tip poolingOn February 13, 2012, the federal district court for the Middle District of Tennessee granted conditional certification of a class action case under the Fair Labor Standards Act (“FLSA”) against Coyote Ugly saloons. As reported by Law360, the court conditionally certified several distinct classes, the most interesting of which is all employees who “worked as bartenders, barbacks, or waitresses at any company-owned Coyote Ugly saloon at any time within the last three years who were required to contribute their tips to a “tip pool” in which security guards also participated.” Under the FLSA, an employer may take a “tip credit” against the minimum wage owed to employees.  That is, an employer may pay a tipped employee $2.13 an hour under the FLSA (note that the amount of the tip wage can vary by state or local law), and then rely on the tips received by a server to make up the difference between $2.13 and the minimum wage. (If the tips received by the employee are insufficient to bring the employee’s compensation up to minimum wage, the employer must make up the difference.)

The FLSA also permits a “tip pool”; that is, an employer may require servers to contribute a portion of their tips to a tip pool and then pay out the funds in the tip pool to other employees who “customarily and regularly” receive tips (See Wage and Hour Fact Sheet #15: Tipped Employees under the Fair Labor Standards Act).  Such a rule immediately reveals the nature of the challenge in complying with the FLSA regulations regarding a tip pool.  If the employees “customarily and regularly” received tips directly, they wouldn’t need to be in a tip pool!  The regulations and case law have gradually come to define an employee who “customarily and regularly” receives tips as an employee who participates in directly providing service to the customer – such as the hostess at the front door and perhaps a busboy or bartender (as opposed to the dishwasher in the “back of the house”.)  One of the factors used to determine whether an employee may be paid out of the tip pool is the extent to which they have any “face-to-face” contact with the customer.  See Kilgore v. Outback Steakhouse of Florida, Inc., 160 F.3d 294 (6th Cir. 1998)

A number of rules govern this tip pooling process but generally the two overriding concerns are first, that all of the tips taken from the servers and put into the pool must be paid out to the other tip pool participants –i.e, the employer may not retain any of the tips; and second, only those employees who participate in the direct service of the customers (“customarily and regularly” tipped employees) may receive a portion of the tip pool.  If the tip pool is administered in compliance with the FLSA rules, then all of the tip pool participants may be paid the tip credit hourly wage and the employer may credit the tips against the remainder of the minimum wage owed to those employees. However, if employees who do not participate in this sort of direct service of the customer (such as the cooks or dishwashers in the back of the house) are paid a portion of the tip pool or if all of the funds paid into the tip pool are not paid out to the tip pool participants, then the tip pool is invalid.  The consequence for having not administered a tip pool in accordance with the FLSA is that the employer will be held to have not been entitled to the tip credit and all tip pool participants – those that paid in to, and those that were paid out of, the tip pool  -must be paid the difference between the minimum wage and the tip credit wage they received for all hours worked. (Note that various state laws regarding this issue support additional damage theories based upon an invalid tip pool.)

The Coyote Ugly saloon case revolves around whether “bouncers” may be included among the employees who are paid out of the tip pool.  Judge Trauger in the Middle District of Tennessee denied Coyote Ugly’s motion to dismiss last summer, finding the issue to be sufficiently fact specific and the record not sufficiently clear to determine that the Coyote Ugly saloon bouncers provided direct service to the customers such that they should have been permitted to participate in the pool.   Apparently Judge Trauger is not convinced that bouncers provide such face-to-face customer service as a matter of law that would permit them to participate in a tip pool.

While taking the tip credit against minimum wage saves an employer a great deal of money, this case demonstrates the difficulty the employer faces when sued over the practice.   While Coyote Ugly may ultimately prevail in convincing the court or jury that bouncers were appropriately permitted to participate in the tip pool, the company will certainly incur significant expense in the effort.  The other challenge for such employers is the absolute necessity of having the records available to demonstrate that all tips that are paid into the tip pool by servers are paid out to the other tip pool participants.  Employers are encouraged to review both who is being paid out of a tip pool and whether an audit of all of their records would demonstrate that all tips paid into the tip pool by servers were paid out to the other tip pool participants.  The case law regarding which party has the burden of proof under the FLSA with respect to these issues includes an underlying public policy that the employer is responsible for maintaining adequate records.  The employer may well find that it will be saddled with the burden of proving the validity of its tip pool process after a minimal showing by the employee raising questions regarding the tip pool process.

You can read more about this case on Law360.