The dinner plate arrives, and there in the center sits a sizzling masterpiece: a perfectly seared, mouth-watering, dry-aged rib eye, from Knife Dallas, a top-rated steakhouse in Texas. You want to reward the chef for this culinary feast. A big tip at dinner’s end?
The chef and other back-of-the house workers in Texas restaurants generally do not share in the tips that are pooled and distributed among the servers, hosts and others in the front of the house. Welcome to the world of tip credits and tip pooling and how Texas restaurant employers became part of a somewhat wonky legal fight that has reached the U.S. Supreme Court.
The central question in the fight challenges the authority of the U.S. Labor Department to enact a rule that restricts tip pooling. Restaurants, by and large, like tip-pooling because it allows them to pay their workers less than minimum wage as long as there are sufficient tips.
The resolution of the case could have implications for another Texas-sized dispute—the multistate challenge to the Labor Department’s rule to extend mandatory overtime pay. That case, in which the Texas Restaurant Association supports the challengers, is pending in the U.S. Court of Appeals for the Fifth Circuit.
Texas is a tip credit state. Businesses can pay their employees a lower amount hourly so long as their tips bring them up to minimum wage. But not every restaurant takes the tip credit, said Kenneth Besserman, general counsel to the Texas Restaurant Association. “Whether they’re permitted to or not, some just don’t,” he said.
Some states enforce a universal minimum wage and others, like Texas, have a minimum wage and a tipped minimum wage. The tipped minimum wage in Texas permits employers to pay tipped employees $2.13 per hour as long as all or a portion of their tips make up the difference between the tipped wage and the federal minimum wage of $7.25 per hour. The tipped minimum wage in Texas has not changed in 26 years.
In some instances, a tip-credit restaurant owner wants tips pooled or shared among all of the employees. Tip pooling must be voluntary, and the federal Fair Labor Standards Act restricts tip pooling to employees who “customarily and regularly” receive tips. This group typically excludes cooks, chefs and dishwashers.
“Probably the biggest issue I see is not the tip credit’s existence but who is eligible to be part of the tip pool,” Besserman said. “In recent years, there’s been a little bit of blurring of the lines between servers and back of the house.”
Besserman pointed to job descriptions such as expediters or food runners. “While they may not be traditionally a server in the classic sense, they’re also not classically back-of-the-house kitchen,” he said. “Are they eligible to partake in a tip pool? It’s never a black and white answer. It’s always somewhere in the middle. What are they actually doing?”
Answering that question wrong can be costly.
Last year, a federal district judge in Amarillo ordered Hayashi Japanese Restaurant, owned by Lin’s Restaurant Inc., to pay more than $166,000 for running afoul of the Fair Labor Standards Act. The tip pool was distributed among all employees, including those who weren’t customarily tipped, and the employer required employees to pay 5 percent of their total gross sales during each shift to the tip pool and to pay for unpaid customer bills.
And back in 2009, a Houston federal jury awarded 55 employees of the Chili’s food chain $270,000 plus interest and attorney’s fees because they were required to allocate 1 percent of the total tip pool to “food expediters.”
Drew Hermann of Fort Worth’s Hermann Law, who represents employees, said the tip credit and tip pooling system are “fraught with problems.”
“I pretty much know if I get a call from someone working in a restaurant, the chance they have a claim is somewhere around 80 percent,” he said. “With a regular employee, maybe 5 percent have a claim. There are so many restaurants that violate this. Waiters and waitresses, more than any other group of employees, are treated as dispensable.”
Employers, Hermann continued, “can do whatever they want and a lot of times, employees feel they can’t speak out; they’re afraid they will lose their jobs. They feel they can’t call a lawyer because it’s too expensive.”
To the Courts
How did all of this become a Supreme Court issue? Last February, the Ninth Circuit, in separate cases consolidated on appeal, upheld the Labor Department rule that extended the tip-pooling restrictions to all restaurants, including those that pay full minimum wage to all employees.
The department justified the rule, saying, “When the employer uses tips for its own purposes, whether to supplement wage payments to nontipped employees or to otherwise offset its own business expenses … it is in effect making a deduction from employees’ wages. To this end, the department is not regulating the employer’s use of the tips; it is regulating the employer’s statutory wage payment obligation.”
Wynn Las Vegas, one of the defendants in the cases in the Ninth Circuit, was sued by casino dealers who claimed their required participation in a tip pool violated the Labor Department’s 2011 rule. The casino employs about 500 table dealers who generally are paid minimum wage. Wynn does not take a tip credit. The dealers charged that Wynn required them to give a portion of their tips to casino supervisors who did not customarily receive tips from customers.
In the Supreme Court, Wynn Las Vegas, represented by Eugene Scalia of Gibson, Dunn & Crutcher, argued the Ninth Circuit erroneously imposed restrictions that are not found in the Fair Labor Standards Act (FLSA).
“The court of appeals reasoned that ‘statutory silence’ in the FLSA regarding ownership of tips apart from tip credits ‘leaves room for agency discretion’ to regulate as it sees fit,” Scalia wrote in high-court papers. It treated this silence, he wrote, as empowering the Labor Department to create rights and restrictions “where Congress did not.”
The table dealers, represented in the high court by employment law scholar Eric Schnapper of the University of Washington School of Law, contend that about $17,000 a year was taken from each dealer. By using dealers’ tips, rather than its own funds to increase the supervisors’ income, Wynn saved more than $8 million a year, Schnapper argued. The net effect on dealers, they claim, were wages less than minimum wage.
They urge the high court to deny review, arguing there is no conflict among the circuits and, in fact, the Ninth Circuit is the only circuit to have ruled on the rule’s validity.
The National Restaurant Association filed a related high court petition in National Restaurant Association v. U.S. Department of Labor.
“There’s a basic fairness notion here,” said Paul DeCamp of Jackson Lewis, counsel to the restaurant association. “The starting point for our case is employees already are earning cash wages from their employers at or above minimum wage. As long as everybody’s getting full minimum wage, employers and employees ought to have a tip pool where kitchen workers and the kind of people we find in the back of the house can share in some of the fruits of their labor because their work helps to determine what kind of tips people in the front of the house get.”
The association makes a legal argument similar to Wynn’s. If Congress had wanted to say “no tip pooling” for back-of-the-house employees, it could have done that, DeCamp said. But it did not. Instead, Congress imposed restrictions only on employers who take a tip credit.
“Does the Labor Department have the authority to step in and say, ‘Nevertheless, we like those conditions as an abstract, free standing matter, and we’re going to apply them to restaurants that do not take the tip credit?’ Do they have authority to do that?” DeCamp said. “We say no.”
Fort Worth’s Hermann said he sees unfairness to already underpaid employees if the Supreme Court accepts the arguments of Wynn and the National Restaurant Association.
The tip credit would be abandoned, he said. Employers would pay the $7.25 minimum wage, and they would use tips as they see fit, he said.
“I represent a group at a very fine dining restaurant where total wage is very small but total income with tips is significant,” Hermann said. “If employers can just do $7.25 and take a large portion of the tips, they could pay the entire wage with those tips and earn a profit just off them. That’s exactly what would happen. It wouldn’t be right.”
Besserman of the Texas Restaurant Association disputed that assessment. He said the issue is most important in states with no tip credit—including Washington, Nevada, Oregon and California. “I don’t think it would change much in Texas,” he said. “In general, we support the National Restaurant Association and our other fellow associations to the extent we can. This obviously is very important to them.”
But the broader issue with significant implications, he and DeCamp said, is whether the Labor Department exceeded its rulemaking authority.
“We’re back to the issue of agency deference or agency authority and how far it extends,” Besserman said. “It’s the same issue raising its head in the overtime lawsuit.”
That question, DeCamp said, is central to the wage-and-hour tip issue.
“When can federal agencies impose standards when the statute says nothing about the topic? It affects lots of agency rules,” he said. “That could really open a whole reconsideration of what it means for a federal agency to have regulatory power.”