We’ve all struggled with what to do when we’re given conflicting orders.  Grandma says “have some pudding,” and Pink Floyd’s Roger Waters responds, “how can you have any pudding if you don’t eat your meat?!” Employers are increasingly facing similar (though perhaps less-existential) wage-related conflicts.

We’ve recently written about the steady stream of states and localities that have implemented their own minimum-wage laws.  These laws, which often create rights and obligations in addition to increased minimum-wage rates, can give some employers heartburn befitting a meal of pot-roast and pudding.

Sure, employers may be required to pay workers more in some places under these laws.  But multi-state employers often also have to decide whether to implement varying pay policies that mirror the patchwork of local, state, and federal laws, or to implement blanket nationwide policies that are based upon the highest applicable standards.

Recent tip-credit developments illustrate these points.

Example:   Colorado’s New Tip-Ownership Option

These decisions can become even more complicated when provisions intersect.  For example, on January 1, 2017, Colorado’s new minimum wage of $9.30 per hour took effect.  The state also raised the direct cash wage to at least $6.28 per hour for tipped employees for whom an employer takes the balance as a “tip credit” under state law.  (See our previous posts on tip-credits for more information – the details are not as simple as you might assume.)

Presumably as part of a lawmakers’ bargain underlying these changes, Colorado’s legislature also added a provision that supposedly allows employers to claim ownership of an employee’s tips. The employer must display a “conspicuous notice” to the general public stating that all tips are the employer’s property, rather than the employee’s.

We say “supposedly”, because Colorado’s new tip-ownership provision directly conflicts with the U.S. Department of Labor’s current tip-credit regulations under the federal Fair Labor Standards Act.  Those regulations prohibit an employer from diverting or asserting control over an employee’s tips for any reason, except:

◊       To the extent necessary to cover a proper credit against its FLSA minimum-wage obligations to the employee; or

◊       To use them in furtherance of a valid tip pool.

Litigation is ongoing as to whether USDOL’s position is valid with respect to employers who take no FLSA tip credit. But at least some courts have backed the USDOL in this respect.

Consequently, Colorado’s new “conspicuous notice” tip-ownership provision will be of no help to employers who are using the FLSA tip-credit for workers in that state. Moreover, even employers who are not taking an FLSA tip-credit for Colorado workers must keep in mind the possibility that eventually a court consensus will emerge to the effect that asserting control over their employees’ tips runs afoul of the FLSA.

The Bottom Line

The Colorado illustration is by no means the only one.

For instance, New Hampshire’s minimum-wage rate is currently the same as the FLSA’s − $7.25 an hour. But that state’s law requires a higher direct-wage for tipped workers − $3.27 an hour − than today’s $2.13-an-hour FLSA figure. An employer of tipped workers in New Hampshire must ensure that the employees’ pay plan properly melds both state and federal obligations.

As another example, California takes a different approach altogether. That state’s law requires employers to pay tipped workers the full state minimum wage, without regard to tips.

Employers must take into account the requirements and restrictions of all jurisdictions in which they employ tipped workers, as well as how these provisions interact with the FLSA’s requirements. Sometimes the correct approach is obvious, but sometimes it is not. Given that many new state and local requirements take effect early in the year, now is a good time for employers to make sure that they are in compliance with all applicable laws.

Click here for the original article.

What kinds of employment-related issues are other restaurants facing? Here’s a quick look this summer’s court activity.

No Deductions in Tips for Cash Deliveries.

A restaurant chain came under fire for violating federal wage and hour laws by deducting cash handling fees from its employee’s tips. The restaurant withheld a percentage of the credit card tips customers gave servers in order to cover the restaurant’s expenses from receiving armored-car cash deliveries. The restaurant used the armored-car delivery service so that its servers could immediately take their tips in cash at the end of a shift, instead of receiving the tips in the employees’ biweekly paychecks. This practice was held unlawful because the using a cash delivery services was a business decision that could not be lawfully “charged back” to the employees and taken out of their credit card tips. Steele v. Leasing Enters., 5th Cir., 15-20139, 6/14/16.

It’s Called “Side Work” for A Reason.

A federal judge in Ohio dismissed the employees’ claim that a restaurant violated federal and state minimum wage law by requiring its wait staff to perform nontipped duties. Under the Federal Labor Standards Act (FLSA) and Ohio’s Minimum Wage Standards Act, employers can pay certain tipped employees a lower hourly rate and take a “tip credit” to meet the minimum wage standards. In order to take the credit, employees cannot spend more than 20% of their time engaged in non-tipped activities. The employees alleged that they spent 45 minutes to an hour of their time engaged in non-tipped activities like setting up chairs, laying down kitchen mats, preparing coffee, and wiping silverware and glasses. Rejecting the employees’ lawsuit, the judge explained that these activities were precisely the type of duties that the Department of Labor envisioned as “incidental” to the employees’ tipped duties. Craig v. Landry’s, Inc., S.D. Ohio, 1:16- CV-277, 6/21/16.

Properly Documenting Meal Credits.

A federal judge in New York found that a local takeout restaurant violated the Federal Labor Standards Act (FLSA) because it did not properly document the food expenses when it took a “meal credit.” The restaurant provided family meals before shifts but it did not document which employees had taken a meal and/or the actual cost of the provided meals. Under the FLSA, an employee’s wage can include the employer’s reasonable cost of a meal, if the meal is customarily provided by the employer. 29 U.S.C. § 203(m). However, this “reasonable cost” meal credit may not be more than the actual cost of the provided meal and the employer must retain records documenting the out-of-pocket costs it incurred. 29 C.F.R. § 516.27(a). The judge also cautioned that under the FLSA, meal credits can only be used to offset an employer’s minimum wage, and not the employer’s obligations to pay overtime. As a result, the restaurant owed wages and other damages for paying its employees sub-minimum wages. Hernandez v. JRPAC Inc., S.D.N.Y., 1:14-cv-04176-PAE, 6/9/16.

This article provides an overview of recent litigation. It is not intended to be, and should not be construed as, legal advice for any particular fact situation. If you have any questions about this article, or would like to receive our regular newsletters, please contact Wendy McGuire Coats (San Francisco) at wcoats@fisherphillips.com and Rochelle Nelson (Seattle) at rnelson@fisherphillips.com.

What’s on your plate? Curious about a specific legal trend you’re noticing in the food industry or have a question we could address in Legal Bites? We’d love to hear from you. Send your questions to admin@womenchefs.org.

Now, prompted by a spurt of new minimum wage proposals in major cities, an expanding number of restaurateurs are experimenting with no-tipping policies as a way to manage rising labor costs.

Here in Seattle, where the first stage of a $15-an-hour minimum wage law took effect in April, Ivar’s seafood restaurants switched to an all-inclusive menu. By raising prices 21 percent and ending tipping, Bob C. Donegan, the president and co-owner, calculated he could increase everyone’s wages.

“We saw there was a fundamental inequity in our restaurants where the people who worked in the kitchen were paid about half as much as the people who worked with customers in front of the house,” Mr. Donegan said.

Nearby, the Walrus and the Carpenter instituted a compulsory 20 percent service charge. At Manos Nouveau and Sous Beurre, both in San Francisco, the menu prices include tips and taxes. Dirt Candy, an upscale eatery on the Lower East Side of Manhattan, tacks on a 20 percent administrative fee.

Amanda Cohen, the owner of Dirt Candy, said she had fielded a flood of phone calls from other restaurants asking how her no-tipping policy was working.

“I think that restaurants will have to do this,” said Ms. Cohen, who pays servers at Dirt Candy $25 an hour, well above the $7.50 for tipped workers that will go into effect in New York at the end of the year. “How else do you compensate for this extra money you’ll have to pay?”

Like many owners, Ms. Cohen has long wanted to close the yawning earnings gap between those who prepare the food and those who serve it. Tips are not shared with the kitchen staff, whereas the revenue from certain types of surcharges and higher menu prices can be distributed to everyone.

Restaurateurs tick off a long list of reasons for being drawn to the idea. In some cities like New York, where tipping is subject to a confusing welter of federal, state and local regulations and tax laws, eliminating it would simplify bookkeeping. Managers say it would also allow them to better calibrate wages to reward employees based on the length of their service and the complexity of their jobs.

Several also cited research showing that diners tend to tip black servers less and that the system can encourage sexual harassment of women.

Still, many fear a backlash from their customers and servers.

Although mandatory service charges are common around the globe, restaurant tipping is deeply ingrained in the American psyche. Owners worry that potential diners will see significantly higher prices without realizing that they include gratuities. Restaurateurs also worry their best servers will leave.

“The tipped culture is still what draws many people into our industry,” said Christin Fernandez, a spokeswoman at the National Restaurant Association. While the association estimates that the median hourly earnings for tipped servers are between $16 and $22, waiters at high-end restaurants can earn much more.

Chelsea Krumpler, a waitress at Manos Nouveau in San Francisco, said that many waiters she knows were skeptical of her $25-an-hour wage and no tips. But she says she is earning as much as before with no worries about slow nights.

“It’s a little more secure,” said Ms. Krumpler, who has worked as a waitress for seven years. The policy has also drawn the staff closer together. “It’s more of a family,” she said.

Although the no-tipping idea is generating a lot of discussion, the number of restaurants that have signed on is still tiny, and they tend to cluster near the higher end of the price spectrum.

Most are adopting a wait-and-see attitude.

“We don’t want to jump on the trend,” said Akop Paronyan, the general manager of E&O Kitchen and Bar in San Francisco.

With further mandated wage increases scheduled, Mr. Paronyan said the restaurant does need to be prepared. He is researching a hybrid model, where guests might be charged a mandatory 10 percent service charge and then encouraged to add a 5 percent to 10 percent gratuity.

Brian Keyser, the owner of Casellula restaurant in Midtown Manhattan, would prefer to end tipping but does not think his staff members or his diners are ready to accept it.

Now he must contend with a minimum wage for tipped workers that is rising in New York. That means giving his servers a $2.50-an-hour raise — even if they are already pulling in about $25 an hour in tips. “I have a kitchen full of people making far, far less than that, and I would love to give them that money, but I can’t,” Mr. Keyser said.

For many industry veterans, the business model is changing at such a rapid clip that they are not certain how to respond. When Daniel Patterson first started working as a chef in the early 1980s, he said, labor used to account for about a third of total costs, and owners could enjoy a 10 percent to 20 percent profit. Now, as a partner in five San Francisco Bay Area restaurants, Mr. Patterson says labor costs eat up about 40 percent to 45 percent of the budget. At the same time, rent costs are skyrocketing.

“Even a good restaurant doing a lot of business that’s popular on every level, is bringing 2 percent or 1.5 percent to the bottom line,” he said. “It’s like a not-for-profit.”

Coi, Mr. Patterson’s two-Michelin-star restaurant, has had all-inclusive pricing since it opened in 2006. He tried the same strategy when he opened Aster in the Mission District a few months ago, and quickly realized it was not going to work.

“I really believe in that model, but our customers didn’t want it,” Mr. Patterson said, because they thought it was too expensive. “It’s about perception,” he said. “It’s not just about the dollars you’re spending, but what you think you’re spending.”

The next phase of the minimum wage increase in Seattle is pushing Brian Canlis, a co-owner of the upscale Canlis restaurant, to consider a pricing system that includes tips for 2016.

“I’ve got to have a hierarchy of pay,” Mr. Canlis said. He employs 96 workers to serve six meals a week. If the dishwasher earns $15 an hour, then the line cook needs to earn at least $18, he said. And then what about the sous chef, and the waiters? “There’s a cascading effect,” he said.

At the Walrus and the Carpenter, the owner Renee Erickson has been adjusting her no-tipping experiment. Although she originally wanted to adopt an all-inclusive menu, she “worried we weren’t going to have the opportunity to explain why our prices were so much higher than the restaurant right next door.”

Instead, she added an 18 percent service charge. But it did not generate enough money to cover the added labor costs. So she bumped the charge up to 20 percent and shrank the owners’ share.

As the weeks went by, she and her partner kept adjusting the percentage that went to the kitchen workers. To get the staff on board, she decided to let everyone see the payroll spreadsheets, so they could understand how the money was being allocated.

“We’ve gotten a lot of great support and feedback,” she said. And at two new restaurants Ms. Erickson is opening there will also be no tips.

At Ivar’s, eliminating tipping has been a success, said Mr. Donegan, the chief executive — thanks in part to the summer tourist season and a booming economy. Since the policy went into effect four months ago, wages have risen between $3 and $12 an hour, he said, with the lowest-paid worker earning $15 an hour. Everyone, including part-timers, has health insurance and a 401(k) retirement plan.

The No. 1 complaint from customers? The prohibition on tips. So while the menu still states that prices include service, the credit card slips now have a line that reads: “If you INSIST on leaving a tip, write it here.”