Make Sure Your Payroll is as Good as your Pork Belly

When I saw in the news this week that the team behind Michael’s Genuine Food and Drink settled a class action wage and hour lawsuit for nearly half a million dollars, I had two thoughts. The first was about how truly unbelievable the pork belly at that place is. Perfectly crisp in a sweet and sour kimchi glaze, it is truly one of my favorite South Florida restaurant dishes. I lingered on that first thought a while and wished my office was closer to the Design District mainstay.

The second thought I had was that this case would be a good subject for the brand new Hyman & Lewis blog, because the lawsuit Michael’s Genuine found itself embroiled in is a great example of how even a well-run operation can face exposure from the tricky contours of the Fair Labor Standards Act (“FLSA”). The class of plaintiffs in the suit consisted of sixty employees of the restaurant who asserted that the restaurant failed to properly handle tips paid to servers and failed to pay tipped employees appropriate overtime wages. The settlement means that the specifics and accuracy of these claims won’t be fleshed out in a court of law, so I won’t speculate about what the restaurant did or didn’t do wrong. Instead, I’ll take the opportunity to provide a few “tips” for employers to stay on the right side of the FLSA with respect to tipped employees.

I often hear people say that minimum wage is lower for waiters and waitresses because they earn tips. That’s not entirely accurate. State minimum wage (and overtime) requirements apply equally to tipped and untipped employees, but an employer can claim a “tip credit” for money that servers earn in tips. The amount of the tip credit is set by state law, and some don’t allow it all. In Florida it is $3.02 per hour. So for example, with Florida’s minimum wage of $8.05 per hour, an employer can pay servers and other tipped employees $5.03 per hour in wages IF AND ONLY IF the employee has earned enough in tips that their take-home pay equates to at least $8.05 per hour when added to the portion paid by the employer.

For employees who work more than forty hours in a week, Florida’s overtime minimum wage is $12.80, but the same tip credit applies. So employers claiming the tip credit must pay at least $9.78 per hour for overtime AND ensure the employee makes enough in tips that their take-home pay adds up to $12.80 per hour. To be clear, it is not OK to pay employees $5.03 per hour for overtime work, even if their wages with tips add more than $12.80 per hour. No, it’s also not OK to pay employees $7.54 (5.03 x 1.5) for overtime work.

When tips are paid by credit card, employers are allowed to deduct up to 2% from the tips to reimburse costs for credit card processing, BUT they can only do this if the deduction does not bring the employee below minimum wage. Also, they can only do this if they are actually charged 2% for card processing. They can’t make any “processing” deduction for cash tips.

Tip pooling arrangements are another hugely problematic and poorly defined area of FLSA. Many cases involving failure to pay minimum wage claims arise as a result of employees’ tips being redistributed so the tipped employee earns less than the hourly minimum wage. Even if everyone is paid minimum wage, employers can still run afoul of FLSA by including employees who don’t customarily receive tips in the tip pool. This week, the 9th Circuit Court of Appeals issued a ruling against the Wynn Casino in Las Vegas, holding that the casino improperly divvied up tips to kitchen staff and casino floor supervisors. The 9th Circuit held that this was improper even though the casino paid all its employees more than the minimum wage and wasn’t claiming any tip credits. There was also an allegation in the Michael’s Genuine lawsuit that money was taken from the tip pool and improperly allocated to cover lost and broken inventory. The common thread of these cases is that, minimum wage issues aside, tips are the property of the tipped employees and can’t be allocated by employers for other purposes.

Every employer should regularly audit their payroll to ensure they’re properly complying with wage and hour law, but it is especially important for those in the hospitality and restaurant industries. If you have questions regarding tip pooling, tip credits or restaurant payroll, consult with qualified legal counsel and make a small investment in shoring up your process to avoid large liability exposure down the line.

If you have questions regarding the Fair Labor Standards Act (“FLSA”), or another employment issue, please contact us.