Most restaurants take advantage of the tip credit authorized by federal and Maryland wage and hour law when compensating their servers. If used correctly, the tip credit allows an employer to reduce its labor costs by applying tips earned by employees as a partial credit against the minimum wage they would otherwise be paid for each hour they work. However, the tip credit carries with it a number of potential pitfalls, perhaps the most common of which is the employer's failure to provide tipped employees the required notice of its tip credit policy.

A recent decision from the U.S. District Court for the District of Maryland highlights a different risk: claiming the tip credit for time spent by employees on duties that aren't related to serving customers. The case also broke new legal ground in Maryland by giving effect to the U.S. Department of Labor's (DOL) interpretation of the tip credit in its Field Operations Handbook. This article takes a closer look at the court's noteworthy decision.

Here's A Tip: Familiarize Yourself with the FLSA

Although the Maryland minimum wage is currently $8.75 per hour, most servers working in Maryland restaurants receive paychecks reflecting a $3.63 hourly wage. The basis for that discrepancy is the tip credit built into Maryland's Wage and Hour Law and its federal counterpart, the Fair Labor Standards Act (FLSA). Both the federal law and the Maryland statute allow employers to count tips received by tipped employees as a "credit" against the minimum wage.

To use the tip credit, however, an employer must ensure that a number of conditions are met, including:

• The employee must receive at least $30 in tips per month.
• The employee must be permitted to retain all tips unless he is part of a valid tip-pooling arrangement.
• The employee must be given sufficient notice of the tip credit policy.

Failure to comply with the various requirements for the tip credit can carry significant legal risks for employers. If a court determines that an employer wasn't entitled to claim the tip credit, any employee who was paid at the reduced hourly rate will be owed the difference between the tipped employee wage ($3.63) and the regular minimum wage for all hours he worked. The employer may also face liability for penalties and the attorneys' fees incurred by the employee in pursuing recovery.

One area where employers can run afoul of the tip credit rules involves the duties performed by tipped employees. That was the issue before the court in a recent case.

It's A Matter of Percentages

Morgan Barnhart worked as a server and bartender at a Chili's restaurant operated by Chesapeake Bay Seafood House Associates, LLC. Chesapeake operates approximately 31 franchised Chili's locations in Maryland and Virginia. During her employment, Barnhart was paid as a tipped employee at the $3.63 hourly rate. In her lawsuit, she asserted claims under the FLSA and Maryland's minimum wage and wage payment statutes.

Notably, Barnhart filed the lawsuit on behalf of herself and all "similarly situated" employees, suggesting that she would seek to invoke the "collective action" procedure available in FLSA cases. Under that procedure, a court is authorized to allow additional employees to "opt in" to a case if the employee bringing the case makes a sufficient showing that other employees were subjected to the same allegedly improper payroll policy.

The gist of Barnhart's complaint was that she was paid at the tipped employee wage for all hours she worked even though she spent a significant portion of her time performing nontipped duties. Regulations adopted by the DOL provide that the tip credit may be taken only "for hours worked by the employee in an occupation in which the employee qualifies as a tipped employee."

While that provision makes it clear that an employee who, for example, works certain shifts as a server and certain shifts as a janitor may be paid the tip credit wage only for his shifts as a server, it also raises the issue of whether someone classified as a server is in fact working as a tipped employee during all hours of the workday.

Barnhart alleged that she had to spend a substantial portion of her shifts performing tasks such as "setting up, stocking, and/or breaking down the soda, chip, and soup machines, cleaning floors and restaurant surfaces, removing cigarette butts from the bushes outside of the restaurant, preparing the restaurant for pest exterminators, and taking out the trash."

She further alleged that the company required employees to perform nontipped work both before the restaurant opened to customers and after it closed but still paid them the tipped employee rate for that work. Based on those allegations, she asserted that the employer violated the FLSA by not paying her the full minimum wage for the hours of her shift when she was performing duties other than serving customers.

In considering Barnhart's claim, the court began by confirming the general principle that if an individual is employed in a tipped occupation "in which [she] spends part of [her] time performing related duties that are not tip-producing, the performance of these ancillary duties will not alter [her] overall status as a tipped employee, and an employer may still utilize the tip credit provision."

The court then had to grapple with the question of whether Barnhart had provided sufficient evidence that her work involved tasks unrelated to her tip-producing work to establish a valid claim that the company's failure to pay her the full minimum wage for time spent on those tasks was unlawful.

Barnhart advanced two theories in support of her claim. First, she argued that some of the tasks she performed were wholly unrelated to her duties as a server, and she was therefore actually employed in two different capacities. Specifically, she pointed to time she spent "mopping . . . restaurant floors" and "removing cigarette butts from the bushes outside of the restaurant."

The court found that for purposes of ruling on the restaurant's motion to dismiss the case, her allegation that she performed those duties was sufficient to support her claim that a portion of her work time was spent performing tasks unrelated to a tipped occupation.

Barnhart's second theory in support of her claim was drawn from language in the DOL's Field Operations Handbook. The handbook sets out a general rule that when an employee performs nontipped duties unrelated to her tipped occupation during more than 20% of the hours she worked in a given workweek, the tip credit may not be taken for time she spent performing those duties. The restaurant argued that the court shouldn't give effect to the 20% rule because the Field Operations Handbook is an internal DOL guidance document, not an official regulation.

After noting that the 20% rule hasn't been considered by the U.S. Court of Appeals for the 4th Circuit (which covers Maryland, North Carolina, South Carolina, Virginia, and West Virginia), the court examined decisions from other federal courts and ultimately concluded that the DOL's 20% rule is entitled to deference. Because Barnhart alleged that she spent at least 30% of her time on non-tip-producing tasks, the court found that her claim was sufficient to survive the restaurant's motion to dismiss.

Notably, the court swiftly rejected the restaurant's contention that the need to monitor employees' time to ensure that they complied with the 20% rule would impose an unworkable burden on employers. The court simply declared that an employer has two choices to avoid potential violations: "hiring minimum-wage workers to perform the bulk of the non-tip-producing duties or . . . implementing a system to keep track of the tasks performed by tipped employees." Barnhart v. Chesapeake Bay Seafood House Associates, LLC (No. 16-01277).

Bottom Line

This case reinforces the need to carefully assess the circumstances in which you use the tip credit. When assigning duties to tipped employees, you must be conscious of the amount of time they spend performing duties other than serving customers, such as cleaning and setting tables, toasting bread, or making coffee.

If an employee spends too much time on tasks unrelated to serving, the time spent performing those duties cannot validly be compensated at the tipped employee rate. Further, even if the tipped employee's supplemental tasks don't take up a significant amount of her time, the tip credit may be lost if the tasks are wholly unrelated to the duties for which she receives tips.

The logistics of using the tip credit can be complex. While the employer in this case may ultimately escape liability for the employee's claims, the costs associated with any employment claim make wage and hour litigation a significant drain on company resources.

Moreover, the potential for litigation involving multiple employees under the FLSA's collective action procedure, as well as the penalty damages and fee-shifting provisions of the law, means a relatively small claim can quickly explode into a major headache. You would therefore be wise to exercise care when using the tip credit and consult with legal counsel when developing your wage policies.

David Stevens, editor of Maryland Employment Law Letter, can be contacted at dstevens@wtplaw.com or 443-263-8250.