Service charge

Mandatory service charge not tip under FLSA | Parker Poe Adams & Bernstein LLP

One of the hottest areas of controversy in recent years in wage and hour legislation has involved employees’ right to tips and the employer’s ability to use those tips to count toward minimum wage and payment of overtime. As a result of this litigation and the new regulations, employers looked for other ways to avoid lawsuits alleging misuse of these gratuities. Last month, the Eleventh Circuit Court of Appeals reported that the mandatory service charge does not fall under the Fair Labor Standards rules for tipping servers.

In Compère against Nusret Miami, LLC, the employer applied a mandatory 18% service charge on customer bills. This charge was split evenly among restaurant employees, although customers could add an additional tip which was paid in full to the server. The restaurant then used the apportioned service charge to meet its minimum wage and overtime obligations under the RSA. A group of tipping employees sued the restaurant, alleging that the service charge was in fact a tip and therefore the defendant established an illegal tip pool and failed to meet wage requirements. minimum and overtime pay. The district court disagreed, dismissing the motion on summary judgment.

On appeal, the Eleventh Circuit agreed, upholding the dismissal. The court emphasized the essential distinction between a tip and a service charge. The former is discretionary, while the latter does not involve any choice on the part of the client. The court pointed to DOL rules that characterize tips as determined solely by the customer.

In general, mandatory service charges can be unpopular with customers. However, assuming other federal courts follow the reasoning of the Eleventh Circuit, this ruling presents an option for hospitality industry employers who are struggling to meet FLSA obligations to tipped employees. Any changes to server compensation plans must be fully approved by legal counsel before being implemented.

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