Don’t confuse “tips” and “service charges” for hospitality employees

How often have you looked at you bill at a restaurant and have seen an added service fee? Do you think to yourself, "No need to tip; it's already been added to the bill." 

Think again, at least according to the 11th Circuit in Compere v. Nurset Miami, LLC, which held that restaurant service charges are not considered tips under the Fair Labor Standards Act.

Nusret Miami, LLC, is an upscale steakhouse in Miami, Florida. Since its opening, it has always added a mandatory 18% "service charge" to its customers' bills, which it redistributed to certain employees as wages on a pro rata basis to cover its overtime obligations under the FLSA. To meet its overtime obligation, the restaurant relied upon section 7(i) of the FLSA, which permits a retail or service establishment to avoid overtime payments to non-exempt employees if both (1) the "regular rate of pay" exceeds one- and one-half times the minimum wage; and (2) more than half the compensation for a representative period of at least a month is from commissions on goods or services.

The employees argued that the employer could not credit the service charge towards its overtime obligation under the FLSA, because tips cannot count toward the hourly "regular rate of pay." The district court disagreed, relying on two separate DOL regulations:

• 29 CFR 531.32(a): which notes that the critical nature of a tip is that whether to give one and in what amount is solely within the discretion of the customer.

• 29 CFR 531.55(a): which specifically explains, "A compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer's establishment, is not a tip …  even if distributed by the employer to its employees."

Thus, the court concluded: 

By this measure, Nusret's service charge is not a tip. Critically, whether and how much to pay are not "determined solely by the customer." Indeed, those decisions are not determined by the customer at all. As the lead plaintiff, Compere, conceded in her deposition, "Employees were told that the service charge was supposed to be mandatory as if it was an item that a person ordered it, it had to be on the check." … 

The Employees argue that Nusret's service charge was not, in fact, mandatory because managers had discretion to remove the charges on the bills of dissatisfied customers (much like a manager might "comp" an entrée). But what the Employees miss is that the relevant question is whether the decision to pay the given sum is "determined solely by the customer." Here, it is not. 

Hospitality workplaces (restaurants, bars, tap rooms, etc.) are rife with wage and hour risks for unsuspecting or uniformed employers. Tip credit and tip pools, off-the-clock work, tricky exemption problems, etc. This case worked out well for the employer. But that's a minority outcome in wage/hour cases. If you haven't spoken to your employment lawyer about these issues, you should. If you don't have an employment attorney for your business, you need to engage one. I promise you that it's much less painful to have these conversations with someone like me in a privileged meeting than across the table from your employees' lawyer in a deposition, or worse, in a courtroom.