This article is based on federal laws. The law in your state may be different from what is written in this article, which may change the outcome of the scenarios discussed.
You’ve probably heard the term “waiter pay” or “tip credit” but probably do not understand all the legal intricacies behind the meaning of these words. Be warned: Watch your tips!
The tip credit is what allows employers – commonly restaurants—to legally pay their employees less than minimum wage, frequently as little as $2.13 per hour. This reduced minimum wage results in a huge cost savings to employers. However, many employers and employees, alike, do not understand the intricacies of the tip credit, which will ultimately cost the employer dearly.
Violating the federal tip laws can be very costly. If an employer violates the tip credit, the law says the employer owes the employee the full minimum wage for every hour worked multiplied by two plus the employer must pay the employee’s attorneys’ fees and costs.
To illustrate, if a restaurant is paying an employee $2.13 per hour and is found to have violated the tip-credit, that restaurant will have to pay the employee $5.12 (i.e. $7.25 – $2.13 = $5.12) for every hour worked by the employee during the previous two years multiplied by two plus attorney’s fees and costs. To add insult to injury, most wage cases are filed as a collective action, meaning all of its current and former servers can join suit, seeking back wages times two, not to mention the cost to the employer of hiring lawyers to defend a lawsuit. The ultimate cost of violating any part of the tip-credit can be extremely costly.
If you are an employer or business owner you are probably thinking that I am a lawyer trying to instill fear so I can charge you a bunch of money to give you advice. However, even if you were to reach out to me, I likely would send you somewhere else; my practice is almost entirely devoted to representing employees. (I currently only represent a few select business owners.)
I am writing this article because there are many servers not receiving the wages that they are entitled to, not because their employer is intentionally stealing these wages, but because their employer doesn’t know the law. I just want to encourage employers and employees, both, to reach out to an attorney who has experience handling wage lawsuits. (And for all you “Google Lawyers” out there, Google isn’t a substitute for sound legal advice).
Tips Gone Bad.
Now on to the good stuff: what or how is the tip-credit violated? This article is in no way intended to be a comprehensive treatise on ways the tip credit can be violated. However, this article will discuss two very common themes that I come across where restaurants royally screw things up.
The first common mistake I see is with deductions. When it comes to a sub-minimum wage employee, almost* any deduction will violate the tip credit. Deductions for wrong ordered food, a glass breakage fee, uniform, or tools that are used by the employee in furtherance of the business are illegal. Illegal deduction lawsuits are the most common type of case that I have been involved in.
Even wage deductions that would not strike you as illegal can be illegal. For instance, an employer may deduct for the cost of an employer provided meal. However, the employer can make absolutely no profit on the meal. In other words, the employer may not deduct more than the actual cost of the meal or risk violating the tip credit. There is always room for argument that the employer deducted more than the actual cost of the meal. This is asking for a lawsuit.
Deductions for credit card fees can also be a bit tricky. The cost to process credit card tips may be deducted from the employee’s tips. However, no more than the actual cost of deducting the credit card tips is permissible. In other words, you may only deduct the exact percentage that your credit processing company charges; absolutely no more. I recently sued a restaurant that was deducting a five-percent (5%) credit card fee to process credit card tips. As it turns out, the restaurant’s credit card processing fee was only three-percent (3%) – a clear violation of federal law. That case resulted in a sizeable settlement for my clients.
The second common mistake I see is with illegally administered tip pools. Tip pools are per se legal. However, there are some very strict rules to the road. First, everything that is tipped “in” to the tip pool must be tipped “out” of the tip pool. Second, only certain defined employees may receive the tip out. Only employees who regularly receive tips and have sufficient customer interaction may participate in or receive tips from the tip pool. Common examples of employees who may legally receive money from a tip pool are bussers, bartenders, and food runners. Ultimately, whether an employee can receive tips from a tip pool depends on the level of customer interaction.
CAUTION: Managers cannot participate in or receive monies from the tip pool, even if the manager is also making drinks or running food. If a manager has the power to hire and fire, set work schedules, or issue employee discipline, then the participation of this manager in the tip pool is illegal. Another common illegal tip pool participant that I come across is the chef or dishwasher receiving money from the tip pool. To be on the safe side, do not allow any back of the house employees to share in the tip pool.
That’s all the Tips.
Oh, one last tip, the federal wage law also has an anti-retaliation provision; meaning if an employee makes a wage related complaint, the employee is protected from being fired or retaliated against. Retaliation claims can subject the employer to greater liability than the original wage claim. Also, many lawyers (including myself) represent employees on a contingency basis, meaning I only get paid if the employee makes a recovery.
I hope that this article has brought to light a very important issue – servers’ wages. If you are not in compliance with the wage laws, it will only be a matter of time before an employee hires a lawyer to sue you or the Department of Labor (DOL) opens an investigation.
Drew N. Herrmann
Herrmann Law, PLLC
777 Main Street, Suite 600
Fort Worth, Texas 76102
*Drew N. Herrmann is a labor and employment lawyer licensed to practice in Texas. Mr. Herrmann’s labor and employment law practice is devoted to representing aggrieved employees in workplace disputes. If you have any questions or want to consult with Mr. Herrmann, he can be reached by calling 817-479-9229, or emailing firstname.lastname@example.org or check out his website www.paycheckcollector.com
This article is not legal advice. The information contained in this article is informational and you should not rely on it instead of legal advice specific to your situation. Drew N. Herrmann is licensed to practice law in Texas. The law in your state may be different than what is discussed in this article. Further, the law in your state may change the analysis or outcome of what is discussed in this article
The information on this website does not create an attorney-client relationship. Any information submitted through the website does not create an attorney-client relationship with Herrmann Law, PLLC. Further, Herrmann Law, PLLC does not guarantee the accuracy of this article or any article published on this website.