DOL Regulation Exposes Restaurants to Liability; Restaurant Trade Association Sues to Reverse

Restaurants and other employers who have tipped employees may face significant liability if they redistribute tips among employees in violation a new regulation issued by the Department of Labor (“DOL”).   Restaurants who take a tip credit (i.e. pay a lower hourly wage based on tips employees receive) against their employee minimum and overtime wage obligations, have always needed to follow very specific guidelines should they pool and redistribute tips of tipped employees (a “tip pool”). The DOL’s new regulation and guidance it provided earlier this year require that all employers that have a tip pool must follow the DOL guidelines, even if the hourly wages paid to their employees before tips exceed federally mandated minimum wages (i.e. even if the employer does not take a tip credit).  In short, the DOL is taking the position that employees’ tips are the property of the employee and may only be redistributed amongst employees as the DOL has authorized.  In response, the Restaurant and Trade Association (“RTA”) has filed a lawsuit suit which seeks to invalidate this regulation as it applies to employers who do not take a tip credit. 

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Tipping the New York Tip Credit in Employees' Favor

We’ve been discussing the new New York Hospitality Industry Wage Order. One significant difference in the new regulations is how the tip credit has been changed in employees’ favor.

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NYS Trying to Make the Hospitality Industry More Hospitable to Workers

While waiting on tables may seem straight forward (customer orders food, server brings food), the regulations governing compensation for that server, and others in the hospitality industry, are among the most complex. New York employers who’ve mastered the old regulations, with all their exceptions and special rules for tipped employees, will have to go back to school.

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Restaurants are Prime Targets for Overtime Claims

Recently there has been a spate of multi-million-dollar wage and hour lawsuits and an increasing number of audits by the NYS Department of Labor targeting New York City restaurants.  Among the restaurants hit are Club 21 (filed March 17, 2009), the Saigon Grill  (judgment in October 2009 for $4.6 million), and, most recently, Iron Chef Bobby Flay’s  Bar Americain and Mesa Grill (filed January 9, 2009).  On March 18, 2009 NY Labor Commissioner M. Patricia Smith announced a $2.3 million settlement with Ollie’s Noodle Shop and eight other restaurants owned by Tsu Yue Wang. This comes on the heels of the DOL’s January 2009 announcement that it would partner with community groups in its continuing effort to crackdown on wage violations.

Such announcements are symptomatic of a nationwide crackdown on an industry with significant exposure to overtime claims, due to some of the industry’s most common practices.   In the food service sector, where many workers accept long hours in order to increase their earnings (which are based primarily on tips), poor recordkeeping, cash payments, failure to handle tips correctly, improper distribution of tips, tip pooling, deductions from pay for costs such as the laundering of uniforms, and various other wage and hour issues place employers at heightened risk.  The laws governing eateries are often complex, and most restaurant owners are unaware of their legal obligations to pay their workers properly.  Unfortunately, many restaurant owners are following follow long-established (but illegal) industry practices, which is resulting in the type of actions cited above. Today, workers are being educated as to their rights by attorneys and workers’ rights groups, and are much less hesitant than in the past to participate in claims against their employers. Until a fundamental change is made by restaurants in general, there is no reason that this wave of lawsuits and audits will subside anytime soon. 

Eleventh Circuit Defines Notice Requirement When Employer Takes Tip Credit

The U.S. Court of Appeals for the Eleventh Circuit recently upheld a decision by the federal District Court for Southern Florida narrowly interpreting the FLSA requirement that employers notify tipped employees when they intend to take advantage of the “tip credit allowance.” The “tip credit” provision of the FLSA and many state wage laws allows employers to pay tipped employees as little as $2.13 per hour when their base pay, combined with tips, will bring their hourly rate of pay to at least minimum wage.

In Pellon, et. al. v. Business Representation International, Inc. et al. [528 F.Supp.2d 1306 (U.S. Dist. S.D. Fla. 2007)], plaintiffs, a group of 53 “skycaps” at Miami International Airport, attempted to argue that defendants (their employers), had failed to notify them that they intended to take the tip credit, in violation of 29 U.S.C. § 203(m)(2), which explains the tip credit allowance and requires employers who intend to use it to so inform employees. Had plaintiffs prevailed on this point, their employers would potentially have been liable for substantial minimum wage violations.

In granting defendants summary judgment on this count [upheld on appeal, 291 Fed.Appx. 310 (C.A. 11 Fla.)], the Court noted that defendants had notified new hires that they would be paid $2.13 per hour, plus tips, and had also conspicuously posted an explanation of employee rights under the FLSA, including an explanation of the tip credit allowance, as required by the U.S. Department of Labor.  Plaintiffs maintained that defendants owed employees a clearer explanation of the tip credit, but the Court cited precedents such as Chan v. Triple 8 Palace, Inc. [2006 WL 851749 (S.D.N.Y. 2006)] : “Employers do not have to ‘explain’ the tip credit to employees, however; it is enough to ‘inform’ them of it.”

Pellon is a welcome development for employers, since it restricts notice requirements for businesses in the hospitality and service industries with tipped employees. However, it is important to note that opinion on this point is not unanimous on the federal bench, and employers who take advantage of the tip credit should be certain that they have adequately notified employees of their procedures. Collecting signed statements from tipped employees confirming that they have received such notice is always a wise practice.

The FLSA rights poster employers are required to display can be downloaded at A state-by-state guide to pay requirements for employers who take advantage of the tip credit allowance is available at