"Summertime and the Livin' Is Easy" Tips to Make Sure "Tips" Don’t Create Problems Down the Road

by Foley & Lardner LLP

Summertime can be the high season for many service establishments, such as restaurants, hotels and recreational facilities, as we all take some time to relax and enjoy the weather. But with wage and hour litigation constantly on the rise, busier service season can also meet the opposite of relaxation and enjoyment for services business, because busier locations can mean increasing employee hours and wage-related issues. To help avoid this summer season from resulting in more litigation for your establishment, here some tips to avoid getting in hot (hot hot hot…) water:

- Side Work And The 20 Percent Rule: The U.S. Department of Labor permits servers and other tipped employees to perform work “incidental” to their tip generating duties so long as this work does not exceed 20 percent of the working time. For example, it is perfectly reasonable for a server to cut lemons, portion desserts, and make coffee, so long as such time does not exceed the 20 percent threshold. Watch out for the “dual-job” pitfall. The Department of Labor asserts that if a tipped employee is also routinely employed by the same establishment as a “non-tipped” employee, like a maintenance technician, the employer may not take the tip credit against minimum wage for that time spent by the employee in the maintenance technician position. This summer, be mindful that tipped employees spend the majority of their time, at least 80 percent, servicing customers. After all, more service means more revenue.

- Tip Credits May Not Be Allowed In Your State: While employers may reduce a tipped employee’s hourly rate below the normally applicable minimum wage in recognition of the fact that their income also derives from gratuities, some states depart from the federal rule in this area. For example, service employees in California must be paid the state’s minimum wage without reduction even if they earn significant tips. If your business employs service employees in multiple states, make sure you have double-checked what rules apply for tip credits in each state.

- Proper Calculation Of The Overtime Rate: While an employer may properly take the tip credit and pay employee a lower tipped minimum wage in many states provided the employee makes enough tips to bring them to the full state or federal minimum wage, the overtime rate may not be calculated using the lower tipped minimum wage. Rather, the regular rate of pay for overtime calculations must also include the cash wage and bring the employee to the full minimum wage. Tips in excess of the tip credit need not be included in the regular rate of pay because the applicable federal regulation provides that “[a]ny tips received by the employee in excess of the tip credit need not be included in the regular rate.” Note, however, that other payments, such as bonuses and hourly wages in excess of minimum wage, must still be taken into account when calculating the regular rate for overtime purposes.

- Employment of Minors: Minors flock to service establishments looking for work during the busy summer months. Here are some things to keep in mind when hiring a minor. As a general rule, the FLSA sets 14 years of age as the minimum age for employment, and limits the number of hours worked by minors under the age of 16. For 14 and 15 year olds, federal law provides that that they may only work between 7 a.m. and 7 p.m. From June 1 to Labor Day, the evening hours are extended until 9 p.m. Still, 14 and 15 year olds may work no more than 18 hours a week when school is in session and no more than 40 hours a week when school is not in session. For 16 and 17 year olds, there is no limit on the hours per week they may work under federal law, but the types of work may be limited to non-hazardous activities. Many state laws have much greater restrictions on the work minors can perform and the hours they can work. Be sure to check them out.

- Valid Tip Pools: There are several requirements that must be satisfied for a legitimate tip pooling arrangement. For example, employees must have notice of a tip pooling arrangement. Remember also that simply because employees share in a tip pool does not mean that employers are excused from requirements with regard to proper tip credit amounts; the employer (management) may not retain any tips, and only those employees who “customarily and regularly receive tips” may share in a tip pool. The following occupations have been recognized as falling within the eligible category for tip pooling: waiters, bellhops, counter personnel who serve customers, busboys/girls (server helpers), and service bartenders. If your establishment has other occupations that share in a tip pool, be sure to think about whether the specific duties of that job at your establishment customarily and regularly engage in tip generating activities such as greeting customers, engaging with customers, etc.

These are just some of the things that employers in the service industry can run afoul of during the busy summer months. Be mindful of these and other issues in order to avoid the headache of a lawsuit in the fall and winter.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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