Many Restaurants are Exposing Themselves to FLSA Lawsuits with their Automatic Gratuity Policies

The Fair Labor Standards Act (“FLSA”) regulates the wages earned by tipped employees. Under the FLSA, tipped employees are entitled to an employer-paid wage of at least $2.13 per hour, more if tips received do not total $5.12 an hour (based on the current federal minimum wage of $7.25). This means employers can claim what is called a tip credit of up to $5.12 against the federal minimum wage, as outlined by section 3(m) of the FLSA if their tips, combined with their hourly wage, do not reach the minimum wage standard. Note, however, that in Florida, the minimum employer-paid cash wage is $6.98 for tipped workers.

Most states, including Florida, have minimum wage requirements which differ from those set forth by the federal Fair Labor Standards Act. If a state minimum wage is different from the federal minimum wage, the state is required to pay whichever is highest, which in Florida is $11.00 per hour as of September 30, 2022. Employees must retain all of their tips, except if the tipped employees participate in a valid tip pooling arrangement. Tip pooling is allowed by the FLSA and occurs when service employees who regularly receive tips collect their tips at the end of a given night and distribute it among those same tipped employees.

Many restaurants, especially those in South Florida commonly include an added charge on a customer’s bill, which is known as an automatic gratuity. According to Fla. Stat. § 509.214, if a Florida restaurant is going to add an automatic gratuity or service charge to a customer’s bill, it must give notice on the food menu and on the face of the bill that the automatic gratuity is included. In Miami-Dade County, if a restaurant in adds an automatic tip, it must post a notice conspicuously, either on a sign or in a statement on the business’s menu or price listing in the same form and manner as the other items on the menu or price listing, and written in a legible manner in English, Spanish and Creole. Miami-Dade County, Fla., Code of Ordinances § 8A-110.1(3).

The U.S. Court of Appeals for the Eleventh Circuit recently ruled that the Ritz-Carlton hotel chain will need to face a class action lawsuit under accusations of deceptively adding gratuities to customers’ dining bills at its 49 restaurants in Florida in Michael Fox v. The Ritz-Carlton Hotel Company L.L.C. The lawsuit’s plaintiff, Michael Fox, claims that the Ritz-Carlton automatically added tips to customers’ bills at its restaurants without properly disclosing that it would do so or the mandatory nature of those charges.

Additionally, the Fourth Circuit recently ruled that automatic gratuities are not tips as defined by the Fair Labor Standards Act (FLSA) in Wai Tom v. Hospitality Ventures LLC No. 18-2509 (4th Cir. Nov. 24, 2020) and can therefore not be included in tip pools without violating the FLSA. Further, Revenue Ruling 2012-18, defines automatic gratuities as service charges, which are considered restaurant income. The IRS clarified that in determining whether a payment is a tip or service charge the following must be considered: 1) The payment must be made free from compulsion; 2) The customer must have the unrestricted right to determine the amount; 3) The payment should not be the subject of negotiation or dictated by employer policy; and 4) Generally, the customer has the right to determine who receives the payment. The IRS concluded that the absence of any of the four factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge. Thus, automatic gratuities—which fail to meet the criteria above—are service charges. This implies restaurant employers cannot attribute automatic gratuities toward an employees’ overall wage using tip credits in order to meet the applicable minimum wage standard.

There are a number of restaurants in Brickell, and Miami Beach that are currently violating the law and are exposing themselves to FLSA lawsuits. It’s just a matter of time before they are sued.

If you believe that your restaurant may be in violation of the FLSA or have received a demand letter or lawsuit for a violation of the FLSA, call McKellar Poursine, P.L.L.C. at (305) 721-2954 to discuss whether we can help you.

Special thanks to Dion M. Ruiz, University of California Davis School of Law, J.D. Candidate 2022 for his assistance in writing this article.