Given the industry’s fast pace and unique business practices, hospitality employers have become increasingly vulnerable to wage and hour claims. The federal and state government agencies across the country have stepped up vigorous enforcement of various wage and hour laws. Plaintiffs’ attorneys also are filing high-stakes lawsuits against restaurants, hotels and other hospitality businesses daily.
Want to ensure compliance in the New Year? Follow this checklist that highlights the top five issues impacting hospitality employers.
1. Do you rely on the tip credit?
Under the Fair Labor Standards Act, employers are allowed to pay tipped employees a direct cash wage below the federal minimum wage of $2.13 per hour and take the “tip credit” of up to $5.12 per hour to make up the difference. A tipped employee is defined by the United States Department of Labor as “any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips.” The key is that the direct wage and tip must equal the federal minimum wage of $7.25 per hour for the hours worked in the pay period. You will want to check your local and state laws to determine whether you can take a tip credit.
If you rely on the tip credit, then:
- Don’t forget proper notice. To comply with the tip credit requirements, employers must provide advanced notice of taking the tip credit including the amount of the direct cash wage you will pay to the employee; the amount you are taking as a credit against tips received, which cannot exceed the difference between the FLSA minimum wage and the actual cash wage paid to the employee; that the additional amount you claim as a tip credit may not exceed the value of the tips the employee actually receives; that the tip credit shall not apply with respect to any tipped employee unless the employee has been informed of the FLSA's tip-credit provisions; and that all tips employees receive must be retained by the employees, except for the pooling of tips among employees who customarily and regularly receive tips. Additionally, although written notice is not required, it is recommended to prove that you provided such notice. If you fail to provide this notice, then you must pay the full minimum wage for all hours worked.
- Beware of the 80/20 rule. Employers can take the tip credit only for the time the tipped employee performs “tip-producing work.” The DOL defines “tip-producing work” as “any work performed by a tipped employee that provides service to customers for which the tipped employee receives tips.” If a tipped employee spends more than 20 percent of working hours or more than 30 minutes of continuous work performing “directly supporting work,” which essentially is “side work,” then you cannot take a tip credit for that excess. One way you can comply with 80/20 is to require your opening and closing employees to clock in as a host for their opening and closing duties.
2. Do you utilize tip pools?
Tip pooling has been part of the hospitality industry for a long time, but the ever-changing rules often get employers caught out of compliance. Tip pooling is the practice of collecting all or part of the tips received by employees into a pool and then redistributing them among tipped employees. This can either be mandatory or voluntary, depending on your jurisdiction. If an employer takes the tip credit—the pool must be limited to “tipped employees” who customarily and regularly received $30 or more in tips a month (i.e., front-of-house employees). If every participant receives at least minimum wage, there are no federal limitations on participants—except managers, supervisors and owners are strictly prohibited from participating.
- What Is a manager? Their primary duty is management of the enterprise or a customarily recognized department, customarily directs work of two or more full-time employees and has the authority to hire or fire or make those recommendations.
- What if you have managers wait tables? While managers and supervisors are prohibited from retaining tips earned by other employees, they are permitted to retain tips that they received directly from customers based on the service that the manager or supervisor directly and solely provided. Managers and supervisors may still contribute to the tip pool, but not collect a distribution.
3. Do you have minors in your workforce?
The FLSA sets out the minimum requirements and restrictions for child workers. Most states have their own child labor laws and likely are more restrictive. The FLSA prescribes the number of hours a minor can work, the times of day they can work and the types of jobs they may work.
- 14-15-year-olds must work outside of school hours with a maximun of three hours on school days and an eight-hour limit on nonschool days for a total of 18 hours in a school week and 40 in a nonschool week. No work before 7 a.m. or after 7 p.m. and no hazardous job duties.
- 16-17-year-olds may perform any nonhazardous job for unlimited hours and number of hours per day. We recommend checking your relevant state laws.
4. Have you properly classified your employees?
Exempt versus non-exempt. Are your employees properly classified? In the hospitality industry, executive, administrative and professional exemptions are the most common. To be exempt from paying overtime under the FLSA the employee must be paid on a salary basis and must meet the job duties requirements for the specific exemptions. Is that manager truly exempt? What are their job duties? Consider each position on a case-by-case basis.
5. Do you deduct from your employees’ paychecks?
Federal law requires each employee to be paid at least $7.25 per hour worked and many state laws have higher minimum wage laws. It is key that these wages are provided “free and clear” of any deductions that would reduce the pay below the federal minimum wage (i.e., cash shortage, mileage, supplies, etc.). Likewise, a non-exempt employee must be paid at a rate of at least 1.5 times the “regular rate” for time worked over 40 hours in a single workweek. Deductions cannot cut into overtime. Therefore, if you are taking a tip credit on a particular employee, you cannot then deduct from their paycheck for issues like cash shortages or uniforms.
As always, hospitality employers should take care to review and implement the most up-to-date state and federal wage and hour laws in their workplaces. Employers that carefully assess their wage and hour policies will take great strides toward protecting themselves from liability. Be mindful of rapidly changing state and local laws to ensure specific compliance for those wage and hour laws and reach out to your employment counsel for advice and counsel regarding your business’s operations.
Courtney Leyes and Emily Litzinger are partners at Fisher Phillips.