Industry Association's Challenge New USDOL Tip Credit Rule

Posted on July 5, 2011 by Noel Tripp

The hospitality industry remains a favorite target for wage/hour lawsuits. On June 16, 2011, a group of industry associations led by the National Restaurant Association filed a lawsuit of its own in the District Court for the District of Columbia, challenging the new DOL regulations effective in May expanding the notice requirements associated with taking a tip credit against tipped employees’ wages, pursuant to 29 U.S.C. § 203(m). Representatives of the organizations observed that the rule creates draconian and confusing new burdens on small business owners such as restaurateurs, likely leading to exposure to regulatory and private enforcement action, and also that the changes were implemented without a notice and comment process to afford an opportunity for business leaders and others affected to provide input. 

“Hospitality industry employers have seen a disproportionate share of enforcement proceedings, in the form of both Department action and private litigation,” observes Jackson Lewis partner Paul DeCamp, former Administrator of the U.S. Department of Labor’s Wage and Hour Division. “This new lawsuit, like the similar action filed by the Mortgage Bankers Association earlier this year, sends a message to the Department about the need to follow the rules governing administrative procedure, as well as the importance to employers of being able to rely on agency rulings without worrying that they are going to be discarded each time the political winds change.”

We will apprise of further developments arising from this new litigation and other important developments in the heavily regulated hospitality industry.

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Federal Court Reiterates That Banquet Servers Can Satisfy Section 7(i) Exemption

Posted on June 18, 2010 by Noel Tripp

Among the many ambiguities in the FLSA’s often-confusing overtime exemption for commissioned employees of retail or service establishments (known as the “7(i)” exemption), is courts’ varying interpretations of what constitutes a “commission.” This has long been particularly vexing for the banquet industry, where it is customary to charge a mandatory service charge, then distribute that service charge in whole or in part to the banquet service staff. Is such a payment a “gratuity”, or can it be a “commission” within the meaning of 7(i)?

For approximately 20 years, the leading case directly on point was Judge Posner’s decision in Mechmet v. Four Seasons Hotels, Ltd., 825 F.2d 1173 (7th Cir. 1987), in which the court held that such a distributed service charge is a commission for purposes of 7(i).  A second federal court, the Southern District of Florida, has now issued a decision consistent with Mechmet. Judge Marcia Cookeheld that such payments are commissions for purposes of 7(i), rejecting the claims of a banquet server who alleged that he received a paltry hourly wage and that his service charge distributions were “tips”, thereby creating violations of the FLSA’s minimum wage and overtime provisions. Nascembeni v. Quayside Place, 2010 U.S. Dist. LEXIS 58707 (S.D. Fla. June 11, 2010). The Judge noted that the service charge payment by the banquet customer was non-negotiable and involuntary. Thus it was a service charge, not a tip, and distributions from that mandatory charge were commissions for purposes of 7(i).   Id. at * 6-7. 

Hospitality employers utilizing 7(i) should be heartened by the decision, but must remain wary of any practices which might undermine the characterization of supplemental payments for service as mandatory service charges under the FLSA.

 
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How Broad is the Ninth Circuit's Woody Woo Decision?

Posted on March 13, 2010 by Noel Tripp

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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