Failing to Meet Tip-Pooling Requirements Creates Huge Financial Pitfall

The proliferation of wage and hour class actions throughout the United States over the past twenty years is well-documented. A recent federal court decision involving a class action brought under the Fair Labor Standards Act (FLSA) by approximately 750 servers against a chain of famous steakhouses in Texas offers another cautionary — and expensive — tale about the dangers of home-grown tip-pooling arrangements. Operating as Perry’s Steakhouse and Grille, the defendant employer implemented a tip-pooling program which required servers to share their tips with a number of different job categories of employees who worked before and after the respective locations were open to the public. In most cases, these “off-hour” employees were assigned cleaning and prep-related duties during the morning hours. So, unlike many other employers who have run afoul of wage and hour laws by retaining some portion of the tip pool for upper management or the “house,” in this particular instance, the employer just re-distributed some of the tip-pool collections to other non-management employees working in non-server roles as a retention tool.

But Wait — It Was for Other Hourly Workers Only!

While an employer’s motive routinely comes into play in employment lawsuits, the FLSA’s tip-pooling requirements remove that from the equation altogether (unless they are a serial litigant). The FLSA provides a tip credit exemption for employers in the hospitality industry under the following limited circumstances: (1) the employer informs the employee about its tip-pooling contribution policy; and (2) the employee is required to “pool” the tips “among employees who customarily and regularly receive tips.” Doing a deep dive into legislative history, statutory guidance and regulations, and federal court precedent, the court reasoned that, in order to determine whether an employee “customarily and regularly” receives tips, you must analyze the degree of customer interaction for each position. If the employer meets the criteria for the tip credit exemption, the employer is allowed to pay the tipped employee $2.13/hr. (Instead of the federal minimum wage ($7.25/hr.).

After a two-day bench trial on the heels of an initial partial summary judgment win for the plaintiffs, the court found that several categories of non-management employees did not qualify for receipts from the tip-pool. As a result, the servers who were forced to distribute their tips on a weekly basis were entitled to the difference between the $2.13/hr. and the federal minimum wage ($7.25/hr.) for every week there was a tip pool violation. While the employer argued that the company did not keep any of the tips for itself, the court noted that the FLSA prohibits employers from retaining tips received by its employees “for any purposes.” Adding to its financial woes, the court also awarded liquidated damages, finding that the employer’s history of other wage and hour lawsuits and a recent investigation by the U.S. Department of Labor (DOL) warranted a finding of willfulness for these current tip pool violations.

Do I Really Need Legal Advice?

In a surprise twist, the well-known steakhouse did not try to throw its lawyers under the bus. Instead, the employer asserted that the specific creation of the tip-pool program was of its own making without any legal advice. Given the court’s detailed findings, the decision to forego any legal counsel resulted in significant financial consequences. So, lesson learned? Either way, employers should not only become well-versed in the FLSA’s requirements (and seek appropriate legal advice), but they should also be mindful of state wage and hour laws which contain even more stringent requirements for tip-pooling as well as strict liability and mandatory treble damages.