The tip wars between hospitality employers and employees continue unabated. Numerous lawsuits contend that restaurants and other employers wrongfully retain or require sharing of customer gratuities, as well as violate Fair Labor Standards Act requirements for payment of a special minimum wage to tipped servers. Last month, the Eleventh Circuit Court of Appeals (which includes Georgia) confirmed an earlier decision that excludes mandatory service charges from the definition of tips.

In Compere v. Nusret Miami LLC, a restaurant imposed a service charge on customer bills, while allowing an additional gratuity at the customer’s discretion. The service charge was split among servers and the restaurant, while all tips went to the servers. Servers could not remove the service charge from the check, although managers had the discretion to do so if the customer complained.

The servers claimed that the service charge was actually an FLSA tip, and that the restaurant had violated tip credit rules by retaining a portion of the fees. They noted that on its tax returns, the restaurant characterized the service charges as tips. The Eleventh Circuit had previously held in an unpublished opinion that service charges were not FLSA tips.

The appellate court reaffirmed its earlier ruling, holding that the service charges fell outside of the statutory definition of tips. Under the FLSA, tips must be at the customer’s discretion. The service charge here was mandatory. The fact that a customer could ask to have it removed did not change this analysis because the charge was added to their bill in the first place. The Eleventh Circuit found that the employer’s tax returns were not relevant to this determination.

If followed by other jurisdictions, this decision could provide hospitality industry employers with a partial strategy for sharing bill add-ons with the business, or with employees who are not entitled to pooled tips under the FLSA. However, service charges that are not paid in their entirety to servers could be viewed as a takeaway by employees, especially if as a result of these fees, customers reduce additional tips that would be retained in full by the servers.

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