Labor & Employment Law

Tip Pools: Employers Must Be Wary of Wading In

By Mark Tabakman

In another of the slew of tip pool cases that have ripped through the restaurant industry in New York City and elsewhere, a federal judge has granted class certification to workers who receive tips in the Smith &-Wollensky Restaurant Group Inc.  These employees allege that the chain has improperly required them to pool their tips in a manner proscribed by the law.  The case is entitled Schmidt v. Smith & Wollensky and was filed in the U.S. District for the Northern District of Illinois.

The lawsuit charges that Smith & Wollensky did not comply with the Fair Labor Standards Act (FLSA) rules regarding the tip-credit provisions of the Fair Labor Standards Act and Illinois wage law  The 'tip credit' allows an employer to pay less than the federal minimum wage, on the assumption that the employee will make up the difference in tips.

However, certain rigid requirements must be met. If employees who do not receive tips as a customary function of their job duties, they cannot share in the pooled monies.  The complaint charges that such employees did share in the pool and, as such, the validity of the tip pool is destroyed and the employer then loses the ability to claim the tip credit.  What follows then is that for every hour worked, the employer has not properly paid the minimum age and tremendous liability (potentially) arises, depending on the number of employees involved and how far back the statute of limitations goes (e.g. two or three years under FLSA and longer under state law).  In this case, the complaint charges that the employer required servers to share tips with 'expediters, dishwashers, silver polishers and coffee makers' and also included a manager in the tip pool.

In granting class certification under Rule 23, the state law claim, the judge rejected the employer's argument that the class was unduly broad as it sought to include all of the employees receiving tips, not just servers.  This was based on holdings by the Court of Appeals for the Seventh Circuit which has determined that a class is too broadly defined if it seeks to include employees who could not have a recovery or suffered an injury at the misconduct of the employer.  The District Court judge, however, ruled that the manner in which the class was defined was not overly broad because it 'appropriately includes those employees who ‘could' have been injured by defendant's alleged conduct.'

In the restaurant industry, tip pooling arrangements are under constant focus and are the targets of a rash of class action lawsuits.  One way to resolve this dilemma is not to tip pool and just allow each waiter to receive/keep his own tips.  The downside is that there will be fights over good 'stations' and other possible employee discord/unrest.  This may a smaller price to pay than thousands (or hundreds of thousands) of dollars in damages.
 

Full post as published by Wage & Hour - Development & Highlights on August 06, 2010 (boomark / email).