If you’ve been paying attention to the news relating to wage and hour law (and really, who isn’t?), you may recently have heard quite a bit about new federal rules on tipped employees, and more recently Congress stepping in with new legislation. There has been a lot of rhetoric on all sides, though not always

There’s been plenty of press this week regarding the U.S. Department of Labor’s proposed rules governing employer treatment of tips. Commentators are debating whether the proposed changes are a sensible return to the four corners of the Fair Labor Standards Act or a cash-grab for the restaurant industry at the expense of workers. We’ll leave

TipJar_cropped14346183.jpgHospitality industry employers take note: If you claim a “tip credit” toward the minimum wage for any of your employees, you need to make sure that all tips are properly distributed to employees. A recent case from the Fifth Circuit Court of Appeals involving a Texas restaurant chain illustrates the hazards of making a mistake with the tip credit rules. Steele v. Leasing Enterprises, Ltd. (.pdf)

Here’s a summary of this cautionary tale:

Tip Credit Background

Under the Fair Labor Standards Act, employers are require to pay most employees at least $7.25 per hour. The FLSA allows tips received by employees to count for up to $5.12 of this total, meaning that an employer can pay tipped employees as little as $2.13 per hour so long as their tips are sufficient to make up the difference between their hourly wage and the federal minimum wage. But there are some restrictions. Employers can take advantage of this “tip credit” only if three conditions are met:
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Bobby Bare - Winner.JPGOne of the many songs written by Shel Silverstin became a hit for Bobby Bare back in 1976, and the title of Bare’s album that appears in the headline of this post. “The Winner” tells the story about a man who “won” every fight he had ever fought—with the broken bones, glass eye, arthritis, dislocated knees and more to show for it. Just as in the world of Shel Silverstein’s lyrics, being “The Winner” in a wage and hour lawsuit isn’t always that great.

Before the Labor Day holiday, I read on Twitter (by the way—are you following @WageHourInsight yet?) about the supposed “success” a restaurant had in defending its wage and hour practices at trial. I did a double-take. After reading the Southern District of New York’s opinion in Mendez v. International Food House, I would bet that, like the “Tiger Man McCool” in Shel’s hit song, the restaurant isn’t feeling much like “The Winner” now. Litigating a wage and hour case through trial is rarely going to be a victory by any definition after you consider the costs and time expended (even assuming you prevail).


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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