiFiore v. Am. Airlines, Inc., 2011 U.S. App. LEXIS 10306 (1st Cir. Mass. May 20, 2011).

The central issue in these cases is whether the Airline Deregulation Act, 1978 legislation designed to ensure that the federal de-regulation of the airline industry did not result in a body of inconsistent state regulations governing air carriers, preempts state statutes and common law theories relating to the tips through its language preempting all state laws “related to a price, route, or service.” Id. at 11, citing 49 U.S.C. § 401713. Observing that this preemption provision is “broad but vague,” and citing three Supreme Court cases providing general guidance regarding construction of the Act, the court concluded that while the Supreme Court would be unlikely to utilize the preemption clause to free airlines from many, if not most common law and wage law claims, the Massachusetts tip statute at issue in the court’s view had a direct connection to both price and service – the baggage handling at issue itself constituting a service – and thus fell within the preemption clause. 

Jackson Lewis Partner Roger Briton, a leading expert on all aspects of employment law within the aviation industry, observes “The DiFiori decision opens the door a bit further to allowing employers in the aviation industry to fight wage/hour claims based on ADA preemption. While most wage claims are remote from issues ‘related to a price, route or service’, this potential defense should be considered in all cases.” 

Litigation over gratuities and tip practices continues to assail all industries where the practice is prevalent, including hospitality, aviation and car washes. Employers must ensure they understand all applicable federal and state requirements related to gratuities.

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As discussed here, Section 3(m) of the FLSA (like many state laws) places restrictions on which employees within a workforce can receive and share in tips. While the FLSA permits tip pooling “among employees who customarily and regularly receive tips," litigation in the hospitality industry often centers around the legality of tip pool participation by restaurant employees other than the universally-accepted categories of waiters and busboys. On March 7, a Federal District Court in Chicago provided an expansive interpretation of “tipped employee.” Turner v. Millennium Park Joint Venture, LLC, 2011 U.S. Dist. LEXIS 22295 (N.D. Ill. Mar. 7, 2011).

Turner addressed Plaintiff’s contention that, as a server, he should not have been required to contribute $3 from his daily tips to a dedicated “silverware roller,” who rolled silverware into a napkin for place settings. Interestingly, in 2006, prior to Plaintiff’s hire in 2008, the defendant restaurant – Chicago’s Park Grill –held a vote in which the servers unanimously voted to use a silverware roller to do this work in lieu of the servers, and to provide the silverware roller with a portion of their tips. 

Plaintiff argued that an employee could only be one who “customarily and regularly receives tips” if that employee had direct customer contact. Id. at * 6-7. The Court rejected such a narrow reading, interpreting 3(m) to require only what it states: namely that an employee can be eligible for the tip pool “if that employee receives tips, either directly from customers or from other employees who themselves receive direct customer tips, on a regular basis.” The Court further noted that the arrangement with the silverware rollers was voluntary on the part of the servers, and thus did not run afoul of the spirit of DOL regulation 29 C.F.R. § 531.54. The Court provided further practical guidance and observation regarding the appropriateness of tip pool participation by employees assisting servers in the front-of-the-house service enterprise:

in real world terms it is readily understandable that employees receiving tips directly from customers may agree to share tips when they believe that the employees with whom they share help them to serve the customers better and more fully and thus to obtain additional tips and sweeten the pot for everyone. Just so with a silverware roller, who performs work that would otherwise be a waitperson function. Little wonder, then, that the Park Grill servers not only voted for the hiring of such personnel but gave management a standing ovation for acceding to that vote.

Finally, the Court held that Turner’s individual, explicit assent to the tip pool arrangement was not required for it to be upheld as lawful. Rather, “the very nature of the parties' employment relationship is such that no individual employee's separate agreement to the established arrangement was necessary to hold plaintiffs to it. Instead the agreement was implied from the fact of plaintiffs having been hired with that across-the-board understanding in place, in much the same way that an existing collective bargaining agreement binds new  hires into the bargaining unit.” 

Turner is a significant victory for employers operating tip pools which include positions not contemplated by outdated DOL regulations, particularly those within Illinois and the Seventh Circuit.  Hospitality employers – arguably the most popular target for wage-and-hour lawsuits – must continue to be vigilant in assessing their wage and tip practices under the FLSA and state law.

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While a significant percentage of employees’ claims for gratuities emanates from the food service and hospitality industries, other industries, including Aviation, are not immune. Baggage handlers in Massachusetts, New York and Pennsylvania all have asserted claims challenging industry tip practices, alternatively alleging that the amounts paid by customers for curbside check-in are gratuities (which allegedly have been misappropriated by the employer) or that they are service charges which discourage the payment of additional gratuities (thereby decreasing their compensation below the minimum wage). In a recent decision, a federal court ruled that the Federal Airline Deregulation Act does not preempt the plaintiffs’ Pennsylvania state law claims for service charges allegedly misappropriated by their employer. Thompson v. US Airways, Inc., 2010 U.S. Dist. LEXIS 59088 (E.D. Pa. June 15, 2010).

In Thompson, the plaintiff skycaps alleged that the airline’s 2005 imposition of a mandatory $2 fee per bag (paid to the airline) caused a sharp decrease in tip income, causing their income to dip below the minimum wage and serving as a functional misappropriation of tips. Id. at * 4. As a threshold legal matter, the airline argued that the plaintiffs’ claims for wages under state law would have a "forbidden significant effect" on airline prices, and thus were preempted by the federal law (which was designed to ensure that states did not undermine federal airline deregulation through state regulation). Analyzing three different decisions on the issue with different reasoning from federal courts in Massachusetts, Judge Gene Pratter denied the airline’s motion to dismiss and determined that a verdict in favor of the plaintiffs would simply result in a modification of baggage handling practices, and would have only a tangential, remote impact on price, if any. 

While the court’s decision did not address the merits of the Thompson skycaps’ claims, the litigation reminds .all employers of tipped employees of the need to ensure legal compliance and transparency in regard to gratuity practices.

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When an independent contractor alleges s/he was misclassified and seeks alleged unpaid minimum wage and overtime, a significant issue is whether a prevailing plaintiff can receive a windfall.  Simply put, can an independent contractor alleging misclassification under the FLSA (or state law) keep fees for services already collected, and also collect a damages award for unpaid minimum wage and overtime?  In one recent decision, a federal judge has found the answer to be “not necessarily”.  Doe v. Cin-Lan, Inc., 2010 U.S. Dist. LEXIS 16447 ( E.D. Mich. Feb. 24, 2010)(Note: Jackson Lewis partner Allan Rubin represents Cin-Lan in this matter).

Cin-Lan concerns the classification of exotic dancers as independent contractors at a Michigan nightclub.  The named Plaintiff entered into an independent contractor arrangement under which she danced at the defendant club in exchange for a portion of “dance fees” collected from patrons; the balance of the dance fee went to the club.  The club did not pay Plaintiff minimum wage or overtime, though she often collected dance fees at a rate approaching $75/hour.  Significantly, the parties’ agreement called for the dance fees to serve as an offset to any wage liability if Plaintiff were ever found to be an employee. 

In rejecting Plaintiff’s motion to dismiss the counterclaim, the Court first rejected Plaintiff’s argument that the contract itself was “repugnant to the FLSA” and thus invalid.  The Court further observed that “the parties agreed that if there was ever a legal determination that their business relationship was in fact an employment relationship, then the alternative provisions of the [contract] would apply to define the parameters of that relationship. The counterclaim alleges that Doe agreed to such an arrangement” and therefore the Court declined to reject such an arrangement as a matter of law.  Finally, the Court rejected Plaintiff’s argument that all “dance fees” should be re-characterized as tips for purposes of the FLSA (and thus not credited against wages owed). 

While this decision is based on a very-specific fact pattern involving dancers in the nightclub industry, it highlights the importance and value of a well-drafted independent contractor agreement.  Even if such agreement does not support the independent contractor classification, potentially it can limit damages.

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In the food service industry, an employer can take a tip credit against the minimum wage for customarily tipped employees, such as servers, bus persons and bartenders.  Under federal law, a restaurant can pay employees holding such positions $2.13 per hour, rather than $7.25 per hour, as long as the employees receive sufficient tips to make up the difference and the tips are only retained by customarily tipped employees.  For years, an issue that has bedeviled industry employers is how to handle prep time and clean-up time as in most establishments there is a period of time pre and post-shift and potentially even during busy hours, in which customarily tipped employees perform prep work and maintenance work.  Can a tip credit be taken for the entire shift?

The United States Department of Labor through its Field Operations Handbook has long taken the position that an employer may take a tip credit for time spent on prep and maintenance only if it consists of less than 20% of the employee’s shift.  The United States District Court for the Western District of Missouri recently addressed this issue, and upheld the USDOL’s position. However, the court stayed the pending FLSA action (involving over 5,000 plaintiffs) and allowed an immediate appeal to the United States Court of Appeals for the Eighth Circuit.   If the appeal is accepted, the Eighth Circuit will determine whether the USDOL’s position is consistent with the language and intent of the Fair Labor Standards Act.   

The Circuit court would have to balance the conflicting positions of industry employers with that of employees and employee advocacy groups.  Industry employers assert this prep and maintenance work is part and parcel of the job duties that result in tips and accordingly the key inquiries should be solely whether the non-tipped duties were part of the continuum of the tipped duties (i.e., the direct customer service duties) and whether the individual received sufficient tips to make up the tip credit.  Employee advocates argue that the 20% rule provides employers with necessary leeway to assign non-tipped duties during a shift, but provides an inappropriate windfall by only having to pay a subminimum wage for non-tipped work that should be compensated at the standard minimum wage or higher.  See Fast v. Applebee's Int'l, Inc., 2010 U.S. Dist. LEXIS 19571 (W.D. Mo. Mar. 4, 2010).

Of course, at all times, state law must be consulted.  Some states do not allow any tip credit; other states allow a lesser tip credit than federal law and many states impose tangents on its application.  For example, in some states the tip credit cannot be taken for any hour in which more than a de minimis amount of prep or maintenance work is performed.

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The Ninth Circuit Court of Appeals recently ruled that the FLSA does not restrict employer-mandated tip-pooling arrangements when no tip credit is taken by the employer against the minimum wage obligation.  Cumbie v. Woody Woo, Inc., et al., No. 08-35718 (9th Cir. Feb. 23, 2010).  Further, the Court rejected the DOL’s regulation at 29 C.F.R. § 531.35, and held that the employees in Woody Woo had no legal right under the FLSA to retain all of their tips, except where the tip credit is taken by their employer. 

In Woody Woo, all tips received by the restaurant went into a “tip pool”, the proceeds from which were redistributed to all employees, including the kitchen staff, who (it is universally understood) are not “customarily tipped” for the purposes of the FLSA in the restaurant industry.  Importantly, all employees received an hourly wage that complied with both federal and Oregon minimum wage laws: again (it can’t be said enough), no tip credit was taken. 

Based on this decision, in states where state wage-and-hour laws track the FLSA (or states with no applicable state wage law), especially those within the Ninth Circuit, employers may want to consider tip pooling arrangement similar to the one addressed by Woody Woo. Where the FLSA is the only statute at issue, Woody Woo stands for the proposition that, provided all employees receive the federal minimum wage (currently $7.25/hour), tips can be collected and redistributed to the entire labor pool, or even potentially kept by management, without violating the FLSA. 

However, in many states, state wage and hour laws expressly  prohibit the construct Woody Woo authorizes. In New York, for example, tip pooling and tip distribution is limited to voluntary pooling among employees who “customarily” receive tips and an employer or its agent cannot retain any tips. N.Y. Labor Law § 196-d.

Finally, even in states with no state law restrictions, common law theories of contract, quantum meruit or unjust enrichment (which are part of most states’ common laws), or statutory theories under consumer protection or business practices statutes can be utilized by employees to attack tip distribution arrangements where any tips are siphoned away from employees engaged in direct service. This concern is underscored if the customer is not explicitly advised that non-service personnel may receive a portion of tips. 

Further discussion of this decision can be found on www.JacksonLewis.com by clicking here.

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