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JOB CITES: No luck required for employers that follow tip pool law

Aaron Graf is an employment associate in Gonzalez Saggio & Harlan LLP’s Milwaukee office. He can be reached at aaron_graf@gshllp.com.

You’ve got to ask yourself one question: Is my practice of tip pooling rendering my use of the minimum wage tip credit improper?

Well, is it? Sure, the analysis of whether you (or your client’s ) tip pooling practices are negatively affecting your ability to claim the minimum wage tip credit isn’t as dramatic as staring down the barrel of Dirty Harry’s .44 Magnum Smith and Wesson Model 29, but it might be nearly as important.

Many employers, especially those in the service industry, use the minimum wage tip credit in compensating their staff. Generally speaking, the minimum wage tip credit permits an employer to pay employees well below the federal minimum wage so long as the employee’s wage is brought up to the federal minimum wage through tips. 29 U.S.C. Sec. 203(m). A pitfall for many employers is the interaction between the use of this minimum wage tip credit and the pooling of tips amongst employees.

The minimum wage tip credit allows an employer to pay an employee $2.13/hour if the employee’s tips bring the employee’s hourly wage up to the minimum wage threshold of $7.25/hour. 29 U.S.C. Sec. 203(m). If the employee’s wages do not rise to the level of the minimum wage after tips, the employer is required to make up the difference. 29 U.S.C. Sec. 203(m).

The FLSA establishes that certain requirements must be met before an employer can claim a tip credit on behalf of an employee. The employee must first qualify as a “tipped employee,” the employer must inform the employee of the statutory tip credit before it is taken, and the employee must be allowed to retain the tips received. 29 U.S.C. Sec. 203(m,t).

First, an employer should be wary of automatically assuming an employee is a tipped employee simply based on the job title. Courts will look to either the level of customer interaction of the employee, See Hai Ming Lu v. Jing Fong Rest. Inc., 503 F. Supp. 2d 706, 711 (S.D.N.Y. 2007), or whether such a position traditionally participates in tip pools based on the custom and practice in the industry and the locality. See Lentz v. Spanky’s Rest. II, Inc., 491 F. Supp.2d 663, 670-671 (N.D. Tex. 2007).

In addition, it must be noted that simply because the tipped employees actually do receive the minimum wage does not insulate the employer from liability. “[C]ourts have found violations of [the tip credit provision] (and therefore of the federal minimum wage laws) even where the employees were, in fact, paid the minimum wage when their tips were taken into account.” See Bernal v. Vankar Enterp., Inc., 579 F. Supp.2d 804, 808 (W.D. Tex. 2008).

Second, courts have specifically held that the employer must inform the employee that they intend to use the minimum wage tip credit. That being said, courts have found that there is no magical language that must be used by an employer in informing the employee of the minimum wage tip credit and employers are not expected to be experts on the law.

As to the final element, and the real crux of the analysis of whether a tip pool may invalidate the use of the minimum wage tip credit, the employees must be allowed to retain their tips. Despite the requirement that the employee be permitted to retain all tips, the FLSA also provides “that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.” 29 U.S.C. Sec. 203(m).

The problem that often arises is that the tip pool is improperly distributed to non-tipped employees or members of management. Where tipped employees are required to pool their tips with nontipped employees who do not regularly and customarily receive tips, the minimum wage tip credit is defeated and the FLSA is violated. Similarly, if the tips are split with tipped employees who also happen to be members of management, the law is violated as the tipped employees have not been permitted to “retain their tips.”

Improper tip pools which invalidate the use of the minimum wage tip credit can be costly to employers as they will likely both have to reimburse any improperly distributed tips and may have to disgorge the benefits realized from the minimum wage tip credit taken for each employee for every hour worked over a two (or three) year period. Given the compounding effect, damages can quickly rise into the hundreds of thousands of dollars.

Instead of feeling lucky, employers should ensure that their tip pooling system is compliant so as to avoid any violation of the minimum wage laws.

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