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Fourth Circuit Says Tip Pooling Rules Only Apply if Employer Claims Tip Credit

    Client Alerts
  • August 24, 2015
Restaurants and some other hospitality industry employers often take advantage of a sub-minimum wage applicable to employees who receive tips as part of their income. In recent years, a number of these employers have been the targets of collective action lawsuits claiming that they illegally appropriated part of the servers’ tips. In many cases, these tips are “pooled” for distribution among employees ineligible to receive such tips.

Last month, the Fourth Circuit Court of Appeals (which includes North Carolina and South Carolina) answered an interesting question about tip pooling rules under the Fair Labor Standards Act. Do these rules apply to employers who pay servers the regular minimum wage? In Trejo v. Ryman Hospitality Properties, Inc., the plaintiffs claimed that they were forced to share a percentage of their tips with employees ineligible to participate in the tip pool under the FLSA, such as bartenders and busboys. The district court dismissed the claim, concluding that the tip pooling rules only apply in situations where the employer claims the tip credit to meet FLSA minimum wage requirements.

On appeal, the Fourth Circuit affirmed this dismissal. The court analyzed the relevant portions of the FLSA, concluding that the tip pooling rules only apply in the context of the Act’s minimum wage provisions. If the employee in question receives the full federal minimum wage, the tip pooling rules are simply inapplicable.

Employers desiring to create broader tip pools have the option of forgoing the federal tip credit and paying the full minimum wage. However, some states have separate statutes that limit tip pooling arrangements, and these laws may not be interpreted as dependent on payment of a sub-minimum wage. Restaurants and other affected businesses should consult federal and local laws before instituting any tip pooling system.