Wage & Hour Insights - Guidance & Solutions for Employers

Shortly after my co-author, Bill Pokorny, wrote about celebrity and Iron Chef Mario Batali’s multi-million dollar settlement of a class action tip pooling lawsuit, another celebrity chef here in Chicago was sued for violating tip pooling laws.  In March 2012, a lawsuit was filed against Master Chef Graham Elliot by 14 former employees over tip pooling requirements at his self-titled restaurant.

Gregory Curtis, a former waiter at Graham Elliot, claimed that he and others were forced to participate in a tip pool that included bartenders, bussers, food runners and cooks.  Under federal law, employees may be required to participate in a tip pool only if the tips are distributed among employees who “customarily and regularly receive tips,” and this generally is limited to personnel such as servers, bussers and service bartenders.  Curtis alleged that food runners and cooks do not customarily and regularly receive tips and so they may not participate in a tip pool.  Due to the inclusion of such “back of the house” employees in the tip pool, Curtis claimed he was entitled to lost wages.  For a good summary of tip pooling rules, see Bill’s prior blog post. 

After litigating this case for over a year, this week, Graham Elliot reached an undisclosed settlement with Curtis and the other waiters.  If the allegations are true, Graham Elliot’s tip pool did not appear to meet the requirements of federal law. 

While tip pooling is generally limited to the hospitality industry, this is another example of a celebrity experiencing some difficulty navigating wage and hour laws.  Employers can feel better knowing that not even the rich and famous are exempt from compliance with the FLSA and related state laws.  Even the most brilliant chefs must ensure that their businesses comply with wage and hour laws.  More than ever, employees are aware of their rights, particularly as it relates to wages.  While I truly enjoy the brilliance of these celebrity chefs and the meals they create (Bobby Flay is a favorite!), the regulatory side to running a restaurant cannot take a back seat.    

The lesson learned here is this - whether you are a celebrity chef or a more run-of-the mill type of business, all employers must comply with applicable federal and state wage and hour laws.  Given the complexities of wage and hour laws, employers should seek the advice of employment counsel for effective ways to comply with those laws. 

In May, my partner Staci reported on a ruling against Applebee's by the 8th Circuit Court of Appeals, holding that tipped employees who spent more than 20 percent of their working time on nontipped activities like cleaning restrooms were entitled to the federal minimum wage of $7.25 per hour. Applebee's asked the U.S. Supreme Court to review the ruling, arguing that the Eighth Circuit incorrectly deferred to the U.S. Department of Labor's "informal interpretation" of its FLSA regulations in its 1988 Field Operations Handbook, and that as a result it applied an "utterly unworkable standard that has no basis in the text or purpose of the FLSA and that will impose crushing administrative and financial burdens on restaurants and other employers of tipped employees." Last week, the Supreme Court turned down Applebee's petition, leaving the Court of Appeals' ruling intact. 

In light of the Supreme Court's decision not to review this ruling, employers can expect the Department of Labor to continue applying the standard set forth in Chapter 30d of its Field Operations Handbook (.pdf):

Reg 531.56(e) permits the taking of the tip credit for time spent in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips (i.e. maintenance and preparatory or closing activities). For example a waiter/waitress, who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses may continue to be engaged in a tipped occupation even though these duties are not tip producing, provided such duties are incidental to the regular duties of the server (waiter/waitress) and are generally assigned to the servers. However, where the facts indicate that specific employees are routinely assigned to maintenance, or that tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance, no tip credit may be taken for the time spent in such duties.

Insights for Employers

• The rule adopted by the DOL and affirmed by the 8th Circuit will continue to be applied for the time being, subject to possible future challenge in the Supreme Court or other federal appellate courts. 
• As a result, restaurants and other employers of tipped employees need to be conscious of how much time such employees spend on activities not "directed toward producing tips," such as setup or cleaning tasks. Under the DOL's interpretation, employers will have the burden of proving that time spent on these tasks falls below the 20% threshold. 
• If tipped employees spend more than 20% of their time in non-tip-generating activities, the DOL will take the position that these employees should be paid at least the minimum wage for such time. 
• However, the employer can still take a tip credit for time spent on duties that are associated with "producing tips," such as serving customers.

Recently, the Eighth Circuit Court of Appeals ruled that tipped employees who spend more than 20 percent of their time on non-tip-producing “related duties” must be paid at least the minimum wage for that time.  Fast v. Applebee's.  This decision marks the first time an appellate court has expressly adopted the Department of Labor’s 20 percent rule – that employer’s may not pay subminimum wage for time spent on non-tipped related duties that exceeds 20 percent of an employee’s working time. 

In Fast, the plaintiffs’ claimed that Applebee’s improperly paid servers and bartenders the tip-credit rate for all hours worked, which included time spent performing non-tip producing work, such as taking inventory, stocking serving areas, or rolling silverware.  While the FLSA regulations governing “dual jobs” refer to certain terms and concepts, they do not explicitly define when an employee is engaged in a tipped job or related duties.   

Due to the lack of specificity in the regulations, the court gave controlling deference to the DOL’s Field Operations Handbook, which states that the 20 percent limit applies to general preparation work or maintenance.   While the Eighth Circuit adopted the DOL’s interpretation, the court declined to address what duties would be properly included in the 20 percent to allow use of the tip credit. As a result, the question still remains as to what non-tipped duties fall under this category of “general preparation work or maintenance.”

While other courts have rejected the 20 percent rule, the issue is clearly ripe for further litigation.  If an employer loses the ability to take a tip credit for work performed by tipped employees, this would result in a substantial increase in wage costs.  In order to minimize their risk, employers should consider taking the following steps:

• Ensure that tipped employees spend no more than 20 percent of their time on non-tip-producing duties.
• Spread the non-tip-producing duties among all tipped employees; do not assign these duties to just a few tipped employees exclusively.
• To the extent possible, assign non-tip-producing duties to non-tipped employees.
• Keep accurate records of hours worked and time that tipped employees spend on non-tip-producing duties.