The Fourth Circuit reversed the District Court’s grant of summary judgment for the defendant. Otherwise, the decision is a mixed bag for the plaintiffs.
- For servers and other tipped workers, the decision reiterates the rule that non-discretionary gratuities should not be treated as tips under the FLSA. The fact that the gratuities were seen as non-discretionary was a loss for the workers.
- The court opened the door to treating these payments as “commissions,” for overtime purposes but not to satisfy minimum wage obligations.
- It sent back to the trial court the question of whether a “back house” worker should have been included in the tip pool. Ultimately, better policing of tip pools is good news for servers.
How tips and other gratuities were distributed at the restaurant
Ãn Asian Cuisine was an upscale, fine-dining sushi restaurant in Cary, North Carolina. A substantial portion of the restaurant’s income came from large dinner parties, sometimes including groups as large as seventy. It seems to have functioned almost like a banquet hall.
While working at the restaurant, Servers and Server Assistants received compensation from four sources:
- an hourly wage of at least $2.13 for the first forty hours of the week and at least $5.76 for all additional hours;
- cash tips;
- credit card tips; and
- automatic, non-discretionary gratuities of 20 percent for parties of six or more people.
On February 21, 2017, the plaintiffs brought a collective action under the FLSA alleging that the restaurant violated the FLSA’s minimum wage and overtime requirements in two ways:
- by treating employees who received some portion of the 20 percent automatic gratuities through the tip pool as commissioned salespeople not eligible for overtime; and
- including ineligible employees in the tip pool.
How the FLSA minimum wage and overtime requirements apply to tipped workers
Under federal law, the minimum wage is currently $7.25 an hour. This applies to all non-exempt workers, including tipped workers. The FLSA, however, permits employers to take a credit towards their minimum wage obligation for amounts above a $2.13 floor for workers who qualify as “tipped workers.”
In order to qualify as a tipped worker, an employee must customarily and regularly receive more than $30 per month in tips. If an employee's tips combined with the employer's direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage, the employer must make up the difference. Importantly, tipped workers are eligible for overtime calculated on the basis of the current minimum wage of $7.25, NOT the floor wage of $2.13.
Tips are the property of the employee, but an employer may establish a tip pool. A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.
How the FLSA applies to workers who receive commissions
Workers who receive commissions may not be eligible for overtime. For employees like the servers at the restaurant, who make several different kinds of compensation, the calculation can become extremely complicated. In Wai Tom, it matters a great deal how that non-discretionary gratuity is classified. That determination is significant at several points in the calculation.
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- the employee must be employed by a retail or service establishment, and
- the employee's regular rate of pay must exceed one and one-half times the applicable minimum wage for every hour worked in a workweek in which overtime hours are worked, and
- more than half the employee's total earnings in a representative period must consist of commissions.