Restaurant's Tip-Pooling Scheme Violated the FLSA

An employer cannot take advantage of the tip-credit method of paying employees under the Fair Labor Standards Act (FLSA) for any shifts during which the employer retains a portion of the tip pool.

Under the FLSA, an employer can pay an employee $2.13 per hour instead of the prevailing minimum wage if:

• The employee also earns tips.
  
• The total amount of the tips equals or exceeds $5.12 per hour.
  
• All tips received by the tipped employee are retained by that employee, or the employer uses a tip-pooling system in which tips earned by employees "who customarily and regularly receive tips" are combined and redistributed to those tipped employees.
  

However, if the tipped employees are required to share tips with an employee who does not customarily and regularly receive tips, the employer may not take the tip credit and must pay its employees minimum wage.

DMNO LLC, doing business as Doris Metropolitan, is a restaurant in Louisiana that used a tip pool to pay its servers. Under the FLSA, Doris paid its servers a reduced hourly wage and a proportional share of a tip pool consisting of all tips and service charges collected during each shift. Shares of the tip pool were allocated based on the server's specific role, with servers receiving 65 percent, server assistants receiving 25 percent and service captains receiving 10 percent.

The servers sued Doris, claiming that its tip-pooling scheme was illegal because the service captains were actually managers, and Doris was using the tip pool to subsidize their salaries by allocating 10 percent of the tip pool to them. The servers also alleged that when Doris' general manager acted as a service captain, the restaurant simply retained 10 percent of the tip pool. The servers presented the court with a tip sheet from one shift to establish the general manager's participation in the tip pool.

Doris admitted that the general manager's participation in the tip pool violated the FLSA but argued that it was nothing more than an isolated violation.

The issue before the trial court was the length of time for which Doris' tip-pooling scheme would be invalidated. The servers asked the court to invalidate the tip credit for the entire statutory look-back period and require Doris to pay its servers back wages at the prevailing minimum wage for two years. Doris argued that because its violations of the FLSA were intermittent, it should be denied the tip credit only for those specific shifts in which its managers were included in the tip pool.

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The court's analysis focused on the impact of sporadic FLSA violations. The court surveyed other decisions interpreting the FLSA and found that when the violations were infrequent, the employer's liability should be limited to those time periods when an FLSA violation occurred. Accordingly, the court held that Doris' liability to pay the prevailing minimum wage to its servers would be limited to those shifts during the previous two years in which Doris violated the tip-pooling provisions of the FLSA by including its managers on the tip sheets.  

Black v. DMNO LLC, E.D. La., No. 2:16-cv-02708 (May 21, 2018).

Professional Pointer: Employers using a tip-pooling scheme should follow the FLSA's requirements to the letter or risk substantial exposure for back wages. While Doris' liability was limited to the work shifts in which violations occurred, FLSA lawsuits are largely determined by the specific facts of the case.

G. Bryan Adams III is an attorney with Van Hoy, Reutlinger, Adams and Dunn PLLC, the Worklaw® Network member firm in Charlotte, N.C.