How to avoid tip-related traps

Employers are ineligible to participate in tip pools

The FLSA defines an employer as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” Though a low-level supervisor is not an “employer” under the FLSA, an employee with substantial managerial authority over the day-to-day operations of a business is the functional equivalent of the employer. If a manager functions as the employer in this regard, any tip sharing with that individual violates the FLSA.  

Courts generally use the economic reality test to determine whether an individual qualifies as the employer. This test examines whether the individual (1) has the power to hire and fire employees, (2) supervises and controls employee work schedules or conditions of employment, (3) determines the rate and method of employees’ pay and (4) maintains employment records.  

An employee with limited managerial duties is a low-level supervisor, not the functional equivalent of the employer. In one case, senior servers helped with closing, supervised employees’ work, handled complaints, operated the restaurant’s safe, handled money, completed the nightly closing forms, sent employees home, contacted the restaurant owner when the restaurant needed additional staff or supplies, took inventory and maintained the restaurants’ cleanliness.  

Nonetheless, the senior servers were not employers under the FLSA because they had no authority to hire, fire or schedule employees. They did not determine the rate or method of employee compensation, nor did they maintain employment records beyond performing clerical duties such as completing the nightly closing forms.

With respect to hiring and firing authority, the question is whether the individual had final authority to hire, discipline and fire employees. In one case, maître d’s who participated in a tip pool had authority to interview candidates and make recommendations for hiring and firing, but any final decisions belonged to the proprietor/general manager. The court stated that this weighed against a finding that the maître d’s functioned as the employer.

Proactively minimizing legal risks

For many restaurant employers, taking tip credits and requiring tip pooling among employees makes good business sense. To minimize associated legal risks, however, restaurant employers should immediately review their policies and practices pertaining to employees’ tips for compliance with all applicable laws.  

In light of recent litigation trends, it’s particularly important to evaluate tips pooling arrangements to ensure that they do not include (1) employees who do not “customarily and regularly” received tips or (2) employees with substantial managerial authority.

Additionally, prior to taking a tip credit, employers are required by federal law to inform employees of certain information, such as the amount of the cash wage to be paid by the employer to the tipped employee and the amount of tips to be credited as wages toward the minimum wage. It’s an ideal practice for employers to communicate the information to employees in writing and to require employees to sign acknowledgement forms.  

Finally, employers must also be mindful that mandatory tip pooling arrangements are prohibited in some states and may be subject to other restrictions depending on the jurisdiction. In general, when it comes to policies and practices relating to employees’ tips, an ounce of prevention will save restaurant employers much more than a pound of cure.

Natalie Hrubos is an associate in the employment, labor, benefits and immigration practice group in Duane Morris’ Philadelphia office.  She represents and counsels management clients in all aspects of labor and employment law, including wage and hour law compliance.