In the last few years, a new path to monetary liability of employers to employees and former employees has become popular, with costly consequences to employers and opportunities for high court-awarded fees to attorneys for successful plaintiffs. These claims, litigated or not, are especially suited for early resolution by mediation.
The Fair Labor Standards Act (FLSA), and more importantly in Florida and other states with minimum wage statutes, state minimum wage laws allow employers of tipped employees as defined in such laws to take a tip credit against the cash wages owed such employees. The tip credit applies mainly to employers which are or contain commercial dining establishments where diners are served by servers, primarily restaurants, hotels and resorts. The federal minimum wage is $7.25, and employers are required to pay only $2.13 per hour to tipped employees, provided such employees otherwise receive the minimum wage from tips. In Florida, under the Florida Minimum Wage Act (FMWA), the required hourly cash wage differs each year because the Florida minimum wage rises most years. It is now $10.00, and effective September 30, 2022, it will be $11.00. The allowed tip credit under the Florida law is $3.02, so effective September 30 tipped employees in Florida will have to be paid a cash hourly wage of $7.98. Any good payroll service should know this and ensure payment of $7.98 per hour of tipped work (which more than meets the FLSA requirement of $5.12).
There are, however, expensive traps associated with these opportunities to save. Employer liability per tipped employee arises if the common practice of tip pooling is abused. Tipped employees must pay income tax on their tip earnings and therefore must report their cash tips to the employer. The employer already knows the totals of credit and debit card tips per shift and per day. Most dining establishments aggregate cash and credit/debit card tips and distribute the money to tipped employees in a tip pooling arrangement, often at the end of each shift. It is critical that employers know that only statutorily defined tipped employees can legally participate in sharing of tip money. The case and regulatory law provide that tipped employees are limited to those who receive more than $30.00 per month in tips and who have substantial and work-related contact with customers. Only they can share in an employer-sponsored tip sharing arrangement. Thus, cooks and other exclusively kitchen employees cannot be included (and are paid the full minimum wage in cash). Similarly, managers, assistant managers and supervisors cannot be included.
The inclusion of any non-tipped employee in tip sharing in any shift invalidates the arrangement for that shift, and makes the employer liable to each tipped employee who worked that shift for the tip credit taken per employee times the number of hours worked in the shift for which a cash wage was paid to such employees for tipped work. The measure of damages is the amount of the tip credit taken per employee per hour in each shift in which the pooling arrangement was compromised.
Especially in these interesting times, many employers of tipped employees cannot resist saving payroll dollars by giving managers, cooks, and other non-tipped employees part of the tip pool aggregate, which, after all, is in many cases substantial.
Liability can extend for the portion of the statutory period of limitations worked by each affected employee. Many employers have no records to prove which shifts are tainted by illegal participation. In such cases, the court must entertain whatever assumptions the plaintiffs present in that regard. Another problem is that managers are known to “share” without the knowledge of responsible higher management. The limitations period under the FLSA is two years, three if a willful violation can be proven, which is not difficult but may be an expensive jury issue. Under the FMWA, the period is four years, five if a willful violation is proven. Worse for employers, awards of minimum wage under each law are automatically doubled (in lieu of interest) as liquidated damages. The employer has a difficult burden of proving a good faith defense to liquidated damages, but that increases the defense costs.
The most difficult part of this for employers is that under these laws prevailing plaintiffs’ attorney fees are mandatory. Thus, however long the dispute continues, if the employees end up with money, regardless of amount, the verdict or settlement will include an attorney fee that in many cases greatly exceeds the amount the claimant or claimants receive. If a case goes to verdict and plaintiffs recover any amount, case law allows/requires the court to award an hours-based fee to plaintiffs’ counsel: such awards are substantial because of the time and expense of “going all the way”.
Most minimum wage cases settle, some sooner, most later. Any settlement will include a fee for the attorney for the claimants.
Add to the foregoing the fact that many plaintiffs skip the FLSA part, and sue only in state court, where judges are not familiar with this area of law and summary relief is hard to get.
Employers can avoid the above-discussed outcomes by careful and strict compliance, but tipped employee minimum wage claims are nonetheless very numerous. Unlike statutory discrimination cases, which require prior administrative steps, FLSA and FMWA cases can be filed even without a demand. However, most wage action lawyers make a demand, hoping to settle.
A final problem is that in this area there is a lot of non-compliance, coupled with responsible managers being reluctant to own up. Human nature. The employer and its counsel often don’t know what they are up against until a lot of money has been spent and committed.
All of this indicates that tipped employee minimum wage cases, as much or more than any other, lend themselves to mediation early in a civil action, as well as to resolution before suit in a pre-suit, agreed mediation.