Monday, May 2, 2011

Remember the "20% Rule" When Taking Tip Credits

A federal appeals court had a reminder last week for restaurants and other businesses whose employees receive tips.  It wasn’t a new or novel message, but many employers seem to have forgotten it, assuming they ever knew it at all.  The message is quite simple:  you can’t take tip credit for hours during which a tipped employee spends more than 20% of his/her time doing non-tip work.

The Fair Labor Standards Act allows employers to pay a minimum wage of $2.13 per hour to employees who routinely earn more than $30 in tips each month.  If an employee does not receive enough tips to bring their effective hourly rate up to at least the federal minimum wage of $7.25 per hour, then the employer must make up the difference.

In the case at hand, a class of more than 5,000 current and former employees alleged that a nationwide restaurant chain acted unlawfully by taking a tip credit even when employees were assigned to duties that would not generate tips, such as cleaning and maintenance.  The employer argued that the non-tip work was not a substantial part of what the employees did.  Moreover, it said, because the non-tip duties were all included within the plaintiffs’ job descriptions, they did not need to be separately compensated because the tasks were part and parcel of the tipped positions.

The trial court rejected the company’s arguments and denied its motion for summary judgment.  The court of appeals agreed, finding that the DOL’s “20% rule” was a reasonable interpretation of the law and was entitled to deference by the courts.  While acknowledging that the DOL perhaps could have chosen some other figure as a “line in the sand,” the appellate court noted that the 20 percent standard was not clearly erroneous and was, in fact, consistent with “substantial v. non-substantial” determinations found in other contexts within the wage and hour laws.

The case, Fast v. Applebee’s International, is found here.

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