New Rule on Tipped Employees

A settlement agreement filed in the US District Court for the Southern District of New York in Lacovara v. Hard Rock Cafe International (USA), Inc. ends a proposed class action complaint that Hard Rock Café locations in New York failed to pay certain gratuities to hourly private event food and beverage service workers. The settlement fund of $230,000 will go to 469 servers who worked at Hard Rock Café’s 57th Street and Time Square locations. The lead plaintiff, who worked as a bartender for Hard Rock from October 2009 to June 2010, brought the suit last October, claiming the restaurant’s New York locations misappropriated an 18-20 percent gratuity fee that was charged to customers during private parties, in violation of state labor laws.

In preparing a class on Administrative Law for the Advanced Legal Research class at Brooklyn Law School, we found that earlier this year, the Wage and Hour Division of the Department of Labor (DOL) issued a Final Rule interpreting the Fair Labor Standards Act (FLSA). The new regulations, which became effective May 5, 2011, made significant changes to tip credit regulations. The new regulation provides employers must provide employees with proper notice in order to use the tip credit. The must pay their tip employees wages of at least $2.13 per hour. However, the amount of tip credit they using against actual tips plus the actual cash wage they pay must equal the minimum wage of $7.25. A “tipped employee” is defined as one who is engaged in an occupation in which the employee customarily and regularly receives more than $30 a month in tips, 29 U.S.C. § 203(t). A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for the customer, 29 C.F.R. § 531.52. It is distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer, and generally he or she has the right to determine who shall be the recipient of the gratuity. The FLSA now address ownership of tips even in cases where employers already pay at least the full minimum wage in cash. The amended regulations state that tips “are the property of the employee whether or not the employer has taken a tip credit.” 29 C.F.R. § 531.52

In June, the National Restaurant Association and other organization filed a complaint against the Labor Department over the agency’s new tip-credit-notice regulation, claiming that it failed to provide employers with sufficient notice to comment and comply with the new rule and that the new rule is arbitrary, capricious, an abuse of discretion, and contrary to established law. If successful, the lawsuit would nullify the new rule.