Generally, the Fair Labor Standards Act (FLSA) requires employers to pay at least minimum wage (currently $7.25) for all non-overtime hours in a workweek. However, subject to any contradictory state laws, an employer may pay a “tipped employee” – one who customarily and regularly receives at least $30 per month in tips – a reduced minimum wage of $2.13 per hour, with the employee’s tips making up the difference. This difference commonly is known as the “tip credit.” But to claim the tip credit, the employer must comply with certain notice requirements, and failure to do so may result in a claim that the employer violated the FLSA by not paying the required minimum wage. A recent case involving a Houston, Texas pizza parlor exemplifies the potential perils of failing to satisfy those tip credit notice provisions, as well as for overcharging employees for the cost of uniform cleaning. Ettorre v. Russos Westheimer, Inc., 2022 U.S. App. LEXIS 7295 (5th Cir. Mar. 18, 2022). The Fifth Circuit has jurisdiction over the federal courts in Louisiana, Mississippi, and Texas.

The Law

When an employer elects to take a tip credit under the FLSA, it must inform tipped employees of its use of the tip credit, including (1) the amount of the employee’s cash wage; (2) the amount of the tip credit claimed by the employer; (3) that the amount claimed may not exceed the value of the tips actually received; (4) that all tips received must be retained by the employee except for a tip pooling arrangement limited to employees who customarily and regularly receive tips; and (5) that the tip credit shall not apply to any employee who has not been informed of all of these requirements. 29 U.S.C. § 203(m); 29 C.F.R. § 531.59(b). An employer may not take the tip credit for any period of time during which these notice requirements are unmet.

The Lawsuit

Plaintiff Chiara Ettorre was employed as a server at a Russos pizza restaurant in Houston from May 2016 until December 2018. Throughout that time, Russos paid her $2.13 per hour plus tips and claimed the FLSA tip credit. In addition, Russos deducted a mandatory $10 “linen fee” per pay period from Ettorre and other servers to cover the cost of cleaning their work aprons, which they were required to wear. That fee also covered the cost of providing unlimited soft drinks to the employees while they worked. Following her discharge, Ettorre sued Russos, alleging it failed to provide her the FLSA’s requisite notice before claiming the tip credit and that the linen fee was an improper pay deduction. The district court granted summary judgment to Ettorre, finding no evidence that Russos had ever satisfied the required tip credit notice provisions. The trial court further concluded that the linen fee was an unreasonable charge for merely laundering an apron and that Russos had failed to show the actual cost of providing free drinks, as opposed to the menu price it charged customers for such drinks. Accordingly, Russos was liable for the full amount of the tip credit and the linen fee for the time Ettorre was employed, as well as liquidated (double) damages and attorney’s fees.

Russos appealed and the U.S. Court of Appeals for the Fifth Circuit affirmed summary judgment for Ettorre in all respects. In response to Ettorre’s affidavit asserting that she was not informed of the tip credit notice provisions other than that she would be allowed to keep her tips, the company’s corporate designee admitted she did not know whether the restaurant informed Ettorre of the required tip credit notice provisions and further admitted there was no policy of informing employees about these provisions at the time of hiring. Rather, Russos demonstrated only that Ettorre was aware that her hourly rate was $2.13 and that she could retain her tips. Moreover, even if Ettorre was provided with an employee handbook (which she denied), the Court of Appeals ruled that there was no evidence that the tip credit notice provisions were included in it. In sum, the Fifth Circuit held that Russos had failed to produce sufficient evidence to survive Ettorre’s summary judgment motion.

As for the linen fee, the Fifth Circuit noted that under Section 203(m)(1) of the FLSA, an employer may count toward wages “the reasonable cost . . . of furnishing [an] employee with board, lodging, or other facilities, if [they] are customarily furnished by [the] employer to his employees” but “reasonable cost” in this respect means “actual cost” absent any employer profit. 29 C.F.R. §§ 531.3(a)-(b). The Court of Appeals held that Russo’s failed to produce any evidence of the cost of providing unlimited drinks to an employee. Regardless, concluded the Fifth Circuit, if an item is “primarily for the benefit or convenience of the employer,” it is per se not a reasonable cost to impose on employees. 29 C.F.R. § 531.3(d)(1). In this case, the cost of providing and cleaning uniforms was primarily for the benefit of Russos and therefore could not reasonably be imposed on Ettorre or other employees. Moreover, even if some portion of the linen fee was reasonably imposed on employees, Russos failed to maintain and preserve adequate records to separate out that cost. Finally, the Court of Appeals held that Russos produced no evidence that it had reasonable, good-faith grounds to believe that its actions complied with the FLSA. Thus, an award of liquidated damages was appropriate.

The Takeaway

The Fifth Circuit’s holding serves as a cautionary tale for any employer that takes the FLSA tip credit or who imposes a uniform cleaning fee or similar charge on its employees. Employers must ensure that they regularly comply with the FLSA’s tip credit notice provisions (and state provisions, where applicable) and that they understand the legal limits on deducting fees from employee wages.