Court Says Restaurant Doesn’t Have To pay Mandatory “Service Fees” To Workers

If you own a business, and your employees are paid with tips, it’s important to know what is and what is not a tip. Under the Fair Labor Standards Act (FLSA) the distinction can be the difference between paying your employees correctly, or owing money to your employees for unpaid wages.

Restaurant Says Service Fees Aren’t Tips

The U.S. Appeals court in the eleventh circuit (which includes Florida) recently ruled on a case involving online sensation and meme-generator “Salt Bae” who turned his online stardom into a brick and mortar restaurant.

The restaurant included what it called a “service charge” of 18% on customer bills. The restaurant contended that the money was not a tip, and thus did not have to be given to workers. Rather, the restaurant argued, it was proper and legal for it to keep the money, and use it to pay the employees’ base hourly wages, something that could not be done if the money were considered to be a tip.

The FLSA and Tips

The FLSA says that tips are in addition to the employee’s base hourly rate, meaning that the employees in the case would have had to get their base pay plus the 18%, if the employees’ arguments were correct that the charge was actually a tip. The workers had brought their lawsuit on this exact basis: that they should have been paid their wages, and then the tip on top of their wages, the way other tipped employees are paid.

The court thus had to determine and define what a tip actually is, a definition that is not provided for in the FLSA itself.

The court settled on the concept that tips must be voluntarily paid by the customer, and that the 18% “service fee” charged by the restaurant was not voluntary. As such, the money was not a tip, and could be used to pay the base wages of the workers.

The workers argued that because managers could always remove the charge if a customer complained or was dissatisfied, it was in fact not a mandatory charge, and thus, must be considered a tip. But the court found this argument unpersuasive, saying it’s the voluntary-ness of the customer’s payment that made the difference, not whether the restaurant could opt to eliminate the fee if it wanted to.

Other courts have ruled similarly, saying that when restaurants add 20% “gratuities,” but make the gratuity mandatory, the money being paid is properly a fee, and not a tip.

Business with Tipped Employees Be Aware

The case is important for employers to know, if they are in tip-based businesses. These kinds of businesses are handled differently under the FLSA than other businesses.

The FLSA allows the employer to pay a lower base wage, to accommodate for the fact the employee will get tips. However, if that is done, tipped employees must actually get the tips-they cannot go to management, or the business itself.

Call the West Palm Beach employment law attorneys at Pike & Lustig today for any employment or labor law questions you may have.

Sources:

reuters.com/legal/transactional/11-circ-says-salt-bae-steakhouses-service-fee-wasnt-tip-2022-03-18/

fingfx.thomsonreuters.com/gfx/legaldocs/zgvomywwbvd/EMPLOYMENT_TIPS_11THCIRCUIT_decision.pdf