Ask the Lawyer! Is There a Way We can Share Tips with Back-of-the-House Staff, Legally?

Question: Like a lot of restaurants, our management would like to share tips with back-of-the-house staff, so they feel they are appreciated by our guests for their hard work. Is there a way to do this legally?

You run a high-end restaurant in the city. Your patrons tip generously because the service is great and the food is outstanding. As a result, your wait staff is paid quite well and they enjoy competitive wages with other restaurants and hotels in town. On its face, all seems well but as any restaurant owner knows this type of success can lead to problems: What about the back of the house? Sure, your servers and other front-of-house workers reap the benefits of their hard work in the form of increased tips but the back of the house typically doesn't see a dime.

Objectively, this may seem fair for a couple of reasons. First, many restaurateurs take advantage of the "Tip Credit" to lessen the burden of minimum wage laws. The tip credit allows an employer to take a credit toward its minimum wage obligation for tipped employees, because there is an assumption that regularly and customarily tipped employees will make the vast majority of their money through tips from the patron. Thus, where an employer takes advantage of the tip credit, federal law only requires payment of $2.13 per hour to the tipped employee, and the employee makes up the difference of the minimum wage on the back end.

Because the amount of tips a server may receive on an average shift often far exceeds the minimum wage - especially in high-end establishments - the front of the house tends to make quite a bit more than the back of the house. Some owners attempted to even the playing field by allowing back-of-the-house employees to share in tip pools with the front.

So, what does this mean for the savvy restaurateur attempting to generate some extra cash for the back-of-house... It could be bad news.

This scheme has come under intense scrutiny of late by the Department of Labor and the courts, and many employers are finding themselves on the hook for substantial amounts of back pay as a result. This clampdown comes against the backdrop of the Department of Labor's new regulations surrounding the wage-and-hour provisions of the Fair Labor Standards Act (FLSA), which are an effort to curb tip pooling between the front and back-of-house employees even further.

The latest effort to get more money in the hands of the kitchen -- and the subject of this article -- is the move by some restaurant owners to provide a completely separate line item on the check for a tip to the "kitchen." Given the novelty of this tip scheme, it's important to note the potential legal implications before any employer opts to structure their payment model in such a way.

Some Legal Background

When dealing with the propriety of tipping schemes, a restaurant owner needs to be aware of two bodies of law: the federal FLSA, and any relevant state/local laws. Since minimum wage and tipping laws can differ widely depending on the jurisdiction, this article focuses mainly on the federal law. Owners should check with legal counsel regarding their jurisdiction before embarking on any action.

A primary consideration for any owner thinking of adding a separate line-item tip for the kitchen are the FLSA restrictions on tip pooling. Ironically, these very same restrictions likely prompted the evolution to tipping the kitchen directly so as to not give them the status of a "pool," with respect to sharing the money with the front of the house. Still, it is unclear that simply adding the line item gets employers out of the woods.

As mentioned earlier, current case law is clear that the FLSA places certain restrictions on who can participate in a tip pool when the employer takes advantage of the tip credit. The Department of Labor has shown they would like to go further than that, however, and recently published regulations placing those same restrictions on employers regardless of whether they take advantage of the tip credit. The implications of these regulations can have a huge effect on employers hoping to tip the kitchen.

An Unfair Advantage?

Because the back of house usually has a much higher starting wage than traditionally tipped employees, the Department of Labor has taken the position that allowing them to pull from the tipped employees earnings puts the back of the house at an unfair advantage. Accordingly, the federal government limits this type of arrangement through the FLSA and the accompanying regulations.

Prior to the issuance of the Department of Labor's new regulations, there seemed to be a pretty clear workaround for employers desiring to share tips among the front and back of house: Don't take the tip credit. Indeed, a 2008 case out of Oregon found just that.

In this case, Cumbie v. Woody Woo, a waitress filed suit against her former employer because the employer allowed kitchen staff to participate in the tip pooling arrangement with the front-of-house employees.

The text of the FLSA prohibits such arrangements where a tip credit is taken by the employer, and Ms. Cumbie felt she was entitled to all the tips she received while working there. The court disagreed with her, however. Of particular importance was that, in addition to tips, Ms. Cumbie was being paid at Oregon's minimum wage (a wage that is more than $2 higher than the federal minimum wage).

As a result, it was clear that the owner of the restaurant where Ms. Cumbie worked did not participate in the tip credit. The court concluded, "Cumbie received a wage that was far greater than the federally prescribed minimum, plus a substantial portion of her tips. Naturally, she would prefer to receive all of her tips, but the FLSA does not create such an entitlement where no tip credit is taken."

In the wake of Woody Woo, it seemed employers found a sure way to get tips to the back of the house. The Department of Labor, however, then looked to remove that loophole.

In 2011, the Department of Labor published new regulations extending the "back of house" tip pool prohibition to employers who do not participate in the tip credit.

Is It a Tip Pool?

The new regulations create a tipping scheme wherein only "regularly and customarily" tipped employees may pool their tips. So, what does this mean for the savvy restaurateur attempting to generate some extra cash for the back-of-house workers with a separate "kitchen" tip line? It could be bad news.

Although it can be reasonably argued that the separate line item renders the kitchen tip distinct from the front-of-house "tip pool," that may not be the case in practice. The concept of adding a tip line "for the kitchen," in fact, seems to lend itself to the interpretation that the tip goes into a tip pool. Indeed, absent a mythical one-person kitchen, it seems that tips to the kitchen would necessarily be pooled. How can a customer specify which line cook or dishwasher gets the 4 percent tip they put down?

As a result, whatever government body is analyzing the kitchen tipping policy would very likely conclude that such tips constitute a tip pool of some kind. The question would become whether the distinctness of the two pools would render the arrangement compliant under the new regulations. Here is where things can get tricky for restaurant owners, and there is unfortunately little guidance directly on point to help them wade through the uncertainty.

The best-case scenario would be that the Department of Labor finds that the two pools are distinct from one another and, consequently, the front of house is not actually "pooling" its tips with the back of house for compliance. If this is how the Labor Department ultimately comes down then, tip credit or not, an employer is likely within the proper bounds of tip pooling. The argument could be made, however, that the addition of a separate line item is tip pooling in all but name only.

That despite the appearance of two distinct tip pools, all the owner is doing is divvying up the tips on the front end. Indeed, the spirit of the regulations is to ensure that the wages of customarily tipped employees -- a class of employee typically earning a low wage -- are not diminished by sharing among those employees who typically earn higher wages. Yet this is precisely what happens when a patron is planning to tip 20 percent, and reduces that tip to 15 percent for the waiter to provide 5 percent for the kitchen.

It is unclear whether the Labor Department would follow this rationale, but the department's move with the 2011 regulations was clearly one aimed at protecting the "customarily and regularly" tipped employees.

The Effects of a Finding That the Kitchen Is Participating In the Tip Pool

If the kitchen tips are indeed considered pooled, how can a restaurant owner stay in compliance with the regulations when they require that tips be shared only among "customarily and regularly" tipped employees? The originality of the kitchen tip line almost ensures that a reviewing body would consider the kitchen employees to fall outside the definition, but again, the guidance on point is less than perfect.

The FLSA defines a "tipped employee" as "any employee engaged in an occupation in which he 'customarily and regularly' receives more than $30 a month in tips." This definition would seem to help the owner implementing the kitchen tips because once the line item is established, the back of the house would presumably be able to take in the required amount of money to support a finding they are "tipped employees." The regulation proffered by the Department of Labor, however, does not target these "tipped employees." Rather, it states that a valid tip pool "can only include those employees who customarily and regularly receive tips."

A subtle distinction, but an important one nonetheless. Because of this distinction, the Labor Department has expressly dictated, "dishwashers and preparation cooks do not customarily and regularly receive tips." If that interplay between the FLSA and the Department of Labor sounds incredibly confusing, it's because it is.

What the Labor Department is essentially saying is this: While you might be able to establish that a cook or dishwasher is a "tipped employee," you cannot establish that they participate in an occupation that is "customarily and regularly" tipped. It seems the kitchen is in a tough spot to receive any tips at all under the current regulatory scheme. All is not lost, however, and things are looking up for the kitchen if recent federal cases are any indication.

West Coast Cases Reject the Department of Labor Regulations

Following on the heels of the Woody Woo case mentioned earlier, another 9th Circuit case has been extremely critical of the new Department of Labor regulations, saying the department stepped outside the scope of its authority when it applied the restrictions on tip pooling to employers who don't use the tip credit. As a result of the District Court's decision in Oregon Restaurant and Lodging Association v. Solis, the Department of Labor has said it will not enforce the new regulations against restaurants -- at least for the time being -- in the jurisdictions that make up the 9th Circuit (California, Nevada, Washington, Oregon, Alaska, Montana, Hawaii, and Arizona; Guam; and the Northern Mariana Islands).

This case will undoubtedly work its way up the appeals court and a definitive answer will eventually be reached, but for now the jurisdiction encompassed by the 9th Circuit appears to be a somewhat safe proving ground for restaurant owners looking to test the "kitchen tip" line (especially if they also do not take the tip credit). At least one California restaurant has already opted to take the leap. The Los Angeles-based Alimento began the practice toward the end of 2015 and thus far has not received any pushback.

Mitigating Your Risk

As is often the case in areas of law where certainty has not yet been established, tipping the kitchen carries some inherent risks. This article has explored its potential to be considered a violation of the "valid tip pool" requirement, but notes that to even get to that point, the separate line item would first need to be considered "pooled" with the traditional tip line item.

If the courts and the Department of Labor find it to be wholly distinct, then the legal implications of tipping the kitchen would likely be relatively minimal. That said, those restaurant owners not wishing to be the tip of the spear in this developing area of law are not without the capacity to send some extra money to the kitchen.

First, at least in the 9th Circuit, an owner could decline to use the tip credit. Although this is not a guarantee to eliminate all your risk, developing case law seems to indicate that FLSA does not protect tip pooling where no tip credit is involved. While the Department of Labor's new regulations have targeted this line of case law, they may have exceeded the scope of their authority in doing so. Only time will tell if the 9th Circuit's reasoning will be carried nationwide.

Another potential safe haven would be to have the owner standardize the tip percentage on the patron's check (perhaps a mandatory flat service fee of 18 percent). The IRS has determined this type of "tip" not to be a tip at all. As a result, it is the employer's money to distribute as desired. (This approach raises its own legal and tax issues, which we will address in a future issue.)

While it is entirely possible that a separate line item for the kitchen would have no negative legal implication, the law surrounding tipping is simply too uncertain to arrive at any definitive conclusion. Ideally, an employer would discuss their situation with counsel regarding their jurisdiction.

Bryan Jacoutot is an attorney with the Atlanta law firm Taylor English Duma LLP.