Quirky Question #201, Tip Sharing

Question:

I run a restaurant chain that operates in different states, and I’m about to open my first location in Minnesota.  We generally ask our servers to share a portion of their tips with bussers.  We also include mandatory charges for large groups.  I’ve heard the rules surrounding tips and service charges are quite unique in Minnesota.  Is there anything special I need to be aware of?

Answer:  By Joel O’Malley

Joe O'Malley

Joe O’Malley

Minnesota restaurateurs face a unique state tip statute that makes it very difficult to ensure that tips can be shared between servers and non-servers (thereby lowering labor costs for the non-serving employees).  The statute’s intricacies make it difficult to comply and provide an easy avenue for a single disgruntled employee to cobble together a class action lawsuit and seek significant damages.  The detailed requirements are unlike federal laws and those of other states, including the unavailability of the tip credit, restrictions on tip-pooling, and specific constraints on the use of mandatory service fees.  Out-of-state restaurant chains are particularly at risk for violating Minnesota’s laws, since those restaurants tend to simply import into their Minnesota locations practices that are legal elsewhere.

A recent settlement of a putative class-action lawsuit against Outback Steakhouse’s parent company shows the danger of misunderstanding Minnesota’s laws and the power of aggregating small claims.  In that suit, Outback’s system of requiring servers to share tips with bussers and hosts and its mandatory service fee on large parties were challenged.  The putative class included about 1,200 current and former Outback servers in Minnesota who claimed they had been shorted tips otherwise belonging to them.  While Outback disputed the claims and did not admit liability, it agreed to pay a $1.25 million settlement to get rid of the case.

So what should Outback have done differently, and how can your restaurant and other restaurants avoid Outback’s fate?

No tip credits.

Most states permit restaurants to take a tip credit against employees’ wages.  That is, a restaurant can pay an employee lower than the minimum wage as long as the tips the employee receives generally make up the difference.  Minnesota is not among those states.  Tip credits are unequivocally outlawed in the North Star State, so servers are owed the minimum wage plus tips.

Share and share alike—but only among employees providing direct service.

Under federal law and that of most states, a restaurant can require tip-pooling among employees as long as those forced to participate in the pool “customarily and regularly” receive tips.  Generally, only employees who normally receive tips can participate in the pool.  So since the dishwasher is not getting tips for how clean the plates are, servers cannot be forced to pool their tips with him.  Under federal law, employees who “customarily and regularly” receive tips may include, among others, hosts, bartenders, bussers (and, of course, servers).

Minnesota law is quite different.  Whether a restaurant can require employees to participate in a tip pool does not depend on who “customarily and regularly” receives tips, but rather on a distinction between “direct service” employees, who can be required to participate, and “indirect service” employees, who cannot.  The controlling regulations unhelpfully define a direct service employee as “one who in a given situation performs direct service for a customer.”  An indirect service employee “is a person who assists a direct service employee,” including “bus people, dishwashers, cooks, or hosts.”

Thus, unlike federal law, servers cannot be forced to share their tips with bussers and hosts who only assist servers, but do not themselves perform direct service.  The question remains, however, whether an indirect service employee can provide enough assistance to a server to turn him into a direct service employee.  That is, can a restaurant impose enough additional direct-service duties on its bussers and hosts to mandate their inclusion in a tip pool?  The answer is probably no.

A Minnesota federal court analyzed Minnesota’s tip-sharing laws in 2009 in a putative class action lawsuit challenging Starbuck’s policy of distributing tip jar money on a weekly basis among baristas based on their hours worked during the week.  In response to the baristas’ challenge that they did not provide direct customer service for portions of their shifts, and, therefore, they should not have been required to participate in the pool based on their total hours worked, the court held that baristas who were “primarily engaged in performing direct service for customers during a particular shift” may be regarded as a direct service employee for that entire shift and be required to join the tip pool, even if some shift time is spent on indirect service.  The court also provided a hint as to what could be considered “direct” versus “indirect” service.  Refilling a coffee cup exemplified the former; the latter included bussing a table.  Another Minnesota federal court recently analyzed how the tip-sharing laws applied to traditional restaurant service and held the employer could not require servers to share tips with employees who assisted them in providing direct service to customers, because those employees’ duties made them too similar to traditional bussers.  While the employees did assist servers and interact with customers, it was the servers alone who greeted customers at tables and took their food and drink orders.

Based on these decisions, Minnesota restaurants probably can require only traditional servers to participate in a tip pool.  Any expansion of that pool to include employees who are not primarily engaged in greeting, taking orders from, and providing food and drink to customers is likely impermissible under Minnesota law, even if allowed under federal law.

Voluntary tip-sharing can include anyone (except management).

While mandatory tip-pooling is permissible in Minnesota only for direct service employees (as described above), if the pool truly is voluntary and without participation by restaurant management, then anyone—including servers, bussers, hosts, etc.—may join the pool.  The challenge, however, is a restaurant’s ability to legally encourage pools that remain sufficiently voluntary to meet this requirement.

For example, in many restaurants, it is “suggested” by management that servers “voluntarily” redirect a portion of their tips to other employees who helped meet the customers’ needs, including cooks, bussers, bartenders, hosts, etc.  In some restaurants, payments will be spread among all the non-service employees equally; in others, servers will make payouts based on their own views of who was helpful.  Outback’s system went a step beyond such a laissez-faire system.  In a likely effort to have a more equitable redistribution and avoid placing servers in the position of making enemies among coworkers, Outback, through its point of sale system, automatically deducted a small percentage from each server’s nightly tips and pooled those amounts for the benefit of bussers and hosts.  Outback tried to argue the system was voluntary, but the servers claimed that even if it was, Outback’s participation in the system amounted to coercion.

By agreeing to pay over $1 million in settlement, Outback apparently recognized the weakness in its system.  Unless the tip-sharing idea truly stems from the employees themselves, it is illegal in Minnesota.  Moreover, even a voluntary system can turn impermissible if the restaurant gets involved in any way beyond safeguarding and disbursing the tips that have been shared.  Essentially, all the employer can do is act as the passive no-interest bank for the shared tips.  Failure to follow these guidelines may result in the restaurant having to reimburse its servers for any tips shared with indirect service employees.

Want to keep those obligatory service fees?  Use Bold 18 Point Font.

Many restaurants often tack on extra charges to bills for large parties, events, or catered banquets.  Under federal wage law, those types of mandatory charges are not considered tips.  Even if the customer thinks the charge is going to the servers and, as a result, elects not to leave anything extra, the restaurant generally can keep the fee.  Restaurants typically choose anyway to give some of the fee to the people who worked the event, but that is not required under federal law.

Minnesota law, however, deems these obligatory charges as belonging to the employees who worked the events unless certain specific requirements are met.  In Minnesota, an obligatory service charge must go completely to employees if it is possible a customer could “reasonably construe” the charge as being a tip, and there is no “clear and conspicuous notice” that the charge is not a tip.  In other words, to turn a service fee into money that can be kept by the restaurant, there must be “clear and conspicuous notice” that the charge is not a tip so that an average customer would not think it is a tip.  Regulations instruct in painstaking detail what kind of notice meets this criteria:  it should be “clearly printed, stamped, or written in bold type on the menu, placard, the front of the statement of charges, or other printed material given to the customer.”  And what makes the notice “clearly” printed?  Type that is “at least 18 point (one-fourth inch) on the placard, or 9 point (on-eighth inch) or larger on all other notices.”

Even with that detail, though, it remains unclear whether the notice always must be “given to the customer,” or whether a wall placard is good enough.  The best course may be to place a notice on the wall near the restaurant’s entry, in bold 18 point font, and include a similar notice in bold 9 point font on the menu or event form.  While no court has yet endorsed specific language, something like the following likely would be sufficient:  “An X% service charge will be added to events.  Pursuant to Minnesota Statute § 177.23, Subd. 9, this charge is not a gratuity for employee service.”

Restaurants starting operations in Minnesota should think about conducting a self-audit in consultation with legal counsel to see if their policies and practices comply with these unique requirements, and to avoid a mistake that may cost real money down the road.

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