The Wage and Hour Division of the Department of Labor has identified a target for its enforcement initiatives - the restaurant industry. These initiatives specifically target how restaurants comply with the Fair Labor Standards Act, particularly with respect to tipping policies. Such initiatives have already been implemented in multiple jurisdictions, including Florida, Georgia, Illinois, Massachusetts, Utah, and the Los Angeles area, with more expected in the future.

These initiatives have already cost employers plenty. For example, the Wage and Hour Division reported having collected more than $22.5 million in back pay for FLSA violations in restaurants for 2011. Restaurants can expect more of the same attention in 2013. In its most recent budget, the DOL requested an additional $10 million in funding for fiscal year 2013 to pursue "a continued shift to greater directed and complaint activity in priority industries."

As the DOL continues to prioritize its enforcement of the FLSA in the restaurant industry, restaurant employers should ensure that their polices and procedures concerning the tip credit are compliant with the FLSA. Specifically, restaurant employers should pay careful attention to the notice requirements regarding the tip credit and tip pooling.

Notice of Tip Credit

Recently, Philip Flood, the Assistant District Director of the Wisconsin Wage and Hour Division, addressed the Wisconsin State Bar's Labor & Employment Section. Mr. Flood opined that the DOL was likely to ramp up investigation of wage and hour violations in the hospitality industries - particularly employers' compliance with the notice requirements of the tip credit. The DOL requires that employers with tipped employees provide tipped employees with notice of the following:

  1. The cash wage that the employer is paying to the tipped employee (NOTE: under current federal minimum wage law this can be no less than $2.13 per hour, but state laws may require a higher amount).
  2. The amount by which the wage of the tipped employee is increased on account of the tip credit claimed by the employer. Under current federal law this amount may not exceed the lower of $5.12 per hour or the value of the tips actually received by the employee (NOTE: state laws may impose stricter limits on this amount).
  3. That all tips received by the tipped employee must be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips.
  4. That the tip credit will not apply to any employee who has not been informed of these requirements.

The regulations also require employers to notify employees of any required tip pool contribution. Although not required, it is strongly recommended that the notices be in writing to avoid later disputes about whether the employees actually received the notice. Best practice would also include getting the employee's signature acknowledging receipt.

Valid Tip Pools

An employer may require tipped employees to participate in and contribute to tip pool arrangements, so long as the tip pool complies with the FLSA, and as long as the employer informs the employee of the FLSA's tip pooling provisions. DOL regulations require that tip pool participants must consist of employees who customarily and regularly receive tips; this does not include, for example dishwashers, janitors, and chefs. Furthermore, tip pool participants cannot be management employees.

The FLSA does not address the contribution amount to an employee tip pool. The DOL's 2011 regulations now specify that "Section 3(m) of the FLSA does not impose a maximum contribution percentage on valid mandatory tip pools." This sentence replaced the DOL's previous interpretation, which set a limit of 15 percent. Still, restaurant employers must carefully consider applicable state law on the subject of tip pooling, as some states impose stricter requirements, and some states prohibit employer-mandated tip pooling entirely.

Other Violations Found

The most common violations found in the DOL's targeted enforcement of restaurant industries in the Tampa area in Florida included making illegal deductions from workers' wages for walkouts, breakages, and cash register shortages, which reduced wages below the required minimum wage, and incorrectly calculating overtime for servers based on their base rate before tips, instead of the correct minimum wage. Another restaurant investigation in South Carolina found that restaurant employees often worked in excess of 40 hours a week without any overtime compensation. There, kitchen staff employees were improperly classified as exempt from overtime pay and were paid a fixed monthly salary – without regard to the actual amount of hours worked – that, in several instances, resulted in employees' being paid less than the federal minimum wage of $7.25 per hour. The employer also failed to maintain accurate records of employees' work hours and wages, as required.

In light of such increased scrutiny, restaurant employers should take special care in ensuring that they aren't making the kinds of mistakes found by the DOL in Tampa or South Carolina.