By Steven L. Brenneman

Employers with workers who earn tips have long struggled with adhering to special rules for tipped employees, especially when those employees may also perform duties that don’t produce tips. A recent decision by the U.S. 7th Circuit Court of Appeals—which covers Illinois, Indiana, and Wisconsin—provides some much needed clarity and comfort to employers.

Short stack

Both the federal Fair Labor Standards Act (FLSA) and the Illinois Minimum Wage Law permit employers to pay less than the minimum wage rate to workers in jobs that customarily earn tips. Both statutes require some cash payment to such employees, no matter how much they receive in tips.

In Illinois, employers must pay at least 60% of the normal minimum wage, while the percentage under federal law is lower. This so-called tip-credit rate is commonly used in restaurants and other industries where employees customarily receive tips.

Robert Schaefer worked as a server at three of the six Original Pancake House restaurants in Illinois owned by Walker Brothers Enterprises, Inc., a corporation controlled by Ray Walker. Schaefer claims that he and other servers at the restaurants spent time doing nontipped duties such as slicing mushrooms and cleaning service areas.

He claims that Walker was required to pay them the full minimum wage for time spent on nontipped work. He also claims that until May 2011, the restaurants failed to give servers information required by federal law as a condition of paying a tip-credit wage.

Schaefer filed these claims on behalf of a class of approximately 500 servers who worked for Walker. After certifying the class, the district court entered judgment for Walker before trial, and Schaefer appealed.

Side dishes

In the 7th Circuit, the court acknowledged that the evidence supported Schaefer’s claim that many restaurant servers also performed tasks that didn’t directly generate tips. These tasks included washing and cutting strawberries, mushrooms, and lemons; preparing applesauce and jams by mixing them with other ingredients; preparing jellies and salsas; restocking bread bins and replenishing dispensers of milk, whipped cream, syrup, and other items; filling ice buckets; brewing tea and coffee; and performing some light cleanup. Servers would rotate among these tasks. Different servers estimated that these nontipped duties took between 10 and 45 minutes each day.

The U.S. Department of Labor (DOL) has a regulation that attempts to define the line between the concepts of “dual jobs” and “related duties.” The dual jobs scenario exists when an employee serves the same employer in two distinct roles—only one of which generates tips. Such employees must receive the full minimum wage (not the lower tip-credit rate) for the hours they spend in the position that doesn’t generate tips.

On the other hand, the related duties scenario applies when an employee’s primary duties generate tips but the worker must also perform incidental duties that don’t produce tips. Employees whose nontipped duties are related and incidental to their primary tipped duties may be paid at the tip-credit rate for all work performed.

Full stack

Under the federal regulation as well as the DOL’s field operations handbook, employers may take the tip credit for employees in a tipped occupation, such as restaurant servers, if the duties that don’t generate tips are regularly and generally assigned among all workers in the same position, are incidental to the regular duties, and don’t make up more than 20% of their working time.

In this case, the servers’ estimates of 10 to 45 minutes per day for nontipped activities were all well below 20% of an 8-hour shift. Further, the nontipped duties—making coffee, cleaning tables, slicing food, and other activities—are the same types of duties that the regulation and handbook give as examples of related duties that may be performed by persons paid at the tip-credit rate.

The 7th Circuit concluded that the nontipped tasks were related and incidental to the servers’ regular serving duties. Therefore, the restaurant was within its rights to pay servers the tip-credit rate for all hours worked. One possible exception was the servers’ duties of wiping down burners and woodwork and dusting picture frames, but Schaefer had aggregated all nontipped duties together and thus had no proof of the estimated time spent solely on those seemingly unrelated cleaning duties. For those reasons, Walker prevailed on the wage payment claims.

Menu

The 7th Circuit also found no violation of the notice requirement. The pertinent statutory language provides that employers may not take advantage of the tip-credit rate unless each “employee has been informed by the employer of the provisions” of the statutory section allowing the tip-credit rate. In May 2011, a DOL regulation took effect that interprets the mandatory statutory notice as requiring five things:

1. The cash wage the employee will receive;
2. The difference between the cash payment and the minimum wage;
3. Notice that the employee is entitled to the full minimum wage in a combination of the cash wage plus tips;
4. Notice that the worker is entitled to keep all tips received (unless there is a tip-pooling arrangement); and
5. Notice that the tip credit cannot be taken in the absence of the first four notice items.

Walker had given the DOL’s prescribed notice containing all five items as of May 2011 but before then relied on a combination of an employee handbook, a handout to new hires, and minimum wage posters to convey tip-credit information to servers.

While these employee communications weren’t ideal, the court concluded that together they conveyed to employees the “three things [that] are apt to matter most to employees at establishments such as [Walker]: (a) in anticipation of tips the employer will pay less than the minimum wage; (b) how much the cash wage will fall short of the current minimum wage; and (c) if tips plus the cash wage do not at least match the current minimum wage, the employer must make up the difference.” Case dismissed. Schaefer v. Walker Bros. Enterprises, Inc., No. 15-1058 (7th Cir., July 15, 2016).

Here’s a tip

Restaurateurs and other employers in the hospitality industry should take heart in this significant ruling. It confirms that tipped employees may perform incidental, nontipped duties and still be paid the tip-credit rate for all work. The decision also infuses some common sense into the federal notice requirement for tipped workers—which has been a favorite tool of the plaintiffs’ bar to leverage technical notice deficiencies to workers’ advantage.

Nevertheless, hospitality employers would be well-advised to ensure they are giving proper notice to tipped workers (such as the DOL-supplied notice) and that they monitor and maintain adequate records of tasks performed by tipped employees to ensure they aren’t crossing the line that divides “dual jobs” from “related duties.”

This article was written by Steven L. Brenneman of Fox, Swibel, Levin & Carroll, LLP, and an editor of the Illinois Employment Law Letter. He can be reached at sbrenneman@fslc.com