Talk about complicated compensation schemes, some of the most complex rules of the Fair Labor Standards Act (FLSA) apply to people who work for tips like a waitress, bartender, dishwasher, barber, hairdresser, babysitter, caregiver, housecleaner, etc. In Texas, the minimum wage for tipped workers is $2.13, exactly as it has been for three decades.

Furthermore, when employers abuse, or innocently misapply, the rules for paying tipped workers, such employees often feel powerless. People who receive tips assume they cannot afford legal help. This is not necessarily true. Many tipped workers have valid pay claims under the FLSA, and federal courts in Texas and throughout the country are now hearing more and more of these cases. To make such cases more economic, workers can unite to bring a collective action under the FLSA. If you suspect that something is not right with the way your employer is calculating your wage and tips, our employment lawyers may be able to offer legal help.

Kilgore & Kilgore Employment Lawyers Understand What Tipped Workers Should Get Paid

If you have questions about your wage, tips, or other problems at your job, including discrimination, harassment, wrongful termination, or other employee rights issue, we are here to listen. Click on this link to find out about our employee rights law practice. If you think your employer is not paying you everything you are owed, reach out to us using this link Contact Kilgore Law. We offer free case evaluations.

The Issue of Tips, Salaries, and Compensation is Complicated and Often Requires Legal Help

The recent Fourth Circuit case, Wai Tom v. Hospitality Ventures LLC, is a useful illustration of the kinds of questions that people who work for tips have. The decision is not yet controlling precedent in Texas and is so recent that its implications have yet to fully percolate through Texas courts. The questions it raises are hotly debated, though. They can be expected to come up again.

Mr. Tom, and others who ultimately joined the collective lawsuit, worked as servers and server assistants at Ãn Asian Cuisine, an upscale sushi restaurant in North Carolina. Their pay came from four sources:

• A guaranteed hourly wage of at least $2.13 plus tips or employer pay to reach at least the federal minimum wage of $7.25 per hour;
• cash tips;
• credit card tips; and
• automatic, non-discretionary gratuities of 20 percent for parties of six or more.

In July 2014, the restaurant instituted a tip pool for its evening shifts, pooling together all tips and automatic gratuities. This pool was distributed among the servers and others, who did several different kinds of jobs. To determine whether the restaurant violated the FLSA minimum wage and overtime requirements, the Fourth Circuit Court looked at several persistent questions:

• whether the automatic 20 percent gratuity was actually a tip;
• who should be included in the tip pool;
• for whom was the restaurant entitled to claim tip credit; and
• who was entitled to a minimum wage of $7.25 plus overtime, rather than the minimum tipped wage of $2.13 plus tips?

Basic FLSA Rules Regarding Tipped Workers

As with much employment law, the FLSA lays down basic rules, but states may be more generous to employees, as each state chooses. Texas stays close to the federal minimum wage but has developed its own interpretive rules.

The FLSA currently sets the minimum wage at $7.25 an hour. The law 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 Texas, some employers choose to pay the $7.25 minimum wage, rather than contend with the accounting challenge of topping up pay to reach $7.25.

To qualify as a tipped worker under the FLSA, 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 wages of at least $2.13 per hour do not equal the $7.25 per hour, the employer must make up the difference. Tipped workers who work more than 40 hours per week are eligible for overtime calculated at one and one-half times $7.25 (NOT $2.13).

Tips are the property of the employee under both the FLSA and the Texas Payday Law. However, 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. Only tips received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.

According to the FLSA, when is a Gratuity not a Tip? If It is Not a Tip, what is It?

As a rule, mandatory gratuities are not considered tips for purposes of the FLSA. Whether a gratuity is actually “mandatory” or just strongly suggested is very dependent on the evidence in a particular situation. In Wai Tom, the Court decided that the gratuity was mandatory, even though the workers presented evidence that it had been waived on occasion.

If gratuities are considered mandatory, they are considered part of the employer’s gross receipts. If an employer pays a portion of the mandatory gratuity to the employee, it counts as wages. This has three consequences:

• Employers must withhold Social Security and Medicare tax from wages.
• The mandatory gratuity must also be factored into the calculation of overtime unless it qualifies as a commission – a new argument to which the Fourth Circuit appeared receptive in Wai Tom.
• If the mandatory gratuity counts as wages, an employer may not count any portion of it toward the tip credit.

In Wai Tom, the restaurant’s argument that the compulsory gratuity was a commission earned by the servers seems to be new and may not have yet been considered by the Fifth Circuit. If successful, it would have other far-reaching implications since workers who receive commissions may not be eligible for overtime. If you are feeling confused, we sympathize.

Legal Help to Determine Who can Participate in the Tip Pool?

This question comes up often in Texas courts. Only workers who customarily receive tips can participate in a tip pool. Ordinarily this would include those who interact with the customer, but not back-of-the-house employees. Managers and owners can never participate in the tip pool, even if they periodically chip in to serve customers or tend bar. This is another very fact-specific inquiry. If a tip pool includes ineligible employees, the entire pool may be found to be invalid.

The consequences for an employer can be serious. In 2016, the District Court for the Northern District of Texas ordered a Japanese restaurant to pay more than $166,000 for including ineligible employees in the tip pool. In 2009, the District Court for the Southern District of Texas ordered Chili’s restaurant to pay $270,000 to workers for a similar infraction. Under a recent U.S. Department of Labor rule, however, an employer may permit non-tipped workers to participate in a tip pool if the employer does not take the tip credit.

Deciding Who is a Tipped Worker in the Court’s Opinion Could Require Legal Help

This is really a two-sided question. To qualify as a tipped employee, a worker must perform certain kinds of jobs and make a certain minimum amount of money each month in tips. An employer can generally claim the tip credit of up to $5.12 per hour only for someone who legally qualifies as tipped worker, and only if it notifies the worker in advance.

In 2015, in a case known as Montano v. Montrose Restaurant Associates, the Fifth Circuit concluded that a worker cannot qualify as a tipped worker solely because he or she participated in the tip pool. That would be circular reasoning. However, in Texas, an employer may claim the tip credit for non-tipped work if the latter work is closely related to the tipped work an employee does. Think about a server who steps to the back of the house briefly to make coffee during a slow time. The credit might not be available if the server picked up extra shifts doing the books.

Reach out to our Employment Lawyers for Legal Help about Wages and Tips

People who work for tips perform difficult and sometimes underappreciated work. You should not also have to have an accounting degree to get paid what you are owed. Our Texas employment lawyers understand your situation and the intricate ins-and-outs of the law. We offer a free evaluation of the facts of your case. Use this link to get started Contact Us.