Here’s a Tip – Not All “Tips” Relieve an Employer from Paying Minimum Wage (French Food Chefs versus Japanese Food Chefs)

Businesses whose employees are paid in tips know that the minimum wage law doesn’t apply to them.  The Fair Labor Standards Act (“FLSA”) requires employers to pay employees a statutory minimum hourly wage.  For each hour an employee works in excess of 40 hours in a given week, employers must pay an overtime wage that is at least one and one-half times the employee’s regular rate.

Under limited circumstances, however, an employer may pay a “tipped employee” an hourly wage that is less than the minimum wage. Specifically, the employer may pay an employee an hourly wage of no less than $2.13 if the amount of the tips the employee actually receives, added to the hourly wage the employer pays, is at least equal to the minimum wage — $7.25 per hour. This practice is known as taking a “tip credit.” See 29 U.S.C. §§ 203(t), 206(a), 207(a). No tip credit, however, may be taken “with respect to any tipped employee unless … all tips received by such employee have been retained by the employee,” except in cases in which tips are pooled “among employees who customarily and regularly receive tips.” 29 U.S.C. §§ 203(m).

The issue is clear as to a single waiter who gets and keeps his own tips, but what employees are covered under this minimum wage exception when all tips are “pooled” – say, between a waiter, a bartender, and a busboy?  A restaurant in Texas recently found out that there is no clear-cut answer.

In Barrera v. MTC, Inc., a federal court judge in Texas waded through the statutory text, the FLSA’s legislative history, a Department of Labor handbook, and Department of Labor opinion letters only to come to the conclusion that there are no bright-line rules about which employees may be included in a tip pool and which may not.  Specifically, the court was tasked with determining whether a restaurant’s practice of including a “service bartender” within the tip pool violated the FLSA and thus deprived the employer of the tip-credit/tip-pooling exception.  Rather than creating clarity, the court illustrated the perils that an employer faces in making decisions about tip-pooling arrangements without first obtaining competent legal advice.

The court struggled with the distinction between different positions and why one position could be included in a tip pool without violating the FLSA while another seemingly similar position could not.  For example, the court noted that while a normal chef could not be included in the tip pool without violating the FLSA, a sushi chef possibly could.  The court also noted that persons holding identical positions may or may not be included in the tip pool depending on the particular type of business in which the person is employed.  For instance, it may be industry custom to tip service bartenders in the hotel industry and thus permissible to include hotel service bartenders in a tip pool; however, it might not be industry custom to tip service bartenders in the restaurant industry and therefore including restaurant service bartenders in the tip pool might be a violation of the FLSA.  Failing to make such nuanced distinctions may lead to FLSA lawsuits.

In sum, the case illustrates that important decisions about FLSA compliance are made on an ad hoc basis with little guidance provided to the employer by the Department of Labor.  In certain circumstances, such as those described above, it is virtually impossible to absolutely ensure compliance and eliminate the threat of a FLSA lawsuit.  However, by undertaking an audit of the business’s employment policies and practices, and identifying and correcting any weaknesses, an employer can better position itself for defending against future FLSA claims.