UPDATE: On January 26, 2021, the U.S. Department of Labor (DOL) announced that it is withdrawing opinion letter FLSA2021-4. According to the DOL, this letter was issued “prematurely” because it was “based on rules that have not gone into effect.” Thus, as of January 26, 2021, the letter may not be relied upon as a statement of agency policy.​

*  *  *

On January 15, 2021, the U.S. Department of Labor issued two opinion letters addressing tip-related issues.  The first, FLSA2021-4, addresses whether, and in what circumstances, a restaurant that takes a tip credit for its servers may institute a lawful, mandatory tip pool that includes hosts.  As discussed in more detail below, the DOL concluded that evidence of how hosts are treated in tip pools among other establishments in a community may be required to support their inclusion in a mandatory tip pool.  The second, FLSA2021-5, provides guidance on how to calculate an overtime premium when a tip-credit employee, like a server or bartender, receives automatic gratuities or service charges as part of their wages.

FLSA2021-4 Hosts in a Tip Pool

The restaurant company at issue used a tip credit against minimum wage for its servers who received tips directly from customers.  The servers, in turn, were required to pay a percentage of the tips to the restaurant’s hosts.  The restaurant’s hosts provided traditional host services, such as greeting and seating guests, presenting menus and informing guests of specials, interacting with guests, taking names for a waitlist, running a floor plan, and cleaning and wiping down tables. 

The DOL reiterated long-standing principles that the FLSA permits employers to take a tip credit for tips received against minimum wage for customarily and regularly tipped employees, like servers, so long as they meet the notice requirements under the FLSA, and are permitted to retain all of their tips, except for those that are part of a lawful tip pool.  A mandatory tip pool is lawful so long as it only includes workers who are customarily and regularly tipped.  As the DOL noted in its opinion letter, the legislative and agency guidance has long indicated that the non-exclusive list of those that are customarily and regularly tipped includes waiters, bussers, countermen, and service bartenders, but does not include janitors, dishwashers, and chefs.  The DOL then drew upon generalized language regarding hourly compensation of food and beverage workers in recent Bureau of Labor Statistics publications to lend support to a conclusion that hosts are not considered to be in a tipped occupation.  But the DOL also drew upon language from a 1987 opinion letter indicating that whether a host can participate in a tip pool turns on whether hosts in similar establishments in the area have received and are now receiving tips. 

In doing so, the DOL questioned the rationale of Kilgore v. Outback Steakhouse of Florida, a 1998 Sixth Circuit case that long stood for the proposition that hosts who had sufficient interaction with guests could be part of a mandatory tip pool.  In Kilgore, the hosts greeted guests, supplied them with menus, seated them at tables, and at least occasionally “enhanced the wait” by performing tasks such as refilling drinks, providing complimentary appetizers, and taking appetizer orders.  The Kilgore court found this level of guest interaction sufficient for mandatory tip pool participation. In the new opinion letter, however, the DOL noted that while customer interaction is one factor to consider, it is not alone dispositive.  The DOL concluded that a restaurant must consider whether hosts in similar establishments in the locality also customarily and regularly receive tips, either directly from customers or from a tip pool.

The DOL also took the opportunity to reiterate that, under the 2018 FLSA amendments, a mandatory tip pool may include hosts and other workers, regardless of whether they customarily and regularly receive tips, if no tip credit is taken for anyone (i.e., even the servers who contribute to the tip pool are paid full minimum wage), and neither the employer nor supervisors or managers with exempt duties participate in the tip pool.

The opinion letter could result in a significant shift for employers that utilize a tip credit for servers and include hosts in a mandatory tip pool.  While hosts have traditionally been included in many restaurant tip pools, and a number of courts have found that hosts are lawful tip pool participants, the DOL is signaling that proof of similar pools among other restaurants in a community is required to support the lawfulness of the tip pool. Given the DOL’s and the courts’ tough approach to penalties associated with an unlawful tip pool (loss of the entire tip credit), restaurants utilizing hosts or any other workers in a mandatory tip pool should develop a body of evidence of local trends to support the on-going inclusion of these workers in the tip pool.

FLSA 2021-5 Calculating Overtime with Service Charges and Automatic Gratuities

The restaurant business asked the DOL for assistance in the complicated overtime calculation problem involving tip credit employees.  Specifically, how much overtime premium is due for an employee that earns $2.13 an hour for 18 hours as a server and $75 per 8-hour shift as a bartender, for a total of 42 hours, and also earned $732 in tips and $160 in service charges?

The FLSA requires an additional overtime premium of one-half of the regular rate for all hours worked over 40 in a 7-day workweek.  In laying out the calculation, the DOL reiterated its long-standing principle that the tip credit is included in the calculation of the regular rate, and that compulsory service charges are not tips, and are also included in the calculation of the regular rate. 

The DOL explained the calculation as follows: the regular rate is the sum of all wages, divided by all hours worked.  Here, the wages for the server work are $7.25 multiplied by 18 hours, or $130.50.  This is because the tip credit must be included in this calculation, but not tips that exceed the tip credit.  The bartender wages are $75 multiplied by 3 shifts, or $225.  Then these wages, along with the service charges ($130.50 + $160 + $225) are added together to get total straight time wages of $515.50.  Taking those total wages of $515.50, and dividing by 42 hours, results in a regular rate of $12.27.  Half of that regular rate ($6.135) is due for every hour over 40, or $12.27 (2 x $6.135).

The DOL’s approach, while straight-forward, fills in some gray area for this calculation methodology.  First, in the example, the bartender’s effective hourly rate ($225/24 hours) is well above the $7.25 minimum wage.  The DOL, however, did not include that “overage” to reduce the server tip-credit.  Instead, the DOL fixed the tip credit at $5.12, regardless of the additional wages over minimum wage earned in the bartender shift, the effect of which results in more overtime premium due.  And, similarly, the DOL did not use the service charges earned during that workweek to offset the tip credit, again resulting in more overtime premium due.

While the calculation of overtime in this complicated scenario is helpful for employers, the more important takeaway is that other wages earned in a workweek (like excess hourly or shift wages in another position, or service charges and automatic gratuities) cannot offset the tip credit in order to reduce overtime premium liability in a workweek.