A recent U.S. Department of Labor (DOL) settlement serves as a reminder for employers with tipped employees: you cannot require workers to share tips with nontipped staff. Doing so can leave an employer liable not only for the misappropriated tips, but also—because of a provision in the law—for back minimum wage and overtime payments that it wouldn’t have otherwise owed.
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Background
DOL sued Johnny Rockets, a burger chain, after an investigation revealed wage and hour violations. The Union Station and Arlington, Virginia, restaurants required 55 servers to give a portion of their tips to the employer.
The employer then distributed the tips to cooks and dishwashers, despite the Fair Labor Standards Act’s (FLSA) prohibiting such tip pools. The law allows for pooling under some circumstances, but tipped employees generally cannot be required to share tips with nontipped employees.
“When employers like these two Johnny Rockets restaurants fail to pay legally required wages to tipped workers, they violate the FLSA in an industry where all too often unscrupulous employers short employees’ pay,” said Mark Lara, a Wage and Hour Division (WHD) district director, in a press release.
No Tip Credit Allowed
To resolve the findings, the two restaurants will pay $285,730 in back wages and an equal amount in liquidated damages. But that’s not because the employers took that much in tips.
The FLSA allows employer to take a “tip credit” against the applicable minimum wage for tipped employees. This means that although the federal minimum wage is $7.25 per hour, employers may, under certain circumstances, pay workers as little as $2.13 per hour as long as they receive at least $30 in tips per month and as long as their total pay amounts to $7.25 per hour. (Note that many states have higher minimum wages and tipped minimum wages.)
However, if an employer operates an “invalid” tip pool, it loses its option to take a tip credit and all employees involved must be paid at least the applicable minimum wage and corresponding overtime.
Because Johnny Rockets’ tip pool was invalid, it became liable for back minimum wage and overtime payments for the past several years, in addition to the misappropriated tips.
“As demonstrated in this case, we will use all enforcement tools available, including litigation and the assessment of liquidated damages, to ensure employees receive the wages they have rightfully earned,” said Oscar L. Hampton, a WHD regional solicitor, in a statement.