Publication

June 2008Newsletter

A New Wave of Fair Labor Standards Act Class Action Litigation?

Employment Law Express

Last year, plaintiffs bombarded employers and the courts with a flurry of class action litigation regarding so-called “off-the-clock” disputes and other questions regarding what constitutes “hours worked” for purposes of the Fair Labor Standard Act (“FLSA”). Many of those were deemed the infamous “donning and doffing” cases. (See “Are You Paying Your Employees for Their Time Spent ‘Donning and Doffing’ Equipment Before and After Their Shift? The Latest FSLA Class Action Trend,” from the September 2007 issue of the Employment Law Express for a refresher on this topic.) Although those cases are still prevalent, a new wave of FLSA and state wage and hour litigation has hit the courts – disputes over employer-imposed tipping practices. Perhaps the most famous case this year involved a class of coffee baristas who filed suit against Starbucks, alleging that its tip pooling practices violated California law. The class argued, and a San Diego court agreed, that Starbucks violated California law because its tip pooling arrangement permitted shift supervisors to share in tips. The court found that the shift supervisors were employer agents and socked Starbucks with liability of approximately $100 million in back tips and interest. Starbucks has indicated that it will appeal the ruling because it believes that the shift supervisors are not store management.

The new wave of tip-pooling litigation that publicly started with the Starbucks case recently reached Wisconsin. In early May 2008, a class filed a complaint against Eddie Martini’s restaurant with the United States District Court for the Eastern District of Wisconsin alleging that its mandatory tip pooling policy violated the FLSA and Wisconsin’s wage and hour laws. The complaint alleges that Eddie Martini’s tip pooling scheme requires each server to provide his tips to management, and that management then reallocates the tips among various employees, including the servers, bus staff, bartenders, captain, and kitchen staff, including cooks and chefs. The complaint alleges that this scheme violates the FLSA, as well as Wisconsin law for the following reasons: first, tipped employees are required to share their tips with non-tipped employees, and therefore, it is not an acceptable tip-pooling arrangement allowed by the FLSA; second, because the tip pooling arrangement is improper, any tips cannot count toward the employees’ salary, and as a result, Martini’s did not pay the class minimum wage.

The FLSA provides an exception to the minimum wage requirements for tipped employees. A tipped employee is an employee who is engaged in an occupation in which he customarily and regularly receives more than $30.00 a month in tips. With respect to those employees, employers may pay less than the minimum wage. However, the employee must be informed regarding this law, and all tips received by the employee must be retained by the employee, except where otherwise distributed pursuant to pooling of tips among other employees who customarily and regularly receive tips. In the Martini class action, one of the dispositive questions will likely be whether all of those persons sharing in the tips are persons who “customarily and regularly” receive tips. However, this question is not as easy as it might first appear because prior case law has stated, and the Department of Labor has opined, that a person (such as a busperson and host) who does not receive tips directly from the customers, but nevertheless receives tips from tip sharing may be considered a person who “customarily and regularly” receives tips. The line, however, may likely be drawn between those persons who regularly have customer contact (buspersons, servers, bartenders, hosts) and those that do not (such as cooks, dishwashers, janitors).

Both the Starbucks and the Martini cases serve as important reminders that class action lawsuits in the wage and hour arena are often an easy and fruitful target for many plaintiffs’ lawyers. In order to avoid potential liability, an employer desiring to take advantage of the tip credit for tipped employees under the FLSA must:

  • Inform each employee that it will be using a tip credit allowance before doing so.
  • Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined.
  • Allow the tipped employee to retain all tips unless the employee participates in a valid tip pooling arrangement.
  • In addition, employers must be mindful that some states (such as California) do not allow employers to use tips to make up a portion of the mandatory minimum wage.

Employers setting up mandatory tip pooling arrangements should:

  • Not include persons who generally have little or no customer contact; and
  • Be mindful that some states may provide greater restrictions than those contained in the FLSA; and
  • Consider making tip pooling voluntary to avoid the uncertainty of determining whether certain employees customarily and regularly receive tips.

For additional information, please contact Farrah N.W. Rifelj at 608.283.0110, or fnwrifelj@michaelbest.com.

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