Federal Appeals Court Says Employees Can’t Be Forced to Share Tips

photo - tip sharingCalifornia restaurants and other businesses who employees receive tips may need to change how they are compensated. The decision by the U.S. Court of Appeals for the Ninth Circuit mostly applies to states where employees are paid the minimum wage to begin with located in California, Alaska, Minnesota, Montana, Nevada, Oregon and Washington, according to the Los Angeles Times.

The appeals court decision upheld a 2011 U.S. Department of Labor rule stating it was consistent with Congress’ intent that tips stay with the employees who get them. They don’t belong to the business owners to divide up. Business owners who provide services are facing multiple issues concerning compensation including tip issues, raising minimum wages and the added costs of the Affordable Care Act in addition to a mix of federal, state and municipal laws.

Restaurant owners are trying different options to address the issues they’re facing. Due to tipping staff working in the “front of the house” could make much more than staff in the “back of the house.” Some are eliminating tipping but raising prices to pay for increased wages for the entire staff. The downside to ending tipping is better wait staff may leave to join restaurants where they can still earns tips and overall higher pay.

Other restaurants are instituting a surcharge to pay for health benefits for employees while some restaurants may charge on overall 18% service fee to equalize pay and medical insurance. Added to the mix is some cities, including Santa Monica, are starting to regulate service fees and surcharges as well. That city has an ordinance mandating service charges to be treated like tips and is considering limiting surcharges.

The two lawsuits at issue resulted in a mixed decision for the plaintiffs who brought them according to the Times. They were brought on behalf of restaurant and lodging associations in Washington, Oregon and Alaska and by two casino dealers against the Wynn Las Vegas casino. The restaurant and lodging groups wanted non-tipped employees to be able to share tips while the dealers complained Wynn was illegally taking their tips and sharing them with others.

Under state law tip sharing is legal as long as the employer or managers don’t keep part of the tip. If paid by a credit card employers can’t take from tips processing fees and base pay cannot be reduced by money made by tips. Mandatory service charges belong to the employer.

A mandatory service charge is not a tip, according to the federal Department of Labor, and are part of the employer’s gross receipts. If distributed to employees these charges are not counted as tips and can be used to satisfy the employer’s minimum wage and overtime obligations under the Fair Labor Standards Act.

Laws concerning compensation and benefits for employees can involve federal, state and local laws. This situation can be especially confusing to owners of small businesses who don’t have the time, energy or expertise to determine what is legal under what circumstances. Getting the help of an experienced businesss law attorney can help you pull apart which laws apply to you and your employees.

If you have any questions about pay issues with your employees contact our office so we can talk about your business, how you pay your employees and how the law may apply.