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Use tip credit for some pay? Beware requiring ‘substantial’ work that doesn’t generate tips

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in Compensation and Benefits

Employees who work in occupations that customarily provide tip income don’t have to be paid the federal minimum wage. Instead, their employers can use the so-called tip credit. They can then pay the employees $2.13 per hour—if their tips bring the total hourly earnings up to $7.25 per hour.

But employers must be careful not to give the tipped employees too many additional duties to complete before, during or after their tip-generating activities. If more than about 20% of their time is spent on such activities, you may have to pay them the full minimum wage for those hours, regardless of how much they earn in tips during the shift.

Recent case: Gerald Fast and sev­eral of his fellow bartenders at an Applebee’s restaurant represent a class of more than 5,500 current and former servers and bartenders. Their lawsuit alleges that the restaurant’s use of the federal tip credit violated the Fair Labor Standards Act (FLSA) because they spent a considerable amount of time doing work that didn’t generate tips.

The restaurant chain paid them $2.13 per hour for all hours worked. With their tips, employees all earned more than the federal minimum wage—a requirement that must be satisfied for employers like Applebee’s to pay the lower hourly amount.

But the bartenders claim they should only have been paid the lower figure for those hours they spent generating tips. The workers claim that the chain required them to spend time wiping down bottles, cleaning blenders, cutting fruit for garnishes, taking inventory, preparing drink mixers and cleaning up after closing hours.

They also claim they performed such duties as cleaning bathrooms, sweeping the floors, cleaning and stocking service areas, rolling silver­ware, preparing the restaurant to open and other general cleaning both before and after the restaurant opens.

Applebee’s argued that all the ­additional work was incidental to tip-generating work.

The court said the workers could continue their lawsuit. They will have to show they spent substantial time on other tasks not directly related to their main duties. The court set a benchmark, concluding that substantial time is more than 20% of their shift. If they succeed, Applebee’s will have to pay the regular minimum wage for those hours. (Fast, et al., v. Apple­bee’s, No. 10-1725, 8th Cir., 2011)

Final note: While it may seem con­venient to have employees who earn tips perform related work, it may be more trouble than it’s worth. A solution is to have them do things like clean and set up, for an hour before their shifts begin and then perform cleaning and setup for another hour after the serving shift ends. Pay them the regular minimum wage for those two hours; switch to the tip credit for the remaining hours.

If you have any questions about your tipped employees and how to best compensate them, consult your attorney. He or she can help you decide whether you should move to a dual payment system.

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