The increased costs of operating a restaurant can be attributed to minimum wage increases, healthcare, paid sick leave, restrictive scheduling, cost of food and supplies and increase pay equity between traditionally tipped employees and heart of the house employees. As such, these surcharges need to be analyzed for taxation purposes and legality as to how they are implemented.
A. Tax and Wage Implications
First let us think about how surcharges affect a company from a tax and reporting perspective. Starting in 1994, many restaurants have benefited from being allowed to apply a general business credit toward a portion of the employer’s Social Security and Medicare taxes paid with respect to their employees’ cash tip earnings (IRC 45 B). However, the policy set forth in Rev. Rule 2012-18 means that the credit would not apply with respect to surcharges, because these mandatory charges do not qualify as tips.
Surcharges like a service charge are a taxable event. The sales tax is imposed upon the retailer for the privilege of selling tangible personal property. “Gross receipts” provides that the taxable gross receipts include all amounts received with respect to the sale, with no deduction for the cost of the property sold, materials used, labor or service cost, or any other expense of the retailer passed on to the customer. Any expense of a restaurant passed on to customers in the form of a surcharge must be included in taxable gross receipts. Since there are no specific sales and use tax exemptions for a surcharge imposed, retailers may not claim the cost of the surcharge as a deduction on their Sales and Use Tax return. Therefore, a separate surcharge on customer bills must include the surcharge amount in the calculation of tax.
To the extent, a company elects to distribute a surcharge to its employees, the surcharge will be treated and must be reported as Salaries and Wages on the business tax return. Another issue to consider is that an employer who pays out a portion of the surcharges to employees may have to recalculate its employees’ overtime rates (if the employees work more than 40 hours in a week or 8 hours a day for businesses in California). As any distributed surcharges are wages, that money would count toward an employee’s regular rate of pay and therefore must be factored into the overtime rate calculation.
B. Claims Asserted
Starting in 2017 comments by several City Attorneys, as well as some letters, have raised issues concerning surcharges. Specifically, some City Attorneys have raised the manner under which surcharges are communicated to customers. Also in 2017, there were 16 cases filed in San Diego, California asserting the illegality of the surcharges and the manner of disclosure generally. These lawsuits claimed these restaurants were in violation of consumer protection laws including false advertising, unfair competition and misrepresenting the prices on their menus. It was further claimed that a failure to clearly and conspicuously communicate a surcharge might render the stated price of a food item untrue and misleading under California law. The San Diego City Attorney has made some statements that such charges are being investigated and may result in prosecution under the guise of consumer protection for false advertising. These lawsuits sought restitution, injunctive relief, civil penalties, punitive damages and attorneys’ fees.
In a ruling on November 16, 2018, a San Diego Superior Court Judge ruled in granting judgment for the restaurant at issue that the “undisputed evidence establishes that the surcharge is not unlawful as a matter of law.” Further, the Court concluded the restaurant “made adequate and non-misleading disclosures about the surcharge.” Subsequent judgments were entered in favor of other restaurants by the same judge in December 2018 and January 2019 based on the November 2018 ruling; whereby the ruling of the Court was adopted as to the legality of the use of surcharges by restaurants. In February 2019, a federal judge also granted summary judgment concerning identical allegations concerning the use of a surcharge.
C. Prevention Tips
As a result, even though surcharges are a legal and allowable option to help defray the recent increases in costs, there are some approaches that should be considered to avoid potential litigation. There are no regulations or laws that state how a restaurant should specifically and clearly disclose the existence of a surcharge. However, to try and prevent the filing of an adverse claim, it would be prudent that a company discloses up front that the items for example a meal (food and drink item(s)) is subject to a surcharge and state the percentage of the surcharge on the menu, in a prominent sign or posting, on web pages, as well as on advertising materials either electronic or paper. Also even though not specifically required, it would be prudent that the disclosure stand alone and not be contained in a statement about other aspects of the business. Some companies have elected to highlight the disclosure in a different or larger font or color as a means to try and alleviate concerns raised by governmental entities. That said, there is no mandatory way that a surcharge should be disclosed to a customer. In summary, there is no legislative or statutory guidance as to how a surcharge should be disclosed.
There is no requirement that a sign be used to disclose a surcharge but having a surcharge disclosure sign is another means of avoiding a consumer claim. If a restaurant elects to use signage, there is also no requirement about the size of font on any sign posted in a restaurant about a surcharge. Hospitality companies who elect to use a sign should consider a sign about a surcharge and percentage where patrons are likely to see it as they enter the restaurant. A sign no smaller than 10 inches wide by 10 inches high or a horizontal strip marker no smaller than 10 ½ inches wide by 1 ¼ inches high bearing the surcharge information in at least a 36-point font would arguably comply with the “conspicuous” requirements. Also, if a fair amount of the business is take-out or occurs at a register, the placing of a disclosure sign at the register would likewise be another preventive step for notice purposes.
As to menus, any statement as to surcharges should be separate from other information. Some restaurants have elected to use bold font, a different color or italics. However, none of this is required. It is merely one option. In addition, the font as to the disclosure should not be smaller than other items printed on menus or electronic media and certainly at least the size of the menu items and the prices. These steps should help defray any claims that the restaurant did not clearly and conspicuously disclose the existence of a surcharge.
Many San Francisco restaurants implemented a surcharge (i.e., an extra fee or cost) on the goods or services they sell to customers to cover, in whole or in part, the expense of complying with the Health Care Security Ordinance passed in 2008. This surcharge was specifically designated to defray the costs of the local healthcare ordinance. Some restaurants faced litigation and penalties when these surcharges were not utilized to pay for the cost of health care. There is now a requirement in San Francisco that the business on an annual basis disclose: 1) the amount collected from the surcharge for covered employee health care and 2) the amount spent on covered employee health care. Therefore, based on these lessons learned, if a company elects to impose a surcharge, it should consider disclosing it in a broad manner rather than designating it for a particular cost item. A more specific designation could subject the retailer to show that the surcharge collected must be only used for that item e.g., the cost of health care to employees. As a result, a broad designation of the surcharge would be a good preventive measure. The broader the language, the more flexibility the company has in how to utilize the money collected from the surcharge.
D. Summary Recommendations
Overall, surcharges are legal as supported by the recent court ruling. However, hospitality should implement surcharges with an eye toward prevention of any claims for consumer fraud, false advertising, unfair business practices or improper utilization of the surcharge. A company has wide discretion as to how it discloses and communicates the use of a surcharge but the disclosure should be sufficiently conspicuous to a reasonable consumer.
If a company elects to implement a surcharge, at a minimum the fact that there is a surcharge must be disclosed on the receipt as “SURCHARGE” and sales tax must be charged on all service charges and any separate surcharge line item, regardless of any amount that might be paid to the employees.
Herein is a summary of steps that a company should consider implementing, even though not currently required or mandated, as a means to prevent a legal claim:
Also, it is important to consult with your tax advisor or tax attorney to determine the proper method of taxing surcharges and paying your employees if a portion of the surcharge is distributed to the employees. It is also highly recommended to consult with qualified legal counsel concerning any questions about surcharges and how to disclose them to customers.
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]]>What Is the GDPR?
The GDPR (or Regulation) is perhaps the most comprehensive privacy law of its kind in the world, emphasizing the growing social, political and legal concerns about the potential misuse and abuse of individuals’ personal data. This is no surprise given the rapid advances in technology and the impact of the new economic reality of “big data” and data analytics on consumer information.
The GDPR has set a new precedent for the high stakes of protecting individuals’ privacy, which is being watched closely and even shaping the privacy laws in other countries. The GDPR replaced the Data Protection Directive of 1995 and sets stricter standards for companies that collect or process data on citizens and residents of EU member countries. While considered a milestone achievement for individuals’ data protection laws, the GDPR presents complex challenges for companies that must now take steps to become GDPR compliant or run the risk of being subject to audits, lawsuits and/or stiff financial penalties.
Which Organizations Are Subject to the GDPR?
There is a big misconception in the U.S. business community that the GDPR only applies to EU companies. The new Regulation expands the territorial reach of the GDPR to include companies established outside the EU. This means that a company that has no offices, staff or even customers in any EU country may nonetheless need to comply with the GDPR if it processes and stores personal data on EU residents in any way. In other words, U.S. companies may be subject to the GDPR if they control or process data of EU residents.
The GDPR focuses in particular on the activities of data “controllers” and data “processors.” A data controller is an individual or entity that “determines the purposes and means of processing personal data.” A data processor is any individual or entity that processes (i.e., collects, stores, uses) personal data at the direction of the data controller. A positive response (yes) to one or more of the questions below may signal that an organization is subject to the GDPR.
Does your organization process or store data on EU residents?
The GDPR broadly defines the term “data processing” to include “collection, recording, organization, structuring, storage, adaption or alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment, combination, restriction, erasure or destruction.” In reality, virtually any activity involving personal data of EU subjects may be closely scrutinized and classified as a processing activity within the definition of the Regulation, to the extent it is performed at the request of a data controller.
Does your organization offer goods or services to EU residents?
The GDPR expressly states that the Regulation applies to organizations outside the EU that offer goods or services to data subjects within the EU regardless of whether a fee is charged for such goods or services. Thus, an organization should consider whether it:
It is noteworthy that merely having a website that is accessible by EU residents is not conclusive for purposes of determining whether an organization is subject to the GDPR.
Does your organization monitor the behavior of EU residents as that behavior occurs in the EU?
The GDPR also applies to non-EU organizations that monitor the behavior and activities of EU residents within the EU. This includes tracking EU residents on the internet to create profiles or to analyze or predict individual preferences and behavior.
What Is Protected Personal Data Under the GDPR?
The GDPR protects “personal data,” which is broadly defined in Article 4(1) to encompass:
“…any information relating to an identified or identifiable natural person (‘data subject’); an identifiable natural person is one who can be identified, directly or indirectly, in particular by reference to an identifier…”
The definition provides a broad range of identifiers, including “a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person.” For example, personal data may include a photo, racial or ethnic data, an email address, bank details, posts on social networking websites, political opinions, health and genetic information, a computer IP address and so on.
The GDPR also refers to sensitive personal data as “special categories of personal data,” which include genetic data and biometric data, where processed to uniquely identify an individual, and data concerning health. Processing of such data is prohibited unless the data subject gives explicit consent. Otherwise there are very few exceptions in which processing of such special categories of personal data also is possible (e. g., if it is necessary to defend or enforce a legal claim).
When a data controller collects personal data from an individual, including a third party, the controller must provide information to the data subject regarding processing activities, including:
What Are Consent Requirements for Processing Personal Data?
Consent remains one of six lawful bases to process personal data, as listed in Article 6 of the GDPR. However, the requirements for validly obtaining consent have been increased to place a higher burden on data controllers. Article 7 sets out what is meant by consent, and the Information Commissioner’s Office (ICO) has published detailed guidance on consent under the GDPR. In brief, consent must be “freely given, specific, informed and unambiguous.” Organizations should review how they seek, record and manage consent, and whether they need to make any changes to their policies and procedures. In evaluating compliance with the GDPR’s expanded consent requirements, organizations should note the following characteristics:
What Rights Do Individuals Have to Protect Personal Data?
One of the key premises of the GDPR is to expand the rights of individuals to protect their personal data. This includes an individual’s right to access, rectify and/or seek erasure of their personal data.
Right to Access
Individuals have the right to access their personal data and request the following information from a data controller:
Right to Rectification
An individual has the right to request the data controller to correct their personal data without undue delay.
Right to Be Forgotten
The GDPR recognizes an individual’s so-called “right to be forgotten,” subject to limited exceptions. In other words, an individual has the right to request the data controller to erase their personal data without undue delay in certain circumstances, including the following:
What Are the Record-Keeping Requirements Under the GDPR?
Data controllers and processors must maintain written documentation of all activities related to the processing of personal data (including documentation of all steps made in order to be GDPR compliant). These records should include the following information:
These records of processing activities must be produced to a Supervisory Authority upon request. Notably, the GDPR’s record-keeping requirement does not apply to organizations with fewer than 250 employees.
What Security Measures Are Required to Safeguard Personal Data?
The GDPR does not dictate specific technical security measures that must be implemented by data controllers or processors to safeguard personal data. However, the Regulation does require organizations to conduct a risk assessment to ensure an appropriate level of security based on a cost-benefit analysis. The size of the organization and the nature and scope of processing activities are key factors to consider. Such security measures may include the pseudonymization of personal data (so that data cannot be linked to a specific individual); encryption of personal data; ability to restore and back up personal data; periodic security audits to test and evaluate processing activities; and adherence to recognized industry standard certification requirements to protect data.
What Is a Data Protection Officer?
The GDPR requires data controllers and processors to appoint a Data Protection Officer (DPO) when an organization’s “core activities” consist of processing personal data on a “large scale.” Germany qualifies this requirement to include instances where there is a minimum of 10 people processing personal data automatically. An organization may designate an employee or hire a third party to serve as a DPO, based on their expert knowledge of data protection laws and regulations. A DPO is responsible for monitoring an organization’s compliance with the GDPR, training employees and staff, oversight of any data protection impact assessments, cooperating with the Supervisory Authority, and acting as the liaison between the organization and the Supervisory Authority. In addition, the DPO may be responsible for responding to inquiries by individuals concerning their personal data.
Is an Organization Required to Report a Data Breach?
The GDPR introduces additional mandatory data breach reporting requirements. A data controller must report security breaches to the relevant Supervisory Authority “without undue delay, and where feasible, not later than 72 hours” after it first becomes aware of the incident. If the notification is made after 72 hours, a reasonable justification for the delay must be provided. The breach only needs to be reported if it is likely “to result in a risk for the rights and freedoms” of data subjects – if, for example, the breach could result in discrimination, damage to reputation, financial loss, loss of confidentiality, or any other significant economic or social disadvantage.
A data controller also must notify individuals of a security breach “without undue delay” where the breach “is likely to result in a high risk” to the rights and freedoms of data subjects. However, notification to individuals is not required if (1) the organization has implemented appropriate security measures that render the data unintelligible to any unauthorized person (i.e., encryption); (2) the organization has taken subsequent measures to ensure that a high risk to data subjects does not materialize (i.e., remediation); or (3) it would involve a disproportionate effort, in which case a public communication will suffice (i.e., media notice or publication on the organization’s website).
The contents of the breach notification communication should include the following information where available in “clear and plain” language:
Notably, the breach notification requirements set forth above apply to data “controllers.” However, in the event of a breach experienced by a data “processor,” the processor is required to notify the controller “without undue delay.”
Are There Any Repercussions for Failure to Comply with the GDPR?
The most serious infringement of the GDPR can result in administrative fines by a Supervisory Authority of up to €20 million or 4 percent of the offending company’s global annual revenue, whichever is higher. For lesser noncompliance offenses, company audits and a tiered fine structure may be imposed.
Under the GDPR, data controllers and processors also may be subject to liability and damages for legal proceedings commenced by a data subject in a court of law or a complaint lodged with a Supervisory Authority. Such complaints may be filed in the jurisdiction where the data subject resides or works, or the location of the alleged infringement of the Regulation concerning the processing of the individual’s personal data. Data controllers and processors may have joint liability for compensatory damages awarded to an individual to ensure they are made whole.
The GDPR also grants Supervisory Authorities the following powers to:
Summary
In summary, U.S. companies are well advised to consider their compliance obligations, if any, under the GDPR. The extraterritorial reach of the EU’s new privacy Regulation means that non-EU companies may be subject to the law. A critical factor in evaluating the potential application of the GDPR to U.S. companies is whether a company collects, stores, transfers or otherwise processes personal data of EU residents. If so, the company may be required to obtain an individual’s express consent to the use of their personal data, in addition to maintaining internal records of the company’s personal data processing activities. Moreover, companies may have a mere 72 hours to notify EU regulatory authorities of a data breach involving the personal data of EU residents. Failure to comply with the GDPR’s extensive requirements may result in regulatory investigations, legal proceedings, compensatory damages, injunction orders or hefty administrative fines.
Tip v. Mandatory Service Charge
In a ruling issued in June 2012 the Internal Revenue Service clarified the difference between a tip and a service charge for tax purposes under the Federal Insurance Contributions Act. The IRS determined that automatic gratuities (a percentage automatically added to a restaurant bill) are service charges, rather than tips for tax purposes. Revenue Ruling 2012-18 also determined that to the extent any portion of a “service charge” is distributed to an employee, it is wages for FICA tax purposes.
Generally, the burden of reporting tips falls on the employee. Employees that receive more than $20 in cash tips (cash, debit/credit cards) per month are required to report the tips to their employers by the 10th day of each month. The employer is then required to withhold FICA taxes, similar to non-tip wages. An employer is not liable for their share of FICA taxes if the employee fails to report tips.
However, effective January 1, 2014, employers are required to treat mandatory gratuities as “service charge wages” instead of tips. This directly affects an employer’s responsibility to report and pay FICA taxes, as well as, overtime calculations.
Under the new guidelines, the IRS stated that the difference between a tip and wage requires a factual determination considering all the circumstances. The IRS will generally categorize a payment as a tip (versus a wage) when: (1) the payment is made free of compulsion; (2) the customer retains the right to determine the amount; (3) payment is not subject to negotiation or employer policy; and, (4) the customer determines who gets payment.
As a result, automatic gratuities or service charges are no longer considered tips. Customers do not have a choice whether or not to leave a gratuity and are forced to leave a specified amount set by the employer. Such mandatory gratuities when distributed to the employee by the business are considered wages. As wages, they are not eligible for the FICA Tip Credit (The 45B Credit). For many years, restaurants have benefited from being allowed to apply a general business credit toward a portion of the employer’s social security and Medicare taxes paid on tips in excess of the federal minimum wage as of Jan. 1, 2007.
Also, since automatic gratuities and service charges are not tips, they cannot be included in the tip amount that social security and Medicare taxes are paid on, which takes some tax credit off the table for restaurants. This credit is claimed on Form(s) 8846 and 3800.
However, where a restaurant provides a customer a receipt with recommended tipping amounts i.e… 15%, 18% and 20%, the IRS does not classify the amount left as wages because the customer has a choice to determine the amount, is free from compulsion and determines the amount of the gratuity, if any, left. Therefore, this situation would support a finding that this is truly a tip and not considered wages.
Absent choice by the customer, an automatic gratuity when paid by the restaurant to the employee is considered part of the employee’s wages. This means the burden rests on the employer to incorporate automatic gratuities as part of the employee’s wages as opposed to relying on the employee to report their tips. Service charges/automatic gratuities are considered part of the employees’ overall rate of pay. As such, where a member of the staff works over 40 hours in week or 8 hours in a day in some states like California and receives a portion of the automatic gratuities, this amount must be factored into the total wages earned and factored into that day’s or week’s regular rate of pay (i.e. total wages ÷8 or ÷ 40). It is this figure that is used to determine the overtime rate of pay (1 ½ times the regular rate of pay) for any overtime earned.
This means employers now have the additional burden make sure their pay systems calculate automatic gratuities as part of employees’ wages and use them to determine the regular rate of pay for a particular day or week for purposes of correctly calculating overtime. As such, employers must pay close attention to avoid the underpayment of overtime wages.
History of Federal law as to Tip Pooling
Historically, the federal law on tip pooling adopts standards which are protective of employees’ right to tips.
The Fair Labor Standards Act (FLSA) permits employer-mandated tip pools among employees who “customarily and regularly” receive tips, such as waiters, waitresses, bellhops, bussers and service bartenders. The interpretation made clear that employees who did not directly interact with customers such as chefs, cooks, janitors, and dishwashers were not allowed to share in the money contributed to a tip pool. A court in one case has held that hosts and hostesses who greet customers and perform some table attendance duties might be included in a tip pool. However, this holding was not all encompassing so a case-by-case analysis needed to be applied to determine applicability.
The FLSA forbids any arrangement where any part of the tip received becomes the property of the employer. A tip is the sole property of the tipped employee or employees appropriately participating in the tip pool.
The Department of Labor (DOL) also mandates that the pooling arrangement must be “customary and reasonable” and can not require an employee to contribute a greater percentage of their tips other than what is customary and reasonable. Although there is no definition or exact percentage of what the DOL deems “customary and reasonable,” the wage and hour division has found in cases where contributions of 15 percent or less of an employee’s tips to be acceptable. Contributions of greater than 15 percent are not statutorily forbidden but may require the employer to show that such a percentage is “customary and reasonable” for that community.
States also have similar definitions of allowable tip pooling. An issue of much interpretation and debate is whether employers may mandate that tips/gratuities be pooled and distributed among certain employees as a mechanism for ensuring that gratuities are shared by all employees in the “chain” of customer service and the chain of service over time in the restaurant industry has come to include all non-management employees in states where a tip credit is not permitted..
Pooling tips for redistribution is not required, nor is a written agreement or policy required to allow a tip pool.
“Chain of Service” Eligibility
However, the definition of “chain of service” has continued to be refined and evolve with opinions both by federal and state wage and hour divisions and the courts. For example, in 2005, California’s Department of Labor Standards Enforcement issued an opinion regarding tip pools stated that employees eligible to participate in a tip pool included anyone who contributes to the “chain of service bargained for by the patron, pursuant to industry custom.” This opinion letter described the “chain of service” to include bussers, bartenders, hostesses, wine stewards and front-room chefs (e.g., chefs at a sushi bar or who prepare food at the patron’s table). The opinion reaffirmed that no employer or agent with the authority to hire or discharge any employee or supervise, direct, or control the acts of employees may collect, take, or receive any part of the gratuities intended for the employees as their own. In other words, despite any tip pool container as is often seen at coffee shops, the owner(s), manager(s), or supervisor(s) of the business can not participate in the tip pool, even if these individuals provide direct table service to a patron. This is the case even if the guest intended to leave the tip for an owner, manager, supervisor, or agent of the business who actually provided service to the patron. Given the broad definition of the Labor Code, an agent could include a floor manager or shift supervisor if that person has the ability to direct or control the acts of employees.
However, recent court decisions have allowed shift supervisors in certain situations to share in gratuities. This situation was dealt with in lawsuits by Starbucks baristas as to company’s practice of permitting shift supervisors to share tips. At the Starbucks stores, the collective tip box was divided among the entry-level employees and the shift supervisors. A trial court in San Diego, California initially ruled that California law prohibited managers and supervisors from sharing such tips and awarded over $105 million dollars in damages. However, this decision was reversed with the Court of Appeals holding that shift supervisors are eligible to share in the tip pool, reversing the lower court decision. The Court found that shift supervisors performed the same tasks as baristas because their primary duty was to serve food and drinks. Chau v. Starbucks, Corp. 174 Cal App 4th 688 (2009). This case has not been overturned and even other states including New York cited to the Chau case to support allowing shift supervisors to participate in the tip pool based on their duties being more akin to baristas. See, Barenboim v. Starbucks Corp., 2013 N.Y. Slip Op. 04754 (June 26, 2013) wherein New York highest court found given that shift supervisors performed the same duties as baristas that they could share in the tip pool. Therefore, there seems to be consistency among states as to the role of shift supervisors working at Starbucks. However, consistently courts have found assistant store managers should not be included in the tip pool because they have too many managerial duties, including hiring and firing, so as not to be classified as staff…
These cases have also brought up the concept of a customer service team (consisting of one or more entry-level and one or more shift supervisors) who rotated jobs throughout the day and spent most of their time performing the same customer service tasks, thereby supporting the Starbucks tip pooling arrangement. Generally, a customer who places a tip in a collective tip box was found to understand that it would be shared by all service employees and these cases appear to be guiding law.
As to tip pooling, the industry has adopted a standard that distributes the majority of the pooled gratuities to waiters and waitresses, followed by a smaller percentage to bussers, and a still smaller percentage to other categories of employees who provide limited direct table service. There is no specific cap placed on the percentage of tips waiters and waitresses can be compelled to “tip out”. As will be explained below, the current state of the law has clarified who can participate in a mandatory tip pool.
Tip Credit and Tip Pooling subject to Attack
The most recent issue that has arisen involves who can share in the tip pool and whether “back of the house” employees like dishwashers, food scrapers, chefs, and cooks can share in the tip pool. For years especially under the Obama Administration, the Department of Labor (“DOL”) has consistently taken the position that employees who do not provide direct service to the customer are not allowed to participate in a tip pool. This would mean that kitchen staff who do not have direct service contact would not be viewed as being valid participants to share in a tip pooling arrangement.
However, inconsistent interpretations of the FLSA among various appellate courts have created confusion for both employers and courts regarding the applicability of valid tip pools. In early 2010, when the Ninth Circuit Court of Appeals (which covers the states of California, Nevada, Oregon, Washington, Arizona, Alaska, Idaho, Montana and Hawaii) held that an employer could require servers to pool their tips with non-tipped kitchen and other “back of the house staff,” so long as a tip credit was not taken and the servers were paid minimum wage. Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). According to the court, nothing in the text of the FLSA restricted tip pooling arrangements when no tip credit was taken; therefore, because the employer did not take a tip credit to reach the minimum wage, the tip pooling arrangement did not violate the FLSA.
In response, the DOL on April 5, 2011, issued new regulations that directly conflicted with the holding in Woody Woo. In early 2012, the DOL clarified its position on tip pooling by fully rejecting the Ninth Circuit’s decision in Woody Woo. Therefore, employers could no longer require mandatory tip pooling with back of the house employees. In conjunction with this announcement, the DOL issued an advisory memo directing its field offices nationwide, including those within the Ninth Circuit, to enforce its rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.
As a result, several restaurant trade groups and Wynn Las Vegas challenged the 2011 rule change in separate cases, seeking to enjoin its enforcement. (The plaintiff employers all required their employees to participate in a tip pool that included both tipped and non-tipped employees, and they did not take a tip credit against the minimum wage.) Both federal district courts concluded that the DOL lacked authority to make the rule change as a result of Woody Woo and, moreover, that the substance of the DOL’s revision contradicted Congress’ clear intent.; therefore upholding Woody Woo and allowing a mandatory tip pool with back of the house employees states where a tip credit was not allowed..
In response, the DOL appealed but set forth language that it would not seek to enforce these 2011 new regulations within states located in the Ninth Circuit area of responsibility that do not allow a tip credit. On February 23, 2016, a sharply divided panel of the Ninth Circuit Court of Appeals (which covers the states of California, Nevada, Oregon, Washington, Arizona, Alaska, Idaho, Montana and Hawaii) ignored its prior precedent issued in 2010 and upheld the 2011 DOL rule change. The majority concluded that the Fair Labor Standards Act’s (FLSA) “clear silence as to employers who do not take a tip credit has left room for the DOL to promulgate the 2011 rule and rejected the notion that the appeals court itself had foreclosed the agency’s ability to do so by virtue of its 2010 decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). This decision meant that even in states where no tip credit exists that employers can no longer mandate a tip pool distribution that includes employees who are not in the chain of service or have direct contact with customers i. e. cooks, dishwashers… Oregon Restaurant and Lodging Association v. Perez, 816 F.3d 1080 (9th Cir. 2016)).
A petition for rehearing en banc before the full panel of Ninth Circuit judges, rather than the usual three, was requested. On September 6, 2016, the Ninth Circuit denied the petition but ten of the judges joined in a sharply worded dissent that laid out a path for an appeal to the U.S. Supreme Court. The Oregon Restaurant decision is directly at odds with the Fourth Circuit Court of Appeals decision in Trejo v. Ryman Hospitality Props., Inc., 795 F.3d 442 (4th Cir. 2015). Due to this “circuit split”, the National Restaurant Association, the National Federation of Independent Business and other hospitality groups filed briefs to join the Wynn’s prior petition for U.S. Supreme Court to decide whether the DOL acted within its statutory authority when it barred restaurants from including kitchen staff in tip pools. This appeal still is pending with the U.S. Supreme Court and a decision as to whether it elects to take this appeal and resolve the split in the federal courts of appeal is still outstanding
New Federal Budget allows Tip Pooling
In response to the DOL rule adopted under President Obama, the Trump DOL proposed a new rule which would allow tips to be shared and pooled between all employees. Even though this would allow some of the lowest paid employees to receive additional monies from sharing in tips, labor groups opposed the proposed new rule claiming this would result in employers’ managers or supervisors taking tips away from employees. The DOL extended the comment period to address these concerns.
On March 22, 2018, a compromise was reached as part of the omnibus budget bill signed by President Trump on March 23, 2018. Under a rider to the bill, now law, the FLSA is amended to allow mandatory tip pooling so long as the workers are paid at least the minimum wage. This is not an issue in California as a tip credit is not allowed and all employees must be paid at least the applicable minimum wage. Also the rider includes a provision reinforcing the rule that already exists in California that do not allow employers to keep “tips received by its employees for any purposes”. As a result, it reinforces the California rule that the agent of the employer i.e. owners, managers, supervisors are not permitted to share in a tip pool.
In summary, the new budget makes it clear that all employees can share in a tip pool and no longer excludes the heart of house employees like dishwashers, cooks and other kitchen staff. This new rule will help close the large wage gap between front of the house and back of the house workers. Finally, the new FLSA rule does not allow, and has never allowed, restaurant owners to keep employees tips. The tips belong to the nonsupervisory employees, even if the employer helps serve meals and interacts with customers
Practical guidelines for compliance
As a result the new FLSA rules, a company that pays all of its employees at least the minimum wage can l impose a tip pool that allows all non-management employees even those who are not directly in the line of service to be a part of a tip pool arrangement. “Back of the house” employees like cooks, kitchen staff and dishwashers can also share in the tip pool. It is unclear if the U.S. Supreme Court will take the pending appeal given this action as the new rule may have made the appeal no longer necessary.
Going forward, employers should take the following steps to limit liability on tip pooling claims:
A mandatory tip pool can include all line employees even those with limited customer contact as the law has evolved to recognize these employees as being a part of the chain of service for the industry.
If a mandatory tip pool is instituted, the employees with the greatest amount of customer interaction should get the largest percentage of the tips. It is important to make sure that the tip pool is distributed to participating employees in a reasonable manner, proportionate with the employees’ direct interaction with the customers.
Rely more on what the employee actually does in his/her job versus a job title. For example, an employee carrying the title of “waitress” whose only job is to prepare food outside the view of patrons or without personal contact with patrons should receive a smaller percentage of the tip pool. Also an employee who has greater contact with the customer should receive a greater percentage of the tip pool than employees who have less direct interaction with the patron.
It is illegal for the employer to share in the tip pool and therefore, do not distribute any portion of a tip pool to any owner, manager or supervisor, even if the owner manager or supervisor provides direct table service and/or the tip was left by the patron specifically for that individual.
Finally, if a tip pool is instituted, please make sure the tip pool is distributed to participating employees in a reasonable manner, proportionate with the employees’ direct interaction with the customers. It is important to review your current tip pooling arrangement, if you have one and revise it as needed to comply with the new rules.
For more specific questions as to prevention and allowable tip pooling policies, it is important to consult competent legal counsel who understands both the hospitality industry and wage and hour issues and can analyze those issues given your specific circumstances and policies.
]]>One issue that can lead to a recall is “mislabeling.” Mislabeling occurs when a food product’s label does not accurately reflect its ingredients. A common reason for a recall is improper identification of allergens. There are more than 160 foods that can cause allergic reactions in people with food allergies. The FDA recognizes the eight most common allergenic foods, which account for 90 percent of allergic reactions to food. Those are milk, eggs, fish, crustacean shellfish, tree nuts, peanuts, wheat and soybeans. These eight foods and any ingredient that contains protein derived from one or more of them are designated “major food allergens” by the Food Allergen Labeling and Consumer Protection Act of 2004 (FALCPA) and require specific labeling.
If a product is not properly labeled, the consequences could be life-threatening. A person with severe food allergies could experience anaphylaxis, which could lead to constricted airways, severe lowering of blood pressure and suffocation by swelling of the throat. Sometimes symptoms start out mild and can become more serious in a very short time. Allergic reactions can include hives, flushed skin or rash; a tingling or itchy sensation in the mouth, face and tongue; lip swelling; vomiting and/or diarrhea; abdominal cramps; coughing or wheezing; dizziness and/or lightheadedness; swelling of the throat and vocal cords; difficulty breathing; and loss of consciousness.
Many instances of mislabeling are caused by cross-contamination, which occurs when an allergenic or undesired product comes into contact with the product but is not listed on the label. Food product producers, manufacturers and distributors must take care to accurately label their products that contain allergens and to prevent cross-contamination. If contamination is discovered, a recall is likely on the horizon. It is imperative to notify the FDA, USDA and consumers promptly to prevent injury and contain the problem.
The FDA and the USDA have helpful guidelines and reporting links on their websites. For more information, see https://www.fda.gov/Food and https://www.fsis.usda.gov.
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]]>“Based on a plaintiff’s attorney generalizing the defendant’s conduct so the jury members feel personally threatened by the alleged danger actions,” the reptile strategy is a force to be reckoned with. This specific strategy has been implemented in “almost 50 notable cases”, one of which a “Florida attorney received a $2.6 million verdict for his client who war run over by a beach patrol truck while sunbathing.” Discover the tactics and characteristics of this strategy as well as red flags to look for from an attorney using the Reptile Strategy as well as methods to refocus the jury and counter the technique
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]]>The hospitality industry will indefinitely be severely affected by these new Overtime Laws. Many employers feel they will have no other option than “to reclassify current managerial employees to nonexempt workers under the proposed regulations.” Employers should consider reviewing “their job descriptions to determine whether they accurately reflect employees’ job duties and skills” to best meet overtime exemptions. By performing a “self-audit,” employers will ease the future process of determining whether employees holding “exempt position[s] who currently fall near or below the proposed salary threshold” will need to be reclassified. By creating a plan of action in advance, employers will be able to better “communicate these changes to employees.”
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]]>Sound good? Maybe and maybe not. The problem was that the lawyer had no idea how long her client kept emails in its active systems and how expensive it would be to retrieve emails not in the active systems. She eventually learned that the systems only retained email for one year, after which it was available, but only after restoration from back-up tapes at a potential cost of more than $500,000.
One would think that it would be a simple matter to go back to the plaintiffs’ counsel, or the court if need be, explain the mistake and retract the commitment. But if relations are strained or credibility with the court has been impaired by other issues, this may not be so simple. It may also be awkward to explain the situation to the client and its insurer.
The lesson to be learned is that lawyers should never make discovery commitments regarding electronically stored information (ESI) before they understand at least the general contours of the client’s ESI systems.
What do we mean by that? Here are some very basic questions that any company should expect its lawyer to ask up-front:
While email is always a compelling topic, your lawyer should also be delving into very basic related issues, such as:
In today’s litigation environment, every case is an e-discovery case. With that in mind, if your lawyers are not asking these types of questions early in any litigation, you should find out why.
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