Hospitality industry employers continue to battle with employees over the proper calculation and distribution of tips under the Fair Labor Standards Act. Last month, the Fourth Circuit Court of Appeals (which includes North Carolina, South Carolina, and Virginia) found that restaurants that claim exemption from overtime rules under FLSA Section 7(i) must still pay minimum wages to commissioned employees. Section 7(i) exempts employers from paying overtime to employees who make a majority of their earnings from commissions.

In Wai Tom v. Hospitality Ventures, Inc., the plaintiffs were tipped employees at a North Carolina sushi restaurant. They sued the restaurant, claiming that it used an illegal tip pooling system that allowed participation by employees who did not typically receive gratuities. The employer moved for summary judgment, and the district court dismissed the claim on the basis that the employees qualified for the Section 7(i) exemption and, therefore, were not entitled to overtime.

On appeal, the Fourth Circuit reversed this decision, remanding the case for jury trial. First, the court agreed the under some circumstances, tipped employees could fall under the Section 7(i) exemption. In this situation, the restaurant applied a 20% service charge to large parties. The Fourth Circuit agreed that the service charge was a commission rather than a tip because it was not paid at the discretion of the diners.

However, even if the servers qualified for the Section 7(i) exemption, this did not answer the question over the legality of the tip pooling system. Section 7(i) does not affect the FLSA’s minimum wage entitlements. Also, actual tips should have been included in the analysis of whether the servers made a majority of their income from service charges. In order to answer these questions, the district court will need to resolve the factual question of what tips should have properly been distributed to the plaintiffs.