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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Tip Pooling Woes for Employers

Disputes over unpaid tips and improper tip pooling have increased significantly in the past several years, and may become the next frontier in wage and hour litigation. Most notably, a series of lawsuits were filed last year against Starbucks alleging that the coffee giant improperly allowed shift supervisors to partake of tips meant for the baristas who serve the coffee. Not surprisingly, restaurants are another prime target in the tip lawsuit gambit. 

Even away from the courthouse, workers are fighting back against employers for allegedly failing to pay out tips amounting to millions of dollars. Just last week, hotel workers at the Jumeirah Essex House in New York staged an organized work stoppage that brought the hotel’s guest services to a halt. (The workers kept things quiet enough so as not to interrupt a movie with Oscar winner Sean Penn being filmed nearby.) The workers are demanding payment of $1.8 million in unpaid tips generated by hotel events, claiming that the Essex failed to heed a prior arbitrator’s ruling in their favor.

Tip pooling typically involves collecting all tips received by directly tipped employees so that they may then be redistributed among a larger group of employees.  The laws regarding tips and tip-pooling can be complex, which means that avoiding tip-related liability is no easy feat. The issue of tips may not even reach the top of the agenda for a restaurant or hotel that is trying to stay afloat in recessionary waters. Also, tip-related rules and obligations vary by state, so a national restaurant chain’s compliant tip policy in Massachusetts may not work in New York. 

One over-arching principle (as Starbucks learned to the tune of over $100 million in one California suit) is that supervisors, staff members with supervisory responsibilities and others who would not be expected to share in tips should not be included in any pool or sharing arrangement. It also behooves employers to avoid implementing mandatory policies regarding tip pooling and sharing, since participation in any such arrangement must be voluntarily chosen by employees. It is wise to provide employees with notice of the tip pooling/sharing arrangement to which workers have generally agreed, and have them sign a written statement acknowledging that their participation in the arrangement is voluntary.