With the recent surge in class action wage and hour lawsuits, hospitality employers have developed a heightened sensitivity to tip pooling arrangements, distributions of service charges to employees, and application of the “tip credit.” A case before the U.S. Supreme Court this month, Applebee’s International Inc. v. Gerald A. Fast et al., is likely to add further fuel to the fiery “tip credit” world,  as the high court will have to decide whether tipped employees should be paid minimum wage for nontipped tasks employees perform.

Under the Fair Labor Standards Act (“FLSA”), tipped employees can be paid below minimum wage – as low as $2.13 per hour – so long as employees earn enough tips to reach the minimum wage (which is $7.25 under federal law, although state minimum wages may be higher).  In the case pending before the high court, Applebee’s is asking the Court to decide whether employers can use the tip credit to pay tipped employees -- namely, waiters and bartenders -- below minimum wage even if they spend more than 20 percent of their time performing nontipped tasks. Applebee’s is challenging a U.S. Department of Labor (“DOL”) rule that requires an employer to pay a tipped employee the regular minimum wage if they spend more than 20% of their work time in a given week performing non-tipped duties. 

In April 2011, siding with the DOL’s 20% rule, the United States Court of Appeals for the Eighth Circuit affirmed a lower court ruling that Applebee’s had violated the FLSA by paying its service staff below minimum wage even when the waiters and bartenders had spent more than 20% of their time on setup, maintenance, and general preparation -- tasks for which they could not be tipped. The case originated from a class action initiated by approximately 43,000 current and former Applebee’s servers and bartenders. Notably, the Eighth Circuit’s decision is a sharp departure from the decisions of two other federal appeals courts, the Sixth and Eleventh Circuits, which have already rejected the DOL’s 20% requirement.

Applebee’s is arguing that it is entitled to take a tip credit for all the work the waiters and bartenders are performing, even if some of it involves nontipped duties. The argument suggests that the question of whether the tip credit can be applied should depend not on how much of the employees’ time is spent on nontipped tasks, but rather on whether the employees are considered tipped employees under the FLSA.

For hospitality employers, the tip credit is a useful cost-saving tool, allowing employers to pay a lower cash wage to employees who rely upon tips received from customers and guests to bring their total hourly compensation up to the minimum wage. If the Supreme Court decides to depart from the DOL’s 20% rule, the decision will have a significant impact on employers’ tip credit arrangements, and could ultimately change the entire landscape of work allocation, assignment of duties, and distribution of pay for tipped employees in the hospitality industry.