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Mandatory Service Charge Not a Tip Under FLSA

    Client Alerts
  • April 01, 2022

One of the hottest areas of controversy in recent years in wage and hour law has involved employees’ right to tips, and employer’s ability to use such tips to count toward minimum wage and overtime payments. As a result of this litigation and new regulations, employers have sought other means to avoid legal claims alleging misuse of such gratuities. Last month, the Eleventh Circuit Court of Appeals signaled that mandatory service charges do not fall under Fair Labor Standards rules applicable to servers’ tips.

In Compere v. Nusret Miami, LLC, the employer applied a mandatory 18% service charge to customers’ bills. That charge was evenly distributed to restaurant employees, although the customers could add an additional gratuity which was fully paid to the server. The restaurant then used the distributed service charges to fulfill its minimum wage and overtime obligations under the FLSA. A group of tipped employees sued the restaurant, alleging that the service charge was actually a tip, and therefore, the defendant had established an illegal tip pool, and had failed to meet minimum wage and overtime pay requirements. The district court disagreed, dismissing the claim on summary judgment.

On appeal, the Eleventh Circuit agreed, affirming the dismissal. The court noted the key distinction between a tip and a service charge. The former is discretionary, while the latter involves no choice by the customer. The court pointed to DOL rules that characterize tips as determined solely by the customer.

In general, mandatory service charges can be unpopular with customers. However, assuming other federal courts follow the Eleventh Circuit’s reasoning, this decision presents an option for hospitality industry employers that struggle with meeting FLSA obligations to tipped employees. Any change to servers’ pay plans should be fully vetted with legal counsel before being implemented.