Business owners often don’t give the Fair Labor Standards Act (FLSA) any thought until they are served with an FLSA lawsuit or the U.S. Department of Labor (DOL) pays a visit. Although the law has been around for longer than most businesses (since 1938), employers still struggle to understand their obligations. Mistakes are common, and plaintiffs’ attorneys are poised to exploit them. FLSA litigation has been on the rise, with eight straight years of increased lawsuit filings.

Hotels and restaurants are particularly vulnerable because of their large numbers of tipped staff. The following issues are frequently a target for FLSA litigation and DOL investigations in the hospitality industry:

Are you calculating overtime correctly? Businesses must pay all non-exempt employees at least the federal minimum wage (currently $7.25 per hour), plus overtime at the rate of 150% the employee’s regular hourly rate for all hours worked in excess of 40 in any given week. For tipped employees, the employer is permitted to take a tip credit toward the minimum wage; the employer must pay at least $2.13 per hour in direct wages, with a maximum tip credit of $5.12 per hour. For example, if a hotel pays a bellhop $2.13 per hour in direct wages, claiming the maximum tip credit of $5.12 per hour, and the bellhop works 50 hours in a particular week, the hotel should calculate his wages as follows:

  • $2.13 (direct wages) x 50 hours = $106.50 direct wages before overtime premium
  • $7.25 (regular rate of pay) x .5 (overtime premium rate) x 10 hours = $36.25 overtime premium
  • Total wages owed = $106.50 + $36.25 = $142.75

Do you give tipped employees the proper notice regarding the tip credit? In order to take the tip credit, the employer must provide specific notice to tipped employees regarding their rights and tip credit requirements. If the employer cannot prove that each tipped employee received the notice, the employer will be denied the tip credit and will have to make up the difference in straight time and overtime wages. The best practice is to prepare a comprehensive notice (the DOL doesn’t provide one) and post and distribute it to tipped employees, keeping a signed receipt from each employee. 

Are your tipped employees earning enough tips to cover the tip credit? If not, you cannot take the tip credit. You need to track the tips your employees receive so that you can prove you’ve met this requirement. 

Do you add a service charge or fixed gratuity to your customers’ bills? Many restaurants add a compulsory charge, such as a fixed “service” or “gratuity” charge, to customers’ bills, particularly for large parties or events. Those compulsory charges are not tips, even if you distribute them to the wait staff. If you do distribute those compulsory charges to the wait staff, that will increase the wait staff’s regular rate of pay, thereby increasing the amount of overtime premium they will be due for any overtime worked that week.  

Who’s in the tip pool?  If you have a tip pool, only tipped employees can participate. If employees who do not regularly and customarily receive tips – such as chefs, dishwashers, janitors, and managers – get to take a dip in the tip pool, or if any of the tips go to the business itself, the tip pool will be deemed invalid. Also, if you’re using a tip pool, there are specific notices you must give employees regarding the pool.

What else are your servers and valets doing? The tip credit is only available for tipped work. If tipped employees perform other, non-tipped work (such as cleaning or cooking), you need to make sure that those non-tipped duties do not exceed 20% of the employee’s workweek. 

Do you deduct credit card charges from your employees’ tips? Credit card companies take a bite out of each transaction, and it’s permissible to deduct the same percentage from the tips customers charge. For example, if Visa charges you 2% on each charge, you can deduct 2% from the tip portion of the charge that you pass on to the waitress. You should not deduct more than Visa does, and you must make sure that the deduction does not reduce the waitress’s wages below the minimum wage and that she’s receiving sufficient tips to cover the tip credit. Also, you must pay her tips by the next regular pay day, even if Visa takes longer to process the charge. 

Who pays for uniforms and broken dishes? You can’t make deductions from an employee’s wages that reduce the wages to below the minimum wage. Also, in Virginia, there are strict rules about what can be deducted from an employee’s wages and in what circumstances.

The best practice to reduce FLSA liability is to develop appropriate policies and procedures, train your employees and their supervisors those policies and procedures, and document everything: training and notices, tips, hours worked, etc. You should audit your wage and hour practices frequently – at least annually – to ensure that problems are identified and corrected quickly. Frequent audits are critical, even if you use a payroll service, because ultimately the business itself and possibly its owners and managers will be held liable for any mistakes. Finally, do not underestimate the task before you; you need legal counsel knowledgeable in the FLSA to assist you. If it were simple, there would be no FLSA litigation.