About a decade ago plaintiffs’ employment lawyers discovered the plaintiff-friendly attorneys’ fee provisions of the Fair Labor Standards Act (FLSA). As a result, overtime pay suits by private lawyers went from almost none to very numerous — and with very costly consequences for employers. Within the last year, yet another path to monetary recovery at the expense of employers has been created. The FLSA, and more importantly in Florida, the Florida Minimum Wage Act (FMWA), allow employers of certain tipped employees (primarily commercial dining establishments) to take a tip credit against the cash wage owed to such employees. The federal minimum wage is $7.25 per hour and employers are required to pay only $2.13 per hour under the FLSA, provided the employees otherwise receive minimum wage. In Florida, because of the FMWA, the required hourly cash wage and the tip credit differ each year, because the Florida minimum wage rises most years. In 2017 the Florida minimum wage is $8.10, the tip credit is $3.02, and the required cash wage is $5.08 per hour. Any good payroll service with restaurant clients should know this and ensure payment of $5.08 per hour of tipped work.
But there are serious conditions and traps attached to this opportunity to save. Liability per employee arises if the common practice of tip pooling is misused. Tipped employees must pay income tax on their tips and therefore must report their directly received tips (cash) to the employer, which already knows the shift and daily totals of credit card tips. Many dining establishments aggregate cash and credit card tips and distribute the money to tipped employees in a tip pooling arrangement, often at the end of each shift. It is critical to know that only statutorily defined tipped employees can legally participate in sharing of tips. The case and regulatory law provide generally that tipped employees are limited to those who receive more than $30 per month in tips and who have substantial and repeated work-related contact per shift with customers. Only they can share tips in an employer-generated arrangement. Thus, cooks and other exclusively kitchen employees cannot be included. Similarly, managers, assistant managers and supervisors cannot be included. The inclusion of a non-tipped employee in tip sharing in any shift invalidates the arrangement for that shift and makes the employer liable to each tipped employee for the amount of tip credit taken per employee times the number of hours worked for which a cash wage was paid for tipped work. The actual measure of damages is the then minimum wage minus the hourly cash wage paid. If you are doing it right — except for having a tainted or partly tainted tip pool — it is $3.02 per hour under the FMWA.
Liability extends for the period of the statutory period of limitations worked by each employee. Many employers have no records to show what shifts are tainted by improper participation, which means the court is likely to accept whatever the plaintiffs say. Another problem is that managers are known to “share” without the knowledge of higher, responsible management. The period under the FLSA is two years, three if the plaintiff can prove a willful violation (which is not difficult). Under the FMWA the period is four years, and five if a willful violation is alleged and proven. Worse for the employer, awards of minimum wage under both laws are doubled automatically under the liquidated damages provisions. Although an employer can try to establish a good-faith defense to liquidated damages, it is hard to prove. Accordingly, an employer can face partially unpaid minimum wages per hour per employee, times two, for the period the employee worked within the applicable period of limitations, plus the plaintiff’s attorneys’ fees and costs and its own fees and costs.
Happily, this grim outcome can be avoided. The employer simply must limit tip sharing to servers and others, mainly including buspersons, who have direct, recurring and significant contact with customers. Extending tip sharing beyond servers and buspersons creates excessive risk for the amount saved. Case law provides exceptions for such persons as cashiers and low level supervisors who act as servers or seaters when necessary, but litigation of those issues tends to be vastly more expensive than avoiding the problem entirely or by reaching a quick settlement in cases when the legal validity of the tip pool is questioned.
In addition to the longer period of limitations, most FMWA suits are filed in state courts, in which judges may be less familiar with applicable law (at this time all of which is under the FLSA) and are less willing to grant summary judgment. In cases which go very far into litigation, the longer the case proceeds it becomes more a win-win situation for plaintiffs, and a lose-lose for employers.