Mishandling Employee Tips Proves Costly for Restaurants

Author: Michael Cardman, HR & Compliance Center Senior Legal Editor

September 26, 2022

Sharing servers' tips with managers or using servers' tips to pay other employees' wages is prohibited under the Fair Labor Standards Act (FLSA), as recent developments highlight.

A diner in Pennsylvania was recently ordered to pay more than $1.35 million to about 100 workers because, among other things, it required its servers to turn over 10 to 15 percent of their tips to pay their bussers' wages.

Meanwhile, three barbecue restaurants in Texas paid about $230,000 in back wages to about 300 servers because the restaurants gave a portion of the servers' tips to managers.

Both followed investigations by the US Department of Labor (DOL), which found almost $35 million in back wages owed to more than 29,000 workers in the food service industry in fiscal 2021.

"Food service industry employers must know that tips are the property of tipped employees who earn them, plain and simple," a DOL representative said.

In 2018, the FLSA was amended to explicitly prohibit employers, including managers or supervisors, from keeping any part of tips received by employees for any purpose, regardless of whether or not the employer claims a tip credit.

And last year, the DOL gave itself the ability to penalize employers $1,162 any time they keep employees' tips (previously it could levy penalties only if those violations were repeated or willful). These civil penalties come on top of broader liability for all tips unlawfully kept, doubled as liquidated damages.

The FLSA does not prohibit the pooling of tips among employees who customarily and regularly receive tips - including servers and bussers. But, in the case of the Pennsylvania diner, the DOL alleged the money seized from servers' tips was retained, at least in part, by the diner and was not used in furtherance of a valid tip pool.