The Fair Labor Standards Act (FLSA) provides that tips count toward the minimum wage. Accordingly, federal and state laws permit employers to pay their tipped employees a tip-credit rate—an amount lower than the required minimum wage—so long as the employee’s tips make up the difference.
Recently, the United States Court of Appeals for the Seventh Circuit ruled on the applicability of the tip-credit rate for tipped employees performing non-tipped work. In Schaefer v. Walker Bros. Enterprises, — F.3d –, 2016 WL 3874171 (7th Cir. July 15, 2016), employee-servers of the Original Pancake House challenged the restaurants’ use of the tip-credit rate on two separate grounds. The first class of servers argued that the restaurants were required to pay the minimum wage rate for any time spent performing non-tipped duties, such as washing and cutting fruits and restocking bread bins. The second class contended that the restaurants failed to meet federal disclosure requirements regarding compensation of tipped employees.
Decision – The 20% Threshold
In Schaefer, the plaintiff servers were required to spend anywhere from 10 to 45 minutes each 8-hour shift performing a variety of tasks in addition to taking orders and delivering food. For instance, they were required to wash and cut fruits and vegetables; prepare applesauce, jams, jellies, and salsas; restock bread bins and replenish milk dispensers; brew tea and coffee; and dust picture frames. The servers argued that the restaurants should not be permitted to use the tip credit rate for the time they spent performing these functions because they are not tipped tasks.
The Seventh Circuit emphasized the Department of Labor’s (DOL’s) regulation distinguishing dual jobs from “related duties.” 29 C.F.R. § 531.56(e). According to the regulation, time spent completing related duties may qualify for the tip-credit rate and “need not themselves be directed toward producing tips.” For example, an employer may use the tip-credit rate for a server’s time spent “cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.” By contrast, Section 30d00(e) of the DOL’s Field Operations Handbook provides that no tip-credit rate may be used where a tipped employee spends a “substantial amount of time (in excess of 20%) performing general preparation or maintenance work.”
The Schaefer court ultimately ruled that it was permissible for the restaurants to use the tip-credit rate because the majority of the servers’ tasks were related to tipped functions, and the time spent on unrelated tasks did not meet the 20% threshold. Relying on the Eighth Circuit’s opinion in Fast v. Applebee’s International, Inc., 638 F.3d 872 (8th Cir. 2011), the court found that preparing small amounts of food and cleaning objects used in that process are related to a server’s tipped duties. Moreover, the court reasoned that 10 to 45 minutes of an 8-hour shift fell well below the 20% threshold (10 minutes is 2% and 45 minutes is 9.4%). The court noted that dusting picture frames and wiping down woodwork may be unrelated duties, but that the time spent on these tasks was negligible.
Thus, in determining whether the tip-credit rate is appropriate for non-tipped work, employers should consider whether the non-tipped tasks are related to the tipped work and whether the non-tipped work comprises more than 20% of the employee’s time.
Disclosure Requirements for Employers
Section 203(m) of the FLSA requires employers using the tip-credit rate to make certain disclosures to each tipped worker. Specifically, employers must tell their tipped workers: (1) that the employer will pay a cash wage less than the minimum wage in anticipation of tips; (2) how much the cash wage will fall short of the minimum wage; and (3) that the employer will make up the difference if tips plus the cash wage do not equal the minimum wage.
In Schaefer, the servers claimed that the restaurants’ employee handbooks failed to contain adequate disclosures—specifically, that they failed to explain that the restaurant would make up the difference if their tips and cash wage together fell short of minimum wage. While the Seventh Circuit agreed that the handbooks were inadequate standing alone, it held that the restaurants met disclosure requirements because they had furnished the missing information on a poster provided by the DOL in each establishment. The poster read:
Employers of ‘tipped employees’ must pay a cash wage of at least $2.13 per hour if they claim a tip credit against their minimum wage obligation. If an employee’s tips combined with the employee’s cash wage of at least $2.13 per hour do not equal the minimum hourly wage, the employer must make up the difference. Certain other conditions apply.
Ultimately, as the court noted, it is preferable to have all of the information together in an employee handbook, but it is not mandated by the FLSA.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
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