The Minnesota Supreme Court recently held that an employer violated a Minnesota law by requiring tipped servers to use their gratuities to pay for customer walk-outs without a written authorization from the server.  The Court held that the practice violated Minn. Stat. § 181.79, which prohibits an employer from making a deduction from the employee’s wages for “lost or stolen property” or other “claimed indebtedness” without the employee’s written authorization, subject to certain exceptions.

In Karl v. Uptown Drink, LLC et al., a class of employees sued their former employers for alleged violations of the minimum wage provisions of the Minnesota Fair Labor Standards Act and Minn. Stat. § 181.79.  The plaintiffs alleged that the employers violated Minn. Stat. § 181.79 by requiring them to pay for register shortages, customer walk-outs (aka “dine and dash”), or instances in which customers forgot to sign credit card receipts.  The trial court initially rejected the plaintiffs’ claims concerning unlawful deductions under Minn. Stat. § 181.79, reasoning that the statue requires wages to fall below Minnesota’s statutory minimum wage in order for deductions to constitute a violation.  The Minnesota Court of Appeals affirmed.

The Minnesota Supreme Court disagreed with both the trial court and the Court of Appeals.  The Minnesota Supreme Court held that gratuities paid to a server constitute “wages” under Minnesota law.  The Court further held that the plain language of Minn. Stat. § 181.79 does not require employees to show that deductions caused their wages to fall below the minimum wage in order to establish a violation.  Accordingly, the Minnesota Supreme Court reversed and remanded the case.

There are two important points that employers should keep in mind regarding this decision.  First, the deductions would not have violated Minn. Stat. § 181.79 if the employees had authorized them.  To be valid, an authorization for a deduction from wages must be:  (i) in writing; (ii) it must occur after the loss or claimed indebtedness arose; and (iii) it must state the amount that will be deducted from the employee’s wages for each pay period that the deduction will apply.  See Minn. Stat. § 181.79, subd. 1(a).  The employer would also need to make sure that any authorized deductions do not run afoul of minimum wage or overtime requirements.

Second, it remains permissible for employers to discipline or terminate an employee in the event that they have too many customer walk-outs.  For example, an employer could give an employee a warning after each walk-out, and if the employee receives a certain number of warnings, the employer could terminate the employee.

Takeaway:  If a Minnesota employer has a practice of requiring tipped servers to use their gratuities to pay for customer walk-outs without the employee’s written authorization, it should stop that practice immediately.  But that doesn’t mean that an employer is without recourse for customer walk-outs.  Deductions from employee wages may be lawful if authorized in writing and in accordance with Minn. Stat. § 181.79.  In addition, employers may discipline or terminate employees if too many customer walk-outs occur.