PART 2 OF A SERIES
EM PL OY MENT
Take This Tip
Tips Versus Compulsory Service Charges By Richard D. Tuschman, Esq., And Mark J. Beutler, Esq.
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tip is “a sum presented by a customer as a gift or gratuity in recognition of some service performed by him” (29 C.F.R. §531.52.). Although this definition may seem obvious, tips must be distinguished from compulsory service charges. Such compulsory charges are not considered tips and, even if distributed to employees, cannot be used to satisfy the tip credit (29 C.F.R. § 531.55). Banquet halls and restaurants that cater to foreign tourists (who oftentimes are unaware of American tipping customs) often impose compulsory service charges. However, if customers provide additional monies above the compulsory service charge as a gratuity, these additional amounts are tips and must be treated as tips, i.e., they must be paid to the tipped employee or into a valid tip pool. That much, and only that much, is clear. The question that arises is whether compulsory charges are “tips” subject to the tip credit rules. If not, so long as the employee receives compensation equal to or more than the minimum wage (through a combination of direct wages and compulsory service charge rebates), it would logically follow that the employer would be free to do as it pleased with the remaining compulsory service fees. However, the regulations suggest, and some cases hold, that in order for the employer to use compulsory service charges to satisfy the employer’s minimum wage obligation, the employer must account for such receipts in the same manner as other revenues, i.e., such tips must be included in gross revenues subject to sales and income taxes (e.g., Chan v. Triple 8 Palace, Inc., 2006 WL 851749, *6-7 (S.D.N.Y. 2006)). Oftentimes employers fail to report compulsory service charges as revenues. One would think that a restaurant that rebates its compulsory charges to its tipped employees so as to raise their compensation above the minimum wage, but fails to report the charges as income to the taxing authorities, has tax compliance issues but should go free under w w w.Res t au ra n t A nd Lodgi ng.com
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the FLSA. But that is not always the result reached by the courts. Some cases hold that compulsory service charges are not tips. Pellon v. Business Representation International, Inc., 528 F. Supp. 2d 1306 (S.D. Fla. 2007) (compulsory $2 bag fees paid to skycaps were not tips subject to tip credit rules). Other cases hold that, based on the facts of the case, the charges are “disguised tips” which belong to the employee. Chan v. Sung Yue Tung Corp., 2007 WL 313483 (S.D.N.Y.); and other cases hold that whether compulsory charges are in reality tips is a jury question, Cachola-Bonilla v. Wyndham El Conquistador Resort & Country Club, 577 F.Supp.2d 566 (D.P.R. 2008). The case law is not well developed. Dual Occupations vs Incidental Duties In some situations, an employee is employed in dual occupations. A waiter may have responsibilities in addition to serving customers. In such a case, the employer may not claim a tip credit for the time the employee spends performing duties unrelated to the tipped occupation. On the other hand, an employer may claim a tip credit for the time an employee spends on duties that are related to the tipped occupation, even though those duties do not directly generate tips. For example, an employer can generally claim a tip credit for the time the waiter spends cleaning and setting tables, making coffee and occasionally washing dishes or glasses, provided that such duties are incidental to the waiter’s regular duties and are regularly assigned to waiters at that establishment. 29 C.F.R. §531.56(e). Restaurants may ask servers to perform duties as ice sculptors, or pastry decorators, or floral arrangers. There may be bussers who make salads or wash dishes between lunch and dinner. The line between non-tipped work and nontipped duties incidental to a tipped occupation is nebulous. Courts rely upon several criteria, which often point in different directions. In Fast v. Applebee’s International, Inc., bartenders and waitstaff claimed that their
jobs included non-tip producing duties. The bartenders claimed that they were required to wipe down bottles, clean blenders, cut fruit for garnishes, take inventory, prepare drink mixers, and clean up after closing hours. The servers claimed that they were required to clean bathrooms, sweep, clean and stock serving areas, roll silverware, and clean the dining room before and after the restaurant was open. A federal appellate court adopted the DOL’s guidelines which provide that, where tipped employees spend in excess of 20% of their time performing tasks that did not produce tips, no tip credit may be taken for the time spent in performing such duties. 29 C.F.R. § 531.56(e). The district court judge whose opinion was affirmed on appeal, reasoned that some limiting principle was necessary or servers and bartenders could be required to perform an unlimited amount of non-tipped duties while the restaurant paid them the tipped wage, so long as those nontipped duties were related in some amorphous way to the occupation of servers or bartenders. In contrast, in Pellon v. Business Representation Int’l, Inc., 528 F.Supp.2d 1306 (S.D. Fla. 2007), aff’d, 291 Fed. Appx. 310 (11th Cir. 2008), a court rejected the application of the 20% rule to evaluate the tipped and non-tipped duties of skycaps, concluding that “a determination whether 20% (or any other amount) of a skycap’s time is spent on nontipped duties is infeasible” because the tasks at issue were intertwined with direct tip-producing tasks throughout the day. Pellon and Fast are the leading cases on this issue. Several courts including one federal court in the Southern District of Florida have adopted the 20% rule. See Ash v. Sambodromo, LLC, 676 F.Supp.2d 1360, 1366 (S.D. Fla. 2009). Other courts, in addition to Pellon, have rejected the 20% rule. See e.g., Driver v. AppleIllinois, 265 F.R.D. 293, 311 (N.D. Ill. 2010) (rejecting the 20% approach and adopting a more “workable” proposed standard, which would be to determine whether a particular duty is part of a tipped occupation.”). Courts on both sides of the issue make good points. Having no limiting principle invites F lo r i da R estau r a n t & Lo d g i n g
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