Published: September 20, 2011
Author: Daniel McAlvanah

Related Video: Five Wage and Hour Issues Every Restaurant Owner Should Know

In the last several years, numerous restaurants — both national chains and individual establishments — have been targets of wage and hour lawsuits, often because restaurant owners fail to pay attention to the rules that dictate how tipped employees must be paid under federal and state law. When that ignorance occurs in an environment in which employees feel overworked, underpaid, or generally neglected, the consequences can be disastrous. Knowledge of the following five issues can help restaurant owners avoid costly and distracting wage and hour litigation.

1. Federal tip credit: duty to provide notice
Anyone who has ever worked in a restaurant is familiar with the federal tip credit. As a general rule, the Fair Labor Standards Act (FLSA) requires you to pay all employees the federal minimum wage, presently $7.25 per hour. However, in the case of tipped employees — i.e., employees who regularly receive more than $30 per month in tips — you are permitted to pay an hourly base wage that is lower than the minimum wage. In Wisconsin, the base wage is $2.33 per hour. The difference between $7.25 and $2.33 ($4.92) constitutes the tip credit. You may take advantage of the tip credit as long as the employee’s wages from tips exceed $4.92 per hour. If a Wisconsin employee’s tips coupled with the employer’s direct wage of at least $2.33 per hour don’t equal $7.25 per hour, you are required to make up the difference. The law views the tip credit as a privilege, and there are a number of missteps that can cause an employer to lose the benefits of the tip credit. One is to fail to provide notice. New rules implemented by the U.S. Department of Labor (DOL) in May 2011 mandate that you notify employees when you plan to use the tip credit. While the new regulations don’t explicitly state that notice must be provided in writing, prudent employers should issue written notices and require employees to sign an acknowledgment stating they have reviewed and understand the notice. Moreover, you should make every effort to provide notices in employees’ native languages. If you fail to provide adequate notice of the imposition of the tip credit, you may be liable for payment of minimum wages rather than a subminimum base wage.

2. Maintaining valid tip pools
Another issue that has spawned considerable litigation is tip pooling. Under a typical tip-pooling arrangement, a restaurant collects its employees’ tips and redistributes them in shares. Commonly, restaurant owners use tip-pooling systems to try to equalize tipped employees’ incomes and promote teamwork. The FLSA allows tip-pooling arrangements so long as the tip pool includes only employees who “customarily and regularly” receive tips. In deciding whether an employee customarily and regularly receives tips, most courts analyze whether the employee’s job is historically a tipped occupation and whether he has more than minimal interaction with customers as part of his employment. Under case law, most back-of-the-house staff (e.g., cooks and dishwashers) cannot participate in tip pools. On the other hand, employees who provide direct table services to guests — such as servers, hosts, and busboys — are valid tip-pool participants. There are more complicated questions when a tip pool includes service bartenders, preparatory dining room staff, and food runners. For example, in a recent case against Chili’s, a group of food expeditors whose duties included monitoring food preparation times, inspecting dishes before delivery, and running food to tables prevailed on their argument that they were not properly included in Chili’s tip pool.

3. Side work and tipped employees: the 20 percent rule
A third issue concerns “side work” performed by tipped employees. Side work encompasses labor that doesn’t directly generate tips, such as cleaning and setting tables, making coffee, cleaning bathrooms, or occasionally washing dishes. Federal regulations state that when an employee is employed for a single employer in both tipped and nontipped jobs — e.g., an employee who is separately employed as both a waiter and as a maintenance person — the tip credit is available only for the hours the employee works in the tipped occupation. However, in the case of servers and bartenders, the analysis is more complicated because the distinction between tip-generating and nontip-generating duties is somewhat murky. To resolve this difficulty, courts and the DOL have created a distinction between tipped work and “related but nontipped” work. While the exact contours of the distinction are unclear, most courts agree that if a tipped employee spends more than 20 percent of his time engaged in related but nontipped work, he must be paid minimum wage (rather than the subminimum wage of $2.33 per hour) for the nontipped work. For example, the Eighth U.S. Circuit Court of Appeals recently upheld application of the 20 percent rule in a case filed by servers and bartenders against Applebee’s for time spent in a variety of nontipped activities, including cleaning, restocking, and taking inventory.

4. Proper calculation of overtime for tipped employees
Another trap for restaurant owners is the correct method of calculating overtime. Given that the tip credit allows you to compensate tipped employees at a subminimum wage (i.e., $2.33 per hour), you may assume that overtime should be calculated at one and one-half times the subminimum wage. That is incorrect. Under federal law, if you take the tip credit, overtime is calculated based on the full minimum wage, not the lower subminimum wage.

5. Deductions for breakages
Breakages are a costly reality of the restaurant business. Ignorance of Wisconsin’s law concerning deductions from employees’ pay for breakages can be even more costly. Section 103.455 of the Wisconsin Statutes prohibits you from making deductions from an employee’s pay for lost or broken property unless the employee voluntarily authorizes the deduction in writing. Moreover, you must obtain the written authorization after each loss or breakage and before the deduction. Thus, a blanket authorization signed by a server at the start of her employment allowing the employer to deduct the cost of broken dishes and wine glasses from her tips is invalid. If you fail to comply with Section 103.455, an employee may file a claim to recover twice the amount of the wrongfully deducted wages. Savvy employees’ attorneys have already used Section 103.455 in class-action cases, though so far, no published cases have concerned restaurants.

Bottom line
Wage and hour lawsuits against restaurants continue to grow. To prevent litigation, restaurant owners should familiarize themselves with the rules of the game. The five issues identified in this article are intended to provide a general overview of the applicable laws. For assistance with a specific issue, consult your wage and hour counsel.

For more information about wage and hour laws in Wisconsin, contact Daniel McAlvanah at 608.260.2489 or dmcalvanah@axley.com.

This article was featured in the September 2011 issue of the Wisconsin Employment Law Letter, which is edited by Axley Brynelson Attorney Saul Glazer and published by M. Lee Smith Publishers LLC. Reproduced here with the permission of M. Lee Smith Publishers, LLC.

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