A Miami restaurant’s mandatory 18% service charge did not constitute “tipping” under the Fair Labor Standards Act (FLSA) and was therefore properly enforced to meet wage requirements for employees of the FLSA, recently ruled in the United States Court of Appeals for the Eleventh Circuit, affirming summary judgment in favor of the employer. Compere vs. Nusret Miami, LLC, 2022 US app. LEXIS 7293 (11th Cir. Mar. 18, 2022). The Eleventh Circuit has jurisdiction over the federal courts of Alabama, Georgia, and Florida.
Department of Labor (DOL) regulations defining what constitutes a “tip” expressly provide that mandatory service charges are not tips. The central feature of a tip is customer discretion: if the customer chooses to tip, and if so, the amount of that tip, then it is considered a tip under FLSA regulations. Conversely, if the employer charges a fee that the customer has no choice but to pay (unless, for example, the employer waives the fee to resolve a complaint about the service provided), the fee is not a tip and the employer can use it to meet its wage obligations.
Since opening five years ago, Nusret Miami (“Nusret”), an upscale steakhouse in Miami, Florida, has added a mandatory 18% “service charge” to customer bills, after which it redistributes those fees to certain employees to cover restaurant costs. minimum wage and overtime obligations. Employees who receive a portion of the service charge are paid very well, sometimes earning over $100,000 a year, and if the 18% charge was a legitimate service charge, then the restaurant has definitely met its duty. minimum wage and overtime for these employees. .
A group of tip employees filed a lawsuit against the restaurant, claiming that Nusret failed to properly pay them minimum wage and overtime, and forced them to participate in an illegal tip pool with untipped employees, all in violation of the FLSA. The plaintiffs’ main argument was that Nusret’s service charge was, in effect, a tip and therefore could not be used to meet the restaurant’s minimum wage and overtime obligations. In support of this argument, the plaintiffs claimed that Nusret failed to include the service charge in its gross receipts and failed to report the income for federal income tax purposes. The restaurant countered that the 18% fee was a legitimate service charge and that it had properly met its wage obligations under the FLSA. The district court agreed with the employer and granted summary judgment.
On appeal, the Eleventh Circuit upheld summary judgment for the restaurant. In support of its decision, the Court of Appeals cited 29 CFR § 531.52(a), which explains that the essential characteristic of a tip is that the sole discretion rests with the customer as to whether it should be given. and, if so, in what quantity. In this case, customers definitely had no say in whether they should pay Nusret’s 18% service fee. Additionally, DOL regulations specifically identify mandatory service charges as an example of a charge that is not a tip.
The Eleventh Circuit rejected the plaintiffs’ argument that service charges should be treated as tips unless Nusret included them in their gross receipts and reported them for tax purposes, finding that claim “irrelevant.” The Court of Appeal also rejected the plaintiffs’ argument that the service fee was not mandatory because, for example, management could waive it to resolve a customer complaint. Reiterating that to constitute a tip, the discretion to give it must belong to the customer and not the employer, in this case Nusret’s clients clearly had no such discretion. Thus, the 18% fee was a legitimate service charge and the restaurant applied it correctly to meet its salary obligations.
The Eleventh Circuit’s ruling reaffirms that true service charges do not constitute gratuities under the FLSA and, in the case of retail or service establishments, can be used to satisfy an employer’s obligations under the FLSA. minimum wage and overtime. Employers should also review state law, which may treat such fees as a form of tipping regardless of who retains discretion to impose or pay them, although such laws may be preempted by federal law.