There is a growing trend of lawsuits alleging that wait staff have been improperly required to contribute a portion of their tips into a pool to be shared with others. Such suits have been filed in numerous states against national chains such as Starbucks and regional chains such as Landry’s, and against single location restaurants.

Employment Report

These suits are often brought as collective actions which means that the one or few who filed the suit can grow to a large class of plaintiffs including past and present employees.

Any employer of wait staff, whether at a restaurant (including restaurants inside hotels or airports) or at a casino or elsewhere, should be aware of this litigation trend and should become informed about the requirements for permissible tip pooling.

The Fair Labor Standards Act (FLSA) permits an employer to require tip pooling with certain limitations on (a) how much of an employee’s tips are contributed and (b) the identity of employees with whom the pool is shared. Although employees may also participate in purely voluntary tip pooling that will not be subject to the limitations imposed on employer-mandated pooling, their participation in a voluntary pool must not in any way be compelled by the employer.

Contributions to a Required Tip Pool

Under the FLSA, an employer can require employees to contribute no more than is “customary and reasonable” in the location of the workplace. Contributions of 15% or less of an employee’s tips will generally pass muster. Contributions of a larger percentage might require the employer to attempt to establish that such larger contributions are “customary and reasonable” in the given locality. An employer should take care not to require a contribution calculated as a percentage of the employee’s sales if doing so results in the contribution reaching too high a percentage of the employee’s tips.

In addition, an employer should not require a contribution from tips that are not in excess of the amount of the tip credit taken by the employer for that particular employee. If the employee is paid less than minimum wage (say $3.00 an hour) and the employer takes a tip credit for the difference between the hourly wage and the federal minimum wage of $5.15 (that is, a tip credit of $2.15 an hour), then an employee whose tips did not exceed the amount of the tip credit (in this example, $86.00 for 40 hours) should not be required to contribute to a tip pool. If such an employee contributes any amount to a tip pool, then she has not been paid the required minimum wage. If the employee’s tips do exceed the tip credit by some amount, then the employee could be required to contribute to the pool, as long as the amount does not “cut into” the tip credit (if this employee had $100.00 in tips, her contribution could not exceed $14.00). Again, if this employee contributed $15.00, thereby reaching into the tip credit amount, she would not have been paid minimum wage.

Distribution of Tips after Employer-Required Pooling

Employees can be required to share their pooled tips only with workers who “customarily and regularly receive tips.” The Department of Labor Wage and Hour Division has provided guidance that wait staff, bellhops, service bartenders, counter personnel who serve customers, and bus employees (who clean tables between customers) are generally permissible recipients of pooled tips.

The category of permitted recipients is in part defined by personal contact with patrons and thus dishwashers, cooks, janitors and laundry-room attendants are generally not permitted to receive distributions of pooled tips. A court found in one case that hosts and hostesses had sufficient customer interaction and table attendance duties to be within the category of employees who could be recipients of pooled tips. Currently pending suits challenge whether pastry cutters, coffee servers and silverware rollers are within the permitted category of recipients of pooled tips.

An employee’s job title is not determinative, however. For example, one court found that employees whose job titles were “waiter” or “waitress” should not have been participants in tip pools for the work shifts during which they only prepared salads outside the view of patrons and without personal contact with patrons.

Consequences of Noncompliance with the Law

The FLSA was drafted to favor employees in their disputes with employers. In lawsuits under this law, close questions are often decided in favor of the employee. A tip pooling lawsuit presents serious financial exposure. The employer may be required to pay numerous past and present employees lost wages (to bring each contributor up to the statutory minimum wage for all time worked) and also refund money improperly contributed to a pool. Employees can be awarded liquidated damages in an amount equal to the damages found. Employees can also recover the cost of their own attorneys’ fees, which in some cases can exceed the damages even after the damages have been doubled. In addition to the financial costs, the employer must devote time and attention to the defense of the suit and deal with the awkwardness of continuing to do business while a suit by current employees is pending.

The law affecting tipped employees is complex, including the definitions of a “tip” and of a “tipped employee,” proper tax reporting and payment by employee and employer, and calculation of overtime for tipped employees. Some states have laws that apply in addition to the federal law. Employers should consult with legal counsel if they want advice on setting up a tip pooling program or have questions regarding any of their employment practices.