Best Ohio Tipped Employee Wage Attorney Answer: What constitutes a service charge under the Fair Labor Standards Act? Are service charges considered part of tips? Can my employer take a service charge out of a tip pool?
The Fair Labor Standards Act (“FLSA”) allows employers to maintain a tip pool for tipped employees that qualify for the pool under the FLSA. It is a basis principle under the FLSA that a tip is “the sole property of the tipped employee regardless of whether the employer takes a tip credit.” As such, the FLSA prohibits any agreement between the employer and the employee that results in a “tip” becoming the property of the employer. The FLSA provides a key exception to this general rule, however, that is, an employer is allowed to take a “service charge” out of customer transactions without it being classified as a “tip” under the law.
Specifically, the Department of Labor (“DOL”) defines “service charge” as a non-tip item that kept by the employer. According to the DOL’s Fact Sheet #15:
A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer’s gross receipts. Sums distributed to employees from service charges cannot be counted as tips received, but may be used to satisfy the employer’s minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.
This “service charge” exception essentially means that restaurants and other similar establishments can legally withhold these sums of money without violating the general provision that a “tip” belongs solely to the employee. Even though employers have this right to keep a “service charge” under the FLSA that does not mean that the employer can withhold an employee’s tips under the guise of it being a service charge. One of the big factors is whether the employer indentified the customer’s payment as gross proceeds. The decision in Hart v. Rick’s Cabaret Int’l, Inc. is instructive on this point:
Accordingly, the Court agrees that, for Rick’s NY to succeed on its claim that the performance fees are service charges countable towards its wage obligations, the performance fees must have been recorded in its gross receipts and distributed to plaintiffs by Rick’s NY. They were not. That is obviously true of the cash payments made by customers to individual dancers: Rick’s NY acknowledges that it has “no record of cash Performance Fees that entertainers retain.” Def. Br. 28. But it is also true of the performance fees paid by means of Dance Dollars: Rick’s NY concedes that it did not include in its gross receipts the $18 that a dancer received for redeeming each Dance Dollar, although it did include in those receipts the $6 portion that was used to cover credit-card processing fees. See SF ¶ 218 (“With respect to the $18 paid to any entertainer upon redemption of any Dance Dollar at Rick’s NY, no Defendant has included any portion of the $18 amount entertainers received for redeemed dance dollars in ‘gross receipts’ reported or listed on any of its tax returns . . . .”); Pl. 56.1 ¶ 371; Def. Resp. 56.1 ¶ 371; Def. Br. 29 (acknowledging that the Club’s final gross receipts were “reduced” to excise the portion of Dance Dollar redemptions ultimately paid to the dancer).
To be sure, the case law is not uniform as to whether the failure of an employer to record fees in gross receipts is alone determinative of whether such fees represent a service charge, as opposed to a tip. Some courts have held that that factor is merely an important one that must be viewed alongside other factors. Compare ABC/York-Estes Corp., 1997 U.S. Dist. LEXIS 6874, 1997 WL 264379, at *5 (HN24 “[A]n employer must include payments in its records as gross receipts as a prerequisite  to ‘service charge’ classification under the FLSA.” (emphasis added)), with Thornton v. Crazy Horse, Inc., No. 3:06-CV-00251-TMB, 2012 U.S. Dist. LEXIS 82770, 2012 WL 2175753 (D. Alaska June 14, 2012) (articulating six-prong test, including gross receipts, for whether a payment is a service charge under the FLSA). In the interests of completeness, the Court alternatively applies this multi-factor inquiry to the facts at hand.
The real take away is that this stuff can be very confusing without the help of a knowledgeable wage and hour lawyer. As such, if you have questions about whether your employer may be illegally retaining your or other employees’ tips, you should seek legal assistance to see whether your employer is complying with the FLSA.
Are you a waiter, waitress, server at restaurant that depends on tips to live? If you are a tipped employee and believe that your employer is not paying you all of your wages for all of your lawfully earned time or taking part of your tips or participating in the tip pool as prohibited under the Federal Fair Labor Standards Act or Ohio Fair Labor Standards Act, contact the attorneys at Spitz, The Employee’s Law Firm today for a free and confidential initial consultation. The wage and hour lawyers at Spitz, The Employee’s Law Firm will provide you with the best options for your overtime pay dispute situation. If you even think that you may be entitled to overtime pay that you are not being paid, call 866-797-6040.
The materials available at the top of this tipped wage violation, wage and hour web page and at this employment law website are for informational purposes only and not for the purpose of providing legal advice. If you are still asking, “Can my boss take my tips?”, “Does my job have to pay me for …”, “My paycheck is not right…” or “What do I do if…”, the your best option is to contact an Ohio wage attorney to obtain advice with respect to FLSA questions or any particular employment law issue. Use and access to this employment law website or any of the links contained within the site do not create an attorney-client relationship. The legal opinions expressed at the top of this page or through this site are the opinions of the individual lawyer and may not reflect the opinions of Spitz, The Employee’s Law Firm, Brian Spitz, or any individual attorney.