A recent decision by the 1st Circuit of the United States Courts of Appeal provides a valuable lesson to restaurant and food service companies who engage in tip sharing. Recently, the First Circuit held that shift supervisors had managerial responsibility thereby making them ineligible to share in tips under a Massachusetts statute. While Starbucks argued shift supervisors did not qualify as managers under the statute because they devoted up to ninety percent of their time performing the same functions as baristas and did not have authority to hire, fire, or discipline, the Court found that the statute indicated that the sharing of tips was only permitted among those with “no managerial responsibility.”
The Fair Labor Standards Act (FLSA) provides a similar prohibition on employers receiving any portion of tipped employees’ collected gratuities. 29 C.F.R. §531.35. Under the FLSA, an employer “includes any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S.C. §203(d). The “economic reality” test is utilized to determine whether a party is an employer, considering “whether the alleged employer (1) had the power to hire and fire the employees, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records.” Carter v. Dutchess Cmty. Coll., 735 F.2d 8, 12 (2d Cir. 1984). No one factor of this test is dispositive and control may be exercised on periodic basis without eliminating employer status. Herman v. RSR Sec. Servs., Ltd., 172 F.3d 132, 139 (2d Cir. 1999).
FLSA provisions regulating tipped employees contain a number of potential hazards for employers which could lead to a Department of Labor Wage and Hour Division Audit. Employers of national chains to local restaurants should periodically review their tip policies, as well as other minimum wage and overtime issues, with an experienced labor and employment attorney.
By: Justin A. Morocco