Are you in a business where employees tend to receive tips? Do you take a tip credit? What happens when the employee(s) do more than one job or they perform a mix of functions, some of which may pay tips and some of which may not? Can you take the tip credit for all the work they do? If not how do you pay them? The questions seem endless, but are there answers? There just might be. We start with the typical lawyer’s answer that I know you all just love: It depends… That probably just leads you to ask, “On what?” Well, hold on there, because I’m going to answer that, and as I often do, I am going to use a real, live case example.
Since I know you don’t want to wait any longer, I’ll get right into it now. The case is Steven Belt et al v PF Chang’s China Bistro, Inc., Case No. 18-3831 Eastern Dist., PA August 15, 2019). Here’s what went down:
The employees worked as servers at various PF Chang’s restaurants. They were required to perform 3 different categories of work: tipped work, untipped work related to their jobs as servers and untipped work not related to their jobs as servers. ’Tipped work included “serving food and drinks to patrons,” “wait[ing] on tables and describ[ing] daily specials,” “regularly check[ing] on patrons throughout their meal,” and collecting payment from customers. Other required work did not provide the opportunity for tips because it ” “did not involve interacting with, nor serving food and beverages to customers.” Untipped work included: a) Preparatory tasks, such as labeling sauces, preparing drink machines, filling sugar caddies, polishing dishes, and rolling silverware; b) Sanitation and maintenance tasks, such as sanitizing the kitchen and dining area and bagging and taking out trash; and c) cleaning tasks, such as cleaning tables and chairs, dusting, sweeping, and polishing.
While their schedules varied, servers generally worked between 20 and 50 hours a week, in 6 to 10-hour shifts. They spent between 30 and 50 percent of their time performing work that didn’t give them the opportunity to earn tips–and received the tip credit rate for both the tipped and untipped work. The servers sued, claiming they were due at least minimum wage for the time spent performing work that did not carry the opportunity to earn tips.
Before I go on, let’s take a minute to review some wage and hour basics. As you may know, the Fair Labor Standards Act (FLSA) generally requires employers to pay their employees at least the minimum wage (hence the term) for all time spent working, unless they either perform a position that fits within an exemption category or another exception. Congress amended the FLSA in 1966 to allow an employer, under certain circumstances to use the tips an employee received to help it meet its minimum wage obligations. An employer therefore may pay a tipped employee $2.13 an hour as long as the employee’s tips at least make up the difference between that rate and the then current federal minimum wage. Since the current federal minimum wage is $7.25 an hour, an employee’s tips would have to equal or exceed $5.12 an hour. (Please note that if the employee works in a State with a higher minimum wage, then under State wage and hour laws, the employee’s tips might have to equal or exceed the difference between the tip credit rate and the higher minimum wage.)
PF Chang’s moved to dismiss the suit, arguing that since the FLSA defines a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” it need only pay the tip rate of $2.13 for both the tipped and untipped work. The judge wasn’t having it though. She denied PF Chang’s motion to dismiss, citing the “ambiguous” language in the FLSA. What ambiguous language? The definition seems clear. Ah, well that’s not all the FLSA says about tipped employees.
The Department of Labor added some regulations in 1967, further interpreting the tipped employee exception and, in particular, sought to address situations where an employee may be performing multiple sets of functions, some of which are tipped, and some of which are not, as was the case here. The judge said the FLSA was unclear as to what it means to be “engaged in an occupation”, and reasoned that “If Congress wished to define a ‘tipped employee’ as one who customarily and regularly receives more than $30 a month in tips, it would have done so. Instead, Congress defined a ‘tipped employee’ as one who is engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” The judge then cited various DOL Opinion Letters that took “different stances” on the split necessary between tipped and untipped work that would allow an employer to pay the tip-credit wage for all the employee’s hours. One opinion letter said that where a waiter/waitress spends 30-40% of his/her time performing “preparatory activities” (e.g. filling salt shakers, setting tables) the employer could not pay the tip credit wage for all the hours. Later, the DOL used the “80/20 rule”, i.e., employees who spend 20% or less of their time performing untipped work can be paid the tip-credit wage for their entire shift. However, if employees spend more than 20% of their time on untipped work, they must be paid the full minimum wage rate for that portion of their shift.
The judge therefore found that:
“[W]hen an employee spends more than 80 percent of his or her time performing tipped work — and less than 20 percent of his or time performing untipped related work — the employee is a ‘tipped employee’ for all of his or her hours spent performing tipped work and untipped related work,Therefore, under this scenario, an employer is permitted to take the tip credit for all of those hours worked by that employee.” “When, however, that employee spends more than 20 percent of his or her time performing untipped related work, they are no longer a tipped employee during any of the time they spend performing untipped related work…”In essence, they become a dual jobs employee, and the employer is no longer permitted to take the tip credit for any of the hours the employee spends performing untipped related work.”
While this case is not binding anywhere outside the Eastern District of Pennsylvania, if you are an employer in a business with tipped employees you should take note. If you have any employees spending more than 20% of their time doing untipped work, pay the minimum wage. Under the FLSA if you are sued and found to owe any wages, the employee is entitled to liquidated damages in the same amount –yes, twice his/her unpaid wages–and you might be on the hook for paying his/her attorney’s fees. If there is more than one employee suing, then you will pay twice the unpaid wages for each employee — plus his/her legal fees. If you’re not a gambler, don’t roll the dice on this one. If you are, I’d still say don’t roll the dice on this one, because the odds are not in your favor…
OK, enough said. Enjoy your holiday weekend–and don’t get sunburned!
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