Restaurant’s Mandatory Service Charge is Not a “Tip” Under FLSA

Tipped employees at Miami’s Nusr-et Steakhouse sued their employer, alleging that the restaurant violated the Fair Labor Standards Act by counting payments to employees from the restaurant’s mandatory 18% “service charge” as part of the employees’ “regular rate of pay,” rather than as tips. The district court rejected the employees’ claim and granted the restaurant’s motion for summary judgment, holding that the service charge was not a tip. In Compere v. Nusret Miami, LLC, 2022 U.S. App. LEXIS 7293 (11th Cir. Mar. 18, 2022), the Eleventh Circuit affirmed.

The “service charge” at issue is announced on the restaurant’s menu and is non-negotiable by customers, though restaurant managers have the discretion to remove it from the bill in response to customer complaints. After deducting credit card processing fees, the restaurant distributes the balance of the service charge directly to restaurant employees.

The dispositive issue in the case was whether the service charge constituted part of the employees’ regular pay, as opposed to a tip. If the service charge were properly considered part of each relevant employee’s “regular rate of pay,” as the restaurant contended, it could be credited towards the employer’s overtime and minimum wage obligations under the FLSA. But if the charge were really a tip, as the employees claimed, it could not be so credited.

The Eleventh Circuit, in an opinion written by Judge Branch and joined by Judges Grant and Brasher, began its analysis by noting that the FLSA does not define “tip” or “service charge.” According to Department of Labor regulations, however, “the critical feature of a ‘tip’ is that ‘[w]hether a tip is to be given, and its amount, are matters determined solely by the customer.” “By this measure,” the court observed, “Nusret’s service charge is not a tip.” The conclusion is bolstered by another DOL regulation, the court added. 29 C.F.R. § 531.55 provides examples of non-tips, including “[a] compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer’s establishment. . . .”

The employees argued that what really mattered was the restaurant’s treatment of the charge for tax purposes. The service charge would be a tip, they claimed, if not included in the restaurant’s gross receipts for tax purposes, presenting a factual issue precluding summary judgment. But the restaurant’s tax forms were irrelevant, the court held. DOL regulations do provide that “service charges and other similar sums which become part of the employer’s gross receipts are not tips for purposes of the [FLSA],” the court acknowledged, but that does not mean that a service charge’s non-tip status depends on its tax treatment. Rather, a non-negotiable service charge like the one presented in this case is not a “tip,” regardless of tax treatment.

Posted by Valerie Sanders.

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