Service charge

11th Circuit Rules Service Charges are not “tips”, they can be used to meet salary obligations

Carry: The imposition of service charges may provide some employers with greater flexibility in their payroll. However, it is important to remember that it can only be used by employers whose employees are paid well above the legal wage rate and only if more than half of the employee’s compensation represents commissions on goods. or services.

The mandatory service charge applied to diners’ final bills was not a “tip” and is rightly considered part of the employees’ regular rate of pay, allowing the employer to use these payments to meet its wage obligations under the Fair Labor Standards Act (FLSA). ) overtime waiver, the 11th U.S. Circuit Court of Appeals ruled.

The employer, an upscale steakhouse in Miami, charged customers an 18% service charge, which was added to their final bill. Customers could also add a voluntary and discretionary tip by writing the desired amount on the final receipt or leaving cash tips. The service charge, however, was non-negotiable.

From November 2017 to April 2018, employees received an hourly rate, overtime pay, and a prorated share of service fees collected. Service fee payments were processed through a point-of-sale system and distributed to employees using a point system to give each employee a proportional share of the total, minus 2.65% for credit card processing. The employer also distributed the additional gratuities to employees entitled to tips.

This salary structure changed slightly on April 30, 2018, when the restaurant eliminated the hourly rate for employees and instead met its salary obligations exclusively through service fees. The employer asserted that the new pay structure was legal under 29 USC § 207(i), which exempts certain employers from overtime pay if: 1) that employee’s regular rate of pay exceeds 1 1/2 times the minimum hourly wage and 2) if more than half of the employee’s remuneration for a representative period represents commissions on goods or services.

Florida’s minimum wage between 2017 and 2019 ranged from $8.10 per hour to $8.46 per hour. During this period, the employer paid its employees amounts ranging from $23.68 to $51.58 per hour.

In January 2019, a group of tipping employees challenged the employer’s compensation plan in a class action lawsuit filed under the FLSA. They alleged that from Nov. 1, 2017, to Jan. 18, 2019, the restaurant paid them less than the required federal minimum wage and overtime and forced them to participate in an illegal tip pool with tipless employees.

Although the plaintiffs’ portion of the service fee exceeded statutory wage requirements, with some employees earning more than $100,000 a year, they argued that the employer violated the FLSA because the 18% service fee was in tip. They argued that since tips are not part of employees’ regular rate of pay, the restaurant could not use them to offset its wage obligations under the FLSA.

The employer sought summary judgment, arguing that the 18% fee was a bona fide service charge and that the uncontested record showed employees were being compensated well above statutory wage rates. The employer argued that the essential characteristic of a tip is that the decision to tip is entirely at the customers’ discretion, while the service charge is mandatory. The district court granted summary judgment to the employer and the employees appealed.

On appeal, the 11th Circuit found that the service charge was not a tip under the FLSA and was part of the employees’ “regular rate of pay”, which refers to the hourly rate actually paid to employees for the week. normal work without overtime. for which workers are employed. The court noted that the FLSA does not define “tip” or “service charge.” However, Department of Labor (DOL) regulations state that the essential characteristic of a “tip” is that “whether a tip should be given and the amount of a tip are matters determined solely by the customer.”

“By this measure, [the employer’s] the service charge is not a tip,” the appeals court said, noting that the decision of whether and how much to pay is not determined by the customer at all. as tips and explained that “a mandatory charge for a service…imposed on a customer by the establishment of an employer is not a tip”.

The court also noted that since the service charge was not a tip, it is irrelevant whether the employer paid some of that money to employees who were not tipped.

The employees argued that a service charge constitutes a tip unless an employer includes the service charge in its gross receipts for tax purposes. They claimed that the employer failed to demonstrate that it included the service charge in its federal tax returns, thus creating a question of fact as to whether the service charge was a tip.

The employer’s tax forms are irrelevant, the court ruled. Evidence shows the employer recorded the service fees in its point-of-sale system before redistributing them to employees, thereby including them in its gross receipts, the court heard. Further, he found no legal requirement for an employer to include service charges in their gross receipts for tax purposes to avoid treating them as a tip.

Finally, employees argued that the service charge was not mandatory because managers had the discretion to remove the charge from the bills of dissatisfied customers. “What the employees miss is that the relevant question is whether the decision to pay the given sum is determined solely by the customer,” the court answered. “Here, that is not the case. Customers did not have the opportunity to determine for themselves whether they would pay the service fee. It is irrelevant that managers sometimes remove the service fee for dissatisfied customers.”

The 11th Circuit, finding that the service charge was a bona fide service charge and not a tip because it was a “mandatory service charge” and that the decision to pay it – and the amount to be paid – were not determined solely by the client, the district court’s summary judgment order upheld.

Compère against Nusret Miami LLC, 11th Cir., n° 20-12422 (March 18, 2022), motions for rehearing and en banc rehearing denied (May 25, 2022).

Rosemarie Lally, JD, is a freelance legal writer based in Washington, D.C.