New Ruling to evade tip related troubles

The U.S. 5th Circuit Court of Appeals recent judgment in New Orleans served as a good guidance for hospitality and restaurant industry employers with tipped employees.

The criteria for participation in a tip pool as well as a reminder for the consequences for not following the rules carefully were also being addressed by the Court.

In the present case, Tony was sued by two waiters for violating the Fair Labor Standards Act (FLSA). Under the FLSA, at the end of each shift, the employees at each station were instructed to divide the station’s tips among the captain, front waiter, back waiter, busboy, bartender and coffee man. The sum of $10 was fixed for the coffee man. Apart from tips, Tony also used to pay the waiters with the base rate i.e., $2.13 an hour as permitted by the FLSA under the tip credit.  Further, the workers claimed that the coffee man should be excluded from the pool as he didn’t serve the customers but only used to work in the kitchen. Although the trial court agreed with Tony’s argument , that coffee man should receive the share from the pool as his primary duties entailed important customer service functions and also supported the waiters by making coffee and other drinks, whereas, the 5th Circuit did not consider this argument for appeal.

Under the FLSA, only those employees could participate in a tip pool who customarily and regularly received a certain amount of tips and the maximum tip credit an employer can currently claim is $5.12 per hour.  A distinction between the tipped employees who worked in front of the house and interacted with customers was drawn by the 5th Circuit Court in order to determine that employees received customary and regular tips.

Thus, based on the facts and evidences the 5th Circuit Court held, it was improper to rule in the employer's favor and that the issue should be reviewed by the Trial Court, as the jury failed to consider all the facts, weigh the evidence, make credibility determinations and ultimately decide whether the coffee man was properly allowed to participate in the tip pool.

After the review, the Jury of the trial concluded that the coffee man was more like a cook or a dishwasher than a waiter or busboy and that the tipped employees were basically those who customarily and regularly received more than $30 per month in tips, such as servers, bartenders, and bellhops.

Under the Federal Law, it was necessary to ensure that the difference between the hourly wage and the applicable minimum wage of the employee's tips be made. In order to take tip from tip credit the employees were required to provide notice in advance, in case the notice is not provided then under such conditions there’s a need to provide the tipped employee with at least the minimum wage rate and also allow him to keep all the tips he received.

The tipped employees are required to contribute a portion of their tips to a pool for redistribution among a larger group of employees. Although no maximum limit or percentage is imposed on tip pools but at least the employee’s minimum wage for each hour worked regardless of the tip pool contribution.

Under the FLSA, an employer can take a “credit” against the minimum wage for a tipped employee only if he:

  1. notifies its employees about the tip pool contribution amount in advance (preferably in writing);
  2. tip credit can be claimed only for the amount of tips each employee ultimately received; and
  3. tips cannot to be  retained for any other purpose.

An employee who doesn't customarily and regularly receive tips (such as dishwashers, cooks, chefs and janitors) can't be included in a tip pool.

Though the rules for paying tipped employees are simple, but even then it’s important to consult the employment counsel as the requirements differ from state to state.

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