The Fair Labor Standards Act (FLSA) and most states permit restaurants to pay tipped employees a tip-credit rate, an amount less than the minimum wage with the expectation that tips will make up the difference. It goes without saying, however, that the system raises questions, such as how to pay a tipped employee when he or she performs non-tipped functions at work. Earlier this month, the United States Court of Appeals for the Seventh Circuit provided some clarity.

The case, Schaefer v. Walker Bros. Enterprises, — F.3d —, 2016 WL 3874171 (7th Cir. July 15, 2016), was brought by two classes of Original Pancake House servers. The first class claimed that the restaurants were required to pay them the minimum wage rate for the time they spent performing non-tipped duties. The second class argued that the disclosures provided by the restaurants regarding compensation of tipped employees failed to meet federal requirements.

In addition to performing normal server tasks like taking orders and delivering food, the servers in this case were also obligated to spend about 10 to 45 minutes each shift performing tasks they argued were completely unrelated to traditional server functions. For example, they were required to wash and cut fruits and vegetables; prepare applesauce, jellies and salsas; restock bread bins and replenish condiment dispensers; fill ice buckets; brew hot drinks; clean toasters, burners and woodwork; and dust picture frames. The servers argued that the restaurants should not be allowed to use the tip-credit rate for the time they spent performing these functions because they are unrelated to tipped tasks. The Seventh Circuit disagreed.

The court highlighted the Department of Labor’s (DOL’s) regulation that distinguishes between dual jobs and “related duties” that may be performed by a tipped employee without requiring the employer to pay the full cash wage. The regulation notes that there are times when a server spends part of his or her time “cleaning tables, toasting bread, making coffee and occasionally washing dishes or glasses . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” 29 C.F.R. § 531.56(e). Section 30d00(e) of the DOL’s Field Operations Handbook further provides that no tip-credit rate can be used when a tipped employee spends “a substantial amount of time (in excess of 20 percent)” performing general preparation or maintenance work.

The Seventh Circuit concluded that it was appropriate for the restaurants to use the tip-credit rate because the majority of the tasks were related to tipped functions and the time spent on unrelated tasks failed to meet the 20 percent threshold. The court relied on the Eighth Circuit’s opinion in Fast v. Applebee’s International, Inc., 638 F.3d 872 (8th Cir. 2011), for the proposition that preparing small amounts of food and cleaning objects used in that process are related to a server’s tipped functions. It also determined that the 10 to 45 minutes a day for non-tipped activities was well under 20 percent of an eight-hour shift (10 minutes is 2 percent and 45 minutes is 9.4 percent). While the court noted that cleaning burners and woodwork and dusting picture frames was problematic, the time spent was negligible and not enough to recharacterize the majority of time the servers spent on their tipped and related assignments. See Sandifer v. United States Steel Corp., 134 S. Ct. 870 (2014).

The decision makes it clear that courts, at least in the Seventh and Eighth Circuits, will focus their analysis on whether the non-tipped tasks are incidental to tipped work and whether the non-tipped tasks comprise more than 20 percent of the employee’s time.

As well as adding clarification to the question of when the tip-credit can be used, the court examined disclosure issues. Section 203(m) of the FLSA requires employers utilizing the tip-credit rate to make certain disclosures to its tipped employees. It specifically requires the employer to explain (a) that the employer will pay less than the minimum wage in anticipation of tips, (b) how much the cash wage will fall short of the current minimum wage and (c) that the employer will make up the difference if tips plus the cash wage do not at least match the current minimum wage. Here, the servers argued that their employee handbooks did not contain an adequate disclosure because the handbooks failed to explain that the restaurants would make up the difference if their tips plus the cash wage did not meet or exceed the minimum wage.

The Seventh Circuit agreed that the handbooks alone were inadequate. However, the restaurants furnished the missing information separately. Each restaurant put up at least one poster provided by the DOL explaining that:

Employers of ‘tipped employees’ must pay a cash wage of at least $2.13 per hour if they claim a tip credit against their minimum wage obligation. If an employee’s tips combined with the employee’s cash wage of at least $2.13 per hour do not equal the minimum hourly wage, the employer must make up the difference. Certain other conditions apply.

Although the Seventh Circuit noted its preference of having all the information in an employment handbook, the FLSA does not require the information to be in one document. As the court explained, “It would be hard to fault an employer for providing exactly the information the Department of Labor then required, in the Department’s own words.”

THE BOTTOM LINE: At its core, the Seventh Circuit’s opinion reinforces the notion that an employer’s use of the tip-credit is not prohibited simply because tipped employees perform minimal non-tipped work assignments, and employer disclosures of the tip-credit can be piecemeal.