By Tom Harper, The Law and Mediation Offices of G. Thomas Harper, LLC

In a recent decision, Florida Federal District Judge James Moody upheld the U.S. Department of Labor's (DOL) rule that a tipped employee may be paid a direct wage that is less than the Florida minimum wage of $8.10 per hour only if he spends no more than 20% of his time on duties that do not directly result in tips.

Background

Under the Fair Labor Standards Act (FLSA), the federal wage and hour law, employers may claim a "tip credit" toward satisfying their minimum wage requirements for tipped employees. That means tips are credited against—and satisfy a portion of—employers' obligation to pay minimum wage. However, Florida's minimum wage currently is $8.10 per hour, higher than the federal minimum wage of $7.25 per hour.

The Florida Constitution provides: "For tipped Employees meeting eligibility requirements for the tip credit under the FLSA, employers may credit towards satisfaction of the Minimum Wage tips up to the amount of the allowable FLSA tip credit in 2003."

In 2003, the FLSA's tip credit was $3.02. At the time, the federal tip credit was calculated by subtracting the federal reduced minimum wage of $2.13 from the federal minimum wage of $5.15. Therefore, under the Florida Constitution, the tip credit can be no more than $3.02.

Although the Florida minimum wage has increased, the $3.02 tip credit has stayed the same. Thus, the direct wage (also called the subminimum wage) that must be paid to employees has also increased. As of January 1, 2017, the direct wage was $5.08—the Florida minimum wage ($8.10) minus the 2003 tip credit ($3.02). Thus, employers are required to pay only $5.08 per hour to tipped employees who meet certain requirements. The rest of the minimum wage is made up by tips employees collect.

Job in Question

Robert Eldridge worked as a server and bartender at Outback Steakhouse in St. Petersburg. He sued his employer, OS Restaurant Services, LLC, a/k/a Outback Steakhouse of Florida, LLC, for unpaid wages and overtime. He claimed that he spent more than 20% of his time on manual duties that were not directly related to receiving tips and that his employer violated the law by paying him the reduced minimum wage and using the tip credit to make up the difference.

He argued that since he spent more than 20% of his time on side duties, he should have been paid the full minimum wage, not the tip credit wage. The employer moved to dismiss the suit, claiming the DOL's 20% rule did not apply. The court ruled that the 20% rule applied and refused to dismiss Eldridge's claims.

Eldridge claimed his employer violated Florida law by paying him the subminimum wage for duties that did not result in tips. The court agreed. Eldridge claimed that performing the following duties took more than 20% of his work time:

• Bar set-up assignments (e.g., brewing coffee and washing dirty glassware);
• Table set up and break down and cleaning projects (e.g., cleaning and wiping down table tops);
• Maintenance and janitorial undertakings (e.g., placing trash cans in designated areas); and
• Undesignated skeleton crew duties to maintain restaurant performance and reduce overhead and labor costs.

In deciding whether Eldridge's claim was valid, the court looked to the DOL's regulations, which took effect in April 2011. The regulations provide that if an employee is engaged in two occupations (one tipped and one nontipped), the employer may not take the tip credit for hours worked in the nontipped occupation. On the other hand, the regulations go on to state that "a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses" is still subject to a tip credit.

The 20% rule came from the 1988 DOL Field Operations Handbook, which states that employees who spend more than 20% of their time performing general preparation work or maintenance are not subject to a tip credit for the time spent performing those duties. Outback Steakhouse argued that the 20% rule was not binding authority in Florida. Indeed, the court acknowledged that the federal court of appeals with jurisdiction over Florida has never ruled on the issue.

The court found that a number of federal courts have sided with the DOL and ruled that its interpretation is reasonable. The U.S. 8th Circuit Court of Appeals stated, "The regulation places a temporal limit on the amount of related nontipped work an employee can do and still be considered to be performing a tipped occupation."

The 8th Circuit found that the 20% rule was a reasonable way to interpret terms like "part of the time" and "occasionally." Thus, the Florida court upheld the 20% rule and denied Outback Steakhouse's motion to dismiss. Eldridge v. OS Restaurant Services, LLC a/k/a Outback Steakhouse of Florida LLC, No: 8:17-CV-798-T-30TGW (M.D. Fla., May 18, 2017).

Remember These Points

The DOL regulations state that an employer must provide the following information to tipped employees before using the tip credit:

1. The cash wages the employer will pay tipped employees (in Florida, at least $5.08 per hour);
2. The amount claimed by the employer as a tip credit (in Florida, at least $3.02 per hour);
3. An explanation that the tip credit claimed by the employer cannot exceed the amount of tips received by tipped employees;
4. An explanation that all tips received by tipped employees are to be retained by employees (except for valid tip-pooling arrangements that are limited to employees who customarily and regularly receive tips); and
5. A statement that the tip credit will not be applied to tipped employees unless they have been informed of the tip credit provisions.

Under the DOL regulations, the employer may inform tipped employees of the tip credit provisions by oral or written notice. Further, the regulations state an employer must be able to show it has provided notice. The regulations also state that if an employer fails to provide the required information, it cannot use the tip credit and must pay tipped employees at least $7.25 per hour ($8.10 per hour in Florida) and allow them to keep all tips received. Provide written notice to make it easy to prove that you gave notice to employees.

Employers electing to use the tip credit must show that tipped employees were paid at least minimum wage when direct (cash) wages and the tip credit are combined. If an employee's tips and direct wages do not equal $8.10, the employer must make up the difference.

Tip Pooling

The DOL regulations allow for tip pooling among employees who customarily and regularly receive tips, such as servers, bellhops, and bartenders. Conversely, a valid tip pool may not include employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs, and janitors. Employee interaction with customers is one factor that helps determine who may be included in a tip pool.

The regulations state that if a tipped employee is required to contribute to a tip pool that includes workers who do not customarily and regularly receive tips, the employee is owed all tips she contributed to the pool and the full $8.10 minimum wage.

One positive aspect: The regulations do not impose a maximum contribution amount or percentage on valid mandatory tip pools. However, the employer must notify tipped employees of a required tip-pool contribution amount and may take a tip credit only for the actual tips each tipped employee ultimately receives.

Whose Tip is It?

The regulations state that tips are the sole property of tipped employees regardless of whether the employer takes a tip credit. The regulations prohibit any arrangement between the employer and tipped employees in which tips become the property of the employer. The DOL's 2011 final rule amending its tip credit regulations specifically sets out the Wage and Hour Division's (WHD) interpretation of the FLSA's limitations on an employer's use of employees' tips when a tip credit is not taken. The rule states in pertinent part:

Tips are the property of the employee whether or not the employer has taken a tip credit. The employer is prohibited from using an employee's tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted: as a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.

Service Charges

A compulsory charge for service (e.g., a charge placed on a ticket when the number of guests at a table exceeds a specified number) is not a tip. Service charges cannot be counted as tips, but they may be used to satisfy the employer's minimum wage and overtime obligations under the FLSA. If an employee receives tips when a compulsory service charge is added, the tips may be considered in determining whether he is a tipped employee and in applying the tip credit.

If tips are placed on a credit card and the employer pays the credit card company a fee, the employer may deduct the fee from the employee's tips. Further, if an employee does not receive sufficient tips to make up the difference between the direct wages and the minimum wage, the employer must make up the difference. If an employee receives only tips and is not paid a cash wage, the employer owes the full minimum wage.

Deductions

Deductions from an employee's pay for walkouts, breakage, or cash register shortages that reduce her wages below the minimum wage are illegal. If a tipped employee is paid $5.08 per hour in direct wages and the employer claims the maximum tip credit of $3.02 per hour, no deductions can be made without reducing the employee's pay below the minimum wage (even if she receives more than $3.02 per hour in tips).

Computing Overtime for Tipped Employees

If the employer takes a tip credit, it must calculate overtime based on the full minimum wage, not the lower direct wage. The employer may not take a larger tip credit for overtime hours than for straight-time hours. For example, if an employee works 45 hours during a workweek, he is owed 40 hours at $5.08 in straight-time pay and five hours of overtime at $9.13 per hour ($8.10 x 1.5 - $3.02 in tip credits).

Bottom Line

The rules for paying tipped employees are so complicated and fraught with potential pitfalls that some employees' attorneys specialize their practices in challenging these pay systems. While common mistakes may not amount to much money per employee, liability can add up to big dollars when mistakes involve many employees over several years. Take care to audit your pay systems periodically, train your employees on proper pay procedures, and respond to any employee complaints or concerns about pay—before they turn into a lawsuit.

Tom Harper, an editor of Florida Employment Law Letter, can be reached at tom@employmentlawflorida.com.