First Circuit Reaffirms Importance of Tip Credit Notice

On October 1, 2014, the United States Court of Appeals for the First Circuit reviewed a case involving claims brought by the United States Department of Labor against the owners of Piccolo e Posto, a restaurant in Guaynabo, Puerto Rico. The allegations in Perez v. Lorraine Enterprises, Inc. centered on the restaurant’s failure to properly pay minimum wages and overtime wages to several employees and its failure to keep proper records as required by the Fair Labor Standards Act.

The case was filed with the United States District Court for the District of Puerto Rico following an investigation by the Department of Labor that produced evidence demonstrating that the restaurant: (1) took advantage of the “tip credit” for tipped employees without notifying those employees that their tips would count against the minimum wage requirement; (2) made deductions from employees’ wages that brought those employees’ below the required minimum wage threshold; and (3) failed to track employees’ tips in order to ensure employees were actually paid all minimum and overtime wages due and owing to them. After successfully obtaining a judgment in the amount of $129,057.22 plus interest for the unpaid wages, the restaurant and its owners appealed.

On appeal, the United States Court of Appeals for the First Circuit affirmed the District Court’s rulings. In so doing, the Court rejected two arguments raised by the defendants. First, the Court rejected the restaurant’s owners’ claims that it had, in fact, provided its tipped employees with the notice required in order to utilize the “tip credit,” a mechanism by which tipped employees can be paid less than minimum wage (but not less than $2.13/hour) by their employer so long as their tips bring them to, or over, the $7.25/hour minimum wage threshold. Specifically, the Court found that there was no admissible evidence showing that the tipped employees were actually informed of the “tip credit” process as required by the FLSA.

Second, the Court addressed the defendants’ contention that the waiters’ pay stubs and the restaurant’s policy of requiring wait staff to report their credit card tips each night in order to be “cashed out” provided actual and constructive notice to the waiters that the “tip credit” was being utilized. Rejecting this line of argument, the Court wrote, “the duty to inform is an affirmative duty placed upon the employer, which cannot be satisfied by the mere hope or assumption that employees will either divine their employer’s intentions or figure out their statutory entitlements from the way in which the employer conducts its business.”

This case provides yet another reminder of the various ways in which tipped employees’ rights are routinely being violated by haphazard employers who routinely ignore the mandates placed upon them by the FLSA. If you are a tipped employee and your employer failed to explain the “tip credit” to you, is taking deductions from your wages, and/or is not tracking your tips in order to ensure you are being paid correctly, you should contact an attorney to discuss your legal rights.