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June 14, 2011
Can Employer Take Tip Credit and Share in Pool?

The owner of two taverns frequently worked alongside bartenders and contributed to a collective tip pool. Some of the bartenders he employed took issue with the fact that he retained a portion of those tips himself, since he owns the businesses and takes a “tip credit” under the federal Fair Labor Standards Act (FLSA) and the Maryland Wage and Hour Law (MWHL).

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What happened. “David” owns and operates two taverns in the Federal Hill neighborhood of Baltimore City. He has management authority over and “generally supervises and controls” both taverns.

He also works as a bartender at both locations and receives a portion of the tips from a collective tip pool as his primary mode of compensation from his businesses. The tips are divided among the bartenders based on the number of hours each works. David receives modest K-1 distributions from his businesses, but he does not draw a salary.

Four of his former bartenders and one sous chef filed suit against him and his businesses, alleging that they were unlawfully deprived of wages under the FLSA, MWHL, and the Maryland Wage Payment and Collection Law (MWPCL). The sous chef (a non-tipped employee) claimed that she did not receive proper overtime and regular wage compensation.

Three bartenders argued that David was prohibited from retaining any of the tips from the tip pool while simultaneously taking a tip credit. The credit allows him to pay tipped employees less than the minimum wage, as long as their tips make up the difference between the tipped wage rate and the full minimum wage.

The fourth bartender did not contest David’s participation in the tip pool. Instead, the bartender alleged that the only compensation he received while working at both taverns was his share of the tip pool and that David owed him the full minimum wage for all hours worked at both locations.

What the court said. The U.S. District Court for the District of Maryland severed the sous chef’s claims for overtime and unpaid wages from this collective action and said her claims would proceed in a separate action.

Similarly, the court dismissed the fourth bartender (i.e., the one who said he received only tips for his work) from this action. Although he “very well may have legitimate claims under the FLSA, this action is not the proper vehicle to raise those claims…,” the court said.

“The central issue in this case is… [David’s] participation in the tip pooling arrangement between the bartenders at the Taverns, and whether or not participation is illegal under the FLSA and Maryland state analog statutes,” the court explained, adding that the three remaining bartenders are “similarly situated as their claims all rest on the same facts and common questions of law.”

Although this is an issue of first impression in this court and in the Fourth Circuit, it is not in others. “Every court that has considered the issue has unequivocally held that the FLSA expressly prohibits employers from participating in employee tip pools,” the court said.

“As the sole owner of the Taverns, … [David] is essentially the sole beneficiary of the ‘tip credit’ provisions of the FLSA,” the court explained. “As such, he is prohibited from participating in the tip pool at the Taverns. A contrary finding, allowing an owner to participate in a tip pool, would broaden the FLSA’s tip credit provisions to a point where they would become meaningless.” The court also concluded that David’s participation in the employee tip pool violated the MWHL.

There was conflicting evidence about whether David’s conduct was willful. As a result, the court said that issue must be determined at trial. “In short, it would be premature to hold, as a matter of law, that… [his] conduct was or was not willful.” The court also left the issue of calculation of damages for further proceedings. Gionfriddo, et al. v. Jason Zink, LLC, et al., U.S. District Court for the District of Maryland, Civil Action No. RDB-09-1733 (3/11/11)

Point to remember: Although there could be “some close circumstances” in which “it may be, at least theoretically, possible to be an employer under the FLSA and at the same time share in a tip pool,” the court said that was not the case here and that employers are typically prohibited from doing so.

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