We Have Some Tips for You: The Dos and Don'ts of Managing Tipped Employees

Hello and welcome to this episode of Counsel at Work a Williams Mullen Labor Employment and Immigration Law podcast where we explore the labor, employment and immigration topics. Executives, human resource leaders and in-house counsel want to learn about the most. We're here to deliver practical insights to help employers reduce risk and make confident decisions. I'm your co-host, Matt Anderson, and I'm a partner in our Labor Employment and Immigration section based in our Richmond office. I've been practicing law for almost fourteen years now, and I not only represent employers of all sizes in litigation, but also help them navigate the complex maze of employment law compliance, whether it be defending against discrimination claims, ensuring their employees are properly paid, or checking in on their handbook. My job is to make sure employers are able to focus on running their business rather than worry about a lawsuit. I'm pleased to welcome my colleague and co-host, Emily Chowhan, who is an attorney in our labor, employment and immigration section here in Richmond as well.

Great to be back. And hello to all our listeners. Matt, you and I, in addition to being employment attorneys and litigators, we are both fans of Bravo Television. Although I think I'm a more recent convert than you, I think you have a more storied history with the Bravo franchise than I do. Yes.

I'll admit I've been on the Bravo reality train for over a decade now.

Incredible institutional knowledge that we have here today. Swear you in as expert witness, but we are both familiar with the show Southern Hospitality, which is a spin off of the show Southern Charm. So southern hospitality and I promise this all leads back to employment law folks. Southern hospitality follows Lamar and Leva Bonaparte for restaurants in Charleston, South Carolina, and in June one of their restaurants, the Republic Garden and Lounge, was sued by a former employee, a former bartender, for alleged violations of the Federal Fair Labor Standards Act. Call it the FLSA for short. The plaintiff. Her name is Miss Alberty. I think that's how you pronounce that. Was a bartender, like I said. And she's now bringing a collective action on behalf of herself and other bartenders. So we're going to use just a high level overview of what's in the complaint. She alleges that bartenders were paid two thirteen an hour, but they weren't given adequate notice that the restaurant was taking a tip credit. Second, she alleges that bartenders were required to pool their tips, and the tip pool improperly included managers and supervisors, which is not permitted by law. Third, she alleges that Republic properly deducted a credit card fee from bartenders tips. She also alleges that bartenders were required to do Non-tipped work while still only being paid two thirteen an hour. AKA she's alleging that they took a tip credit for Non-tipped work. Finally, she says that she alleges that bartenders were required to complete a six hour unpaid shift as an audition before beginning a formal employment, and she alleges that she was retaliated against, that she was terminated for raising complaints about. That was a lot of information. That case is still pending. But as you can probably gather just from what I was just talking through those points, the Fair Labor Standards Act is pretty dense and these cases tend to be dense, but we're going to break it down into some manageable bites today. Talk through the basic requirements for what it means to be a tipped employee and how to manage tipped employees. So, Matt, turning it over to you, who qualifies as a tipped employee?

Yeah. So, you know, the FLSA has a very useful definition of what a tipped employee is. And that is an employee who customarily works for tips. It's kind of like the snake eating its tail here. So, you know, that's obviously bartenders. It's obviously waitstaff. I would say valet would probably be someone who's there. Bellhop at a hotel would be someone who customarily works for tips. But, you know, you could probably think of many other professions or jobs where they're customarily getting tips like a Uber driver would be tipped employee to the extent they are employees. That's a whole other can of worms that we're not going to get into probably ever, because that would be a four and a half hour podcast and no one wants to listen to that. And so that's kind of the definition. But really in practice, what has to happen is that employee actually kind of has to actually be getting tips. So you can't say, oh, you're a waiter. Therefore, I get a tip credit even though we work in a restaurant where we have a big sign that says do not tip the employees, and no one tips the employees, and it has to be customarily and regularly engaged in tip work. So, you know, let's think of, your holiday seasons coming up. You're going to have a lot of holiday parties. You know, you might go to a client party or acquaintances party, a company party or something, and someone from the company is working the bar and there's a tip jar out. That person can't get a tip credit for that because that's not their custom and regular, you know, they're just doing this for a couple hours. But also, you can have tipped employees who don't physically receive the tip from the customer. So in this context, the restaurant context, we're thinking we're looking at, you know, Bussers Barbacks hosts people who are working in the front of the house and are doing a lot of the work to support the wait staff and the bartenders. Those can be tipped employees if done correctly, through a tip sharing or tip pool. But you know, just because you have a tipped employee doesn't mean you just automatically get to take the tip credit. There's some things you have to do to be able to take the tip credit for that specific employee. And Emily, why don't you fill our audience in on that piece?

Yeah. So we're going to explain in a second how tip credits work because I think it's helpful to go through. I mean, whenever the law involves math, I generally need at least like two or three explanations. But for this required employer notices piece. So the law doesn't require employers to take a tip credit pay employees two thirteen an hour without letting them know that it's happening. So the law says that an employer has to give each tipped employee these five things. They need to tell the employee the amount of the cash wage being paid, which is typically two thirteen an hour, because that is the federal minimum. In this context, the employer has to tell the employee the additional amount that they're claiming as a tip. Credit is usually five dollars and some change. It's kind of the standard. They must tell the employee that all tips must be retained by the employee, except for a valid tip pooling arrangement. Essentially, you have to tell the employee no one is allowed to take this away from you unless it's a valid tip pool. They also have to tell the employee that the tip credit doesn't apply to anyone who hasn't been informed of these requirements, and the employee must be told that the tip credit amount per hour has to be reported to them in writing each time it changes. That's a lot of information that has to be conveyed from employers to employees. And the stakes are honestly rather high because FLSA cases can get expensive quickly, especially in contexts like this one. For Republic, where you have a fairly large restaurant establishment with a lot of employees and a lot of hours. So it's it's worth getting this right. And so what I'm winding up to say is that the FLSA doesn't require that all these notices be in writing, but we certainly encourage it as a best practice. I know the Department of Labor does, too, because it's hard on the back end to prove that these employees were given all the required notices. So and the reason this is so vital is that the federal law says that if you don't give employees all these notices, you were never allowed to use the tip credit in the first place. So if you owe employees, you know, seven twenty five an hour and you've been paying them two thirteen an hour for some time, you know, that can add up, especially with damages. But, but Matt, how do tip credits, like what's the mechanics? Can you give us a little info about the math?

Yeah. So under the FLSA, which is the federal law, the minimum wage is seven twenty five an hour. There are probably only a handful of states where the federal minimum wage still governs, because most states these days seem to have passed a higher minimum wage. And we can kind of talk about that in just a second. So but what the FLSA says is that if you have tipped employees and they work in that customary tipped roll, you can, instead of paying them seven twenty five an hour, you can pay them two dollars thirteen cents an hour and then use up to five dollars and twelve cents of the tip per hour to pay them. And this is kind of a little dance that you're doing each week, because the employees got to report the tips, and you have to make sure that when you factor in those tips, that for every hour they worked, they got seven point two five, whether it's the two thirteen and then the tip on top. And if you come up short, then that money comes out of the employer's pocket to make sure that they got that. Seven twenty five and so where this dance gets even more complicated is if you're in a state like we are here in Virginia, where the minimum wage has gone up because of state law, and we're at twelve seventy seven. So you can still take that. Two thirteen but now you're relying a whole lot more on those tips to come in so you can still, like I said, you can still take that two thirteen credit. But you know, if your state minimum wage is higher than the federal minimum wage, you you got to use tips to make up that gap. Leva and Lamar, they're lucky they're in South Carolina. They're still under the seven twenty five minimum wage. So and North Carolina is the same way. But you know, as I said here in Virginia, we're at twelve seventy seven and January one, that's going to thirteen seventy five. So the gap is widening between that. Two thirteen and the state minimum wage. And what you can't do is you can't give them a credit for any for more than any tips that they ever received. So whatever tips they get is, is what you're working with and you got to make up that difference.

So how a tip pool normally works is a traditional tip pools. The employers taking the tip credit employees are only getting paid usually about two thirteen an hour. It's, you know, think of now Matt, I was a server in back in the day. Were you ever a server?

No, my manual labor days were done in a wood shop, so.

Okay, okay, so not as much. Not a different type.

Of tipping me for sweeping the floor.

Yeah, it's a bummer. So after a busy night at the restaurant, I always got to take my own tips. I didn't participate in tip pooling arrangement, but you know, it's every, the goal of a tip pool, I think is so that everybody who is client facing is on the same team. You're all working together for the greater good because at the end of the night, I don't put my tips in my pocket. I put them into effectively a proverbial jar. And then we divvy them up between everybody who was working that shift and was client facing that night. And that is the client facing is not a legal term. It just helps me to think about it in terms of like, who's running around the front of the house of the restaurant. So that's how a tip pool is designed to work. What you are not permitted to do under the law is including employees who are not in customarily tipped operations. For example, dishwashers work in the back of a restaurant. They are not customarily tipped. So when that tip comes together at the end of the night, the dishwashers should not receive a cut of it. Have to be paid the federal like a flat wage per hour that meets at least the state and federal minimum wage requirements. That's an area that often gets tricky, because the dishwasher is a clear example of somebody who is not in a customarily tipped profession. And servers obviously are, you know, there can be some shades of gray in the middle sometimes. That's where some of these cases come from. So that's one aspect of a tip pool. That's one layer other item that is a hot topic or is kind of a bright line. Managers and supervisors may not receive any tips from employer mandated tip pools. Even the managers and supervisors are often, you know, interacting with customers. They're not supposed to be taking tips from the pool. That's only for the regular employees.

Yeah. And I think this is kind of a really important area because like you said, this is where people get tripped up. If you are taking a tip credit for any single employee. They. The tip pool. They cannot participate in a tip pool that includes anyone outside of those customary tipped positions. As soon as you include someone from the back of house into that tip pool, which you are more than welcome to do, that is perfectly legal. But once you do that, that tip credit is out the window and you've got to pay minimum wage to everyone waiters, dishwashers, line cooks, uh, etc. as soon as someone who's not in that customary customarily tipped position is in that pool, then tip credit goes away. There you do a traditional tip pool with the only customarily tipped employees or a non-traditional tip pool. Managers and supervisors are not allowed to be in that pool. Full stop, end of sentence, no questions asked. And that's where a lot of people get in trouble is, you know, they have this, oh, we've got a not we're not taking the tip credit so we can have our fifteen percent of the tip pool house fee. And guess what. You just violated the FLSA. So you know that that is really kind of the meat and bones of a lot of these tip employee FLSA litigations.

And another item, something that comes up in the lawsuit here is that now the Republic lawsuit is still ongoing. And everything in the complaint that we mentioned at the top of this episode is alleged, it's not been proven. But what's alleged in the complaint is that employees are required to do an audition shift. Other variations of this in other cases are employees allege that they were required to do onboarding or training before they actually were on the clock and began getting paid for their work. And in this case, allegedly there was six hours of unpaid work, whether it's a tipped employee or not, whether it's a restaurant or not, that's never permissible under the FLSA. It's very strict. Basically, the way I like to think of it is if you're requiring somebody to be somewhere at a certain time. You know, as an employer, you got to pay them for that because they're not getting to do what they want with that time. They're reporting to you, even if it is just onboarding.

Yeah. And I get it, you know, southern hospitality, you're on TV, you got to audition to be on TV. But you know, in these cases, you got to pay people. And, you know, people might be sitting at home asking, well, what about part of my, you know, job interview process or job application process? I had to perform some practical skill assessment. Well, that's a little bit different. You know, I once interviewed for a job where they had me review a contract and mark it up. And, you know, that's not unpaid work because the employer is not really benefiting from that. So in the context of the Republic lawsuit, if they had had the applicants for the bartender position come in and make leva three drinks that she gets to make up and they, you know, spend fifteen minutes behind the bar making those, those three drinks. I think that's one thing. But to work a six hour shift with patrons in the bar that they're serving and the patrons are paying for the drinks. That's just unpaid labor. And that's a big no no.

Yeah. So our big takeaways here from this case, I would say number one, we didn't touch on this, but number one is don't retaliate. If any employee at any time accuses a business of not paying them properly or raises questions about their pay. Don't punish them for those questions. Unfortunately, that's per se illegal. Number two, only take the tip credit when it is for tipped work in an occupation that is regularly tipped. Always provide notice, adequate notice to the employee and managers, supervisors and the company cannot take any money away from the tip pool. All of these questions are pretty nuanced. And so if you have any questions about how these apply to your workforce or you want some practical guidance on how to implement them, please reach out to us for more than happy to walk you through it.

Yeah, like we said at the top, this is a very complicated topic, and it's no surprise that employers get tripped up on these tips. That's a bit of a tongue twister in itself. Well, that's all we've got for today. Thanks to our listeners for joining us for this episode. As Emily said, if you have any questions or suggestions for future episodes, please contact us. And you can also visit our Labor and Employment and Immigration page at Williams Mullen.com There, you'll find out more about me, Emily, the rest of our team, as well as the different types of legal services our team provides. And you can look through our website and see all the different legal services Williams Mullen provides. Finally, be sure to subscribe to this podcast to be notified when our next episode posts. Thanks for tuning in and let's get back to work.

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