Service charge

Mandatory restaurant service charge was not a tip | Mitchell, Williams, Selig, Gates & Woodyard, LLC

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In the current battle to hire and retain good workers, employers have developed creative ways to balance the increased compensation expectations of employees against the costs of running a business. Additionally, restaurants using tip credit have additional administrative challenges in ensuring that their employees receive enough tips to meet the minimum wage and overtime requirements of the Fair Labor Standards Act (FLSA). A recent opinion from the federal appeals court examined a restaurant’s creative tactic to address challenges by tipping employees their wages from monies collected as part of a mandatory service charge.

Steakhouse uses mandatory service fees to pay employees

Nusret Miami, LLC, is an upscale Miami steakhouse owned by Nusret Gokce, a celebrity chef also known as “Salt Bae”. Since opening in 2017, the restaurant has added a mandatory 18% “service charge” to customer bills.

Nusret used the service fee to pay some of its employees. In doing so, the restaurant believed it complied with 29 USC § 207(i) of the FLSA (we’ll refer to it as “the 207(i) exemption” in this article), which exempts overtime pay for establishments retail or service. if:

  • The regular rate of pay is greater than one and a half times the employee’s minimum hourly rate; and
  • More than half of employee compensation is based on commissions for goods or services.

Nusret met the facial requirements for the exemption. His payments to tipped employees ranged from $23.68 to $51.58 an hour, far exceeding one and a half times the Florida minimum wage for the period, which ranged from $8.10 to $8.46 Of time.

A group of tipped employees were unhappy with the arrangement, however, and claimed that the “service charge” was actually “tipping” under the FLSA. They filed a class action lawsuit against Nusret Miami for unpaid minimum wage and wrongfully taken overtime compensation, damages and tip reimbursement.

Court decisions

By claiming that the service charge was actually a tip, disgruntled employees argued that it could not be used in calculating wages paid to employees for the 207(i) exemption. They also alleged that scattering funds received from service fees among multiple employees created an inappropriate “tip pool.” As a reminder, tips generally belong to the employee who received them and, other than facilitating meaningful tip-sharing arrangements, they cannot be collected by the employer.

The appeals court first noted that tips cannot be used in calculating the first requirement of the 207(i) exemption (i.e., employees are paid in excess of one and a half times their normal rate of pay). In other words:

  • If the service charge was in fact a tip, then the amounts an employee received from it did not count towards the normal rate of pay; and
  • Nusret was not exempt from overtime requirements and may have struggled to state the minimum wage for some employees.

Therefore, the fundamental question of whether the service charge was a tip was essential, and the court concluded that it was do not a dot. In doing so, he relied on US Department of Labor (DOL) regulations stating that the essential characteristic of a “tip” is that whether and how much to tip is solely at the customer’s discretion, and no from the restaurant.

Nusret’s service fee was mandatory both in fact and in amount (18%), and the client had no discretion to pay it. The court further found that the service charge fell squarely within a regulatory example of the DOL regarding monies received that are not tips, which set out “mandatory charges for service, such as 15% of the amount of the tip.” invoice, imposed on a client by the employer. establishment is not a tip.

The employees, however, argued that the service fee should not count for the 207(i) exemption because Nusret Miami had not included it in its gross receipts for tax purposes. The court did not find the argument convincing. Another factor influencing the court was that service fees were integrated into the POS system and then distributed to employees on a pro-rated basis, rather than being paid to them directly.

The impact of the case in Arkansas and elsewhere

What does a deal out of Miami have to do with Arkansas? The FLSA applies to employers in Arkansas and Florida, although the interpretation of the law may differ in federal courts.

Nusret’s case was decided by the United States Court of Appeals for the 11th Circuit, which governs the federal courts of Florida, Georgia and Alabama. Although the 11th Circuit does not govern the federal courts in Arkansas, it joined the 4th Circuit (which operates in the federal courts of Maryland, North Carolina, South Carolina, Virginia, and Virginia -Western) in its interpretation of specific federal regulations and the 207(i) exemption.

Although neither opinion is binding on the federal courts in Arkansas, they do provide guidance on the factors the courts will consider when considering the same statutory and regulatory articles. Compere vs. Nusret Miami, LLC28 F.4e 1180 (11th Cir., 2022).

practice pointers

Be aware of cases like Nusret Miami are often based on individual facts. If, for example, service charges had been paid directly to tipped employees, the 11th Circuit noted that the outcome might have been different.

Here are some of Nusret Miami’s actions that helped his case:

  • It paid employees well above minimum wage using service fees (up to six times more), and the court noted that some workers even earned $100,000 a year.
  • The restaurant has made the service charge mandatory for customers.
  • He did not pay employees directly in cash from the 18% service charge. Instead, he fed the cash into his POS system and then paid the workers on a prorated basis.

Another action that it wasn’t clear the restaurant had taken, but that might have helped their case: being able to show that you included the service charge in your gross receipts for tax purposes. It’s worth talking to a tax advisor about how to treat these types of wages (and other income) for tax purposes.

And a final practice indicator that was not directly at issue in the Nusret Miami case, but the court noted that it would have been relevant if the service charge had been deemed a tip: if you have a valid tip or tip-sharing policy, make sure no manager, supervisor or owner pockets any of the tips!

Republished with permission. Originally published in Arkansas Employment Law Letter.