TipJar14346183.jpgThe latest news in celebrity chef wage and hour litigation is that eight New York restaurants owned by Mario Batali have agreed to settle $5.25 million to settle a class action lawsuit alleging that they illegally withheld tips from hourly service workers. The proposed settlement, which must still be approved by the court following a fairness hearing, would establish a fund for approximately 1,100 captains, servers, waiters, bussers, back waiters, runners, barbacks and bartenders who worked at Babbo Ristorante e Enoteca, Otto, Casa Mono, Bar Jamon, Esca, Lupa, and Del Posto in New York City, and Tarry Lodge in Port Chester, N.Y. between July 22, 2007 and February 14, 2012. The primary claim in the lawsuit was that management at the eight restaurants deducted 4 to 5 percent of each shift’s wine and other beverage sales from the restaurants’ tip pools. The restaurants denied any liability in agreeing to the settlement. 

Legal Background

The claims in this lawsuit illustrate a common issue for restaurants and other employers in the hospitality industry: determining who may participate in a tip pooling arrangement. Under federal law, and that of most states, employers can take a credit toward their minimum wage obligations for tips received by an employee only if the employee retains all tips received. However, employees may be required to participate in a valid tip pooling or tip sharing arrangements that provide for the distribution of tips among employees who “customarily and regularly receive tips.” In the restaurant context, this is generally limited to “front of the house” personnel such as servers, bussers, and service bartenders. “Back of the house” employees such as dishwashers, cooks, chefs and janitors do not customarily receive tips, and so may not participate in a tip pool. Likewise, management is prohibited from retaining any share of tips. 

At the federal level, there was some authority – out of the generally employee-friendly 9th Circuit Court of Appeals no less – for the proposition that these limitations on tip pooling arrangements applied only if an employer was actually taking a tip credit against its minimum wage obligations. See Cumbie v. Woody Woo, Inc. However, a recent memorandum from the Wage and Hour Division of the U.S. Department of Labor states that the Department is now taking the position that regardless of whether employers take a tip credit, they are prohibited from using employee tips for any purpose other than a credit against minimum wage as permitted by the regulations, or in furtherance of a valid tip pool. It is not clear yet whether that position will hold up in court, but for employers that have no desire to get into litigation with the Department of Labor, that may not matter.

Insights for Employers

  • If your employees are permitted to accept tips, they must be allowed to retain all tips that they receive, unless they are required to contribute to a valid tip pooling or tip sharing arrangement. 
  • “Back of the house” employees – dishwashers, cooks, etc. – may not be included in the tip pool. 
  • Management cannot retain any portion of employee tips for any reason, either through managers participating in a tip pool or “the house” taking a cut of the pool. 
  • The Wage & Hour Division maintains a fact sheet that provides a useful guide regarding requirements for tipped employees under the Fair Labor Standards Act.