The Fair Labor Standard Act (“FLSA”) permits employers to pay tipped employees less than the minimum wage—$2.13 per hour—when the tipped employees’ tips make up the difference to the minimum wage (i.e., $7.25 per hour). The employer’s discount is called the tip credit. But to claim the tip credit, the employer must comply with certain notice requirements.
A recent case involving a Houston, Texas restaurant illustrates what can go wrong when a restaurant fails to satisfy the FLSA’s tip credit notice provisions. And to add insult to injury, the restaurant also overcharged employees for the cost of uniform cleaning. Below is a summary of the case. Ettore v. Russos Westheimer, Inc., 2022 U.S. App. LEXIS 7295 (5th Cir. Mar. 18, 2022).
Background.
Plaintiff Chiarra Ettorre was employed as a server at Russos pizza restaurant from May 2016 until December 2018. Russos paid Ettorre $2.13 per hour plus tips and claimed the FLSA tip credit. Additionally, Russos deducted $10 from each of Ettorre’s biweekly paychecks as a “linen fee” to cover the cost of laundering her apron, which she and other servers were required to wear. The linen fee also covered the cost of providing unlimited soft drinks to employees during their shifts.
After Ettorre was fired, she sued Russos. She alleged: (1) Russos failed to provide her with the requisite notice before claiming a tip credit; and (2) the linen fee was an improper deduction from her paycheck.
The district court granted summary judgment to Ettorre. The court found no evidence that Russos satisfied the required tip credit notice. The trial court also concluded the cost to launder aprons was unreasonable and Russos had failed to show the actual costs for unlimited drinks. The court held Russos liable for the full amount of the tip credit claimed for each hour Ettorre worked and for the linen fee for the duration of her employment. The court also imposed liquidated damages on Russos and ordered Russos to pay Ettorre’s attorney’s fees.
The Fifth Circuit’s opinion.
Russos appealed and the U.S. Court of Appeals for the Fifth Circuit affirmed the district court’s judgment.
In its opinion, the Fifth Circuit began with Ettorre’s notice claim. Russos bore the burden to prove it is entitled to the tip credit, including notice. Russos only showed that Ettorre knew that she hourly rate was $2.13. Ettorre’s affidavit stated that she was not told about the tip credit or any of the required components of the tip credit provision. Russos’ corporate designee admitted that she did not know whether Russos notified Ettorre of the required elements to claim the tip credit and that there was no policy of informing employees about their wages at the time of hiring. The Fifth Circuit held that Russos produced no evidence to show that it affirmatively informed Ettorre of the tipped credit components. Still, the Fifth Circuit’s analysis didn’t end there. The Fifth Circuit also examined whether the employee handbook provided the requisite FLSA notice and whether Ettorre received a handbook. Ettorre denied ever receiving a handbook and Russos could not prove contrary. More importantly, the Fifth Circuit found no evidence that the handbook included the requisite tip credit notifications. Ultimately, the Fifth Circuit held that Russos had failed to identify any evidence to survive Ettorre’s motion for summary judgment regarding the tip credit notice claim.
Russos fared no better on Ettorre’s linen fee claim. The Fifth Circuit noted that under Section 203(m)(1) of the FLSA, an employer may count towards wages, “the reasonable cost . . . of furnishing [an] employee with board, lodging, or other facilities, if [they] are customarily furnished by [the] employer to his employees.” In this context, the term “reasonable cost” means the “actual cost” to the employer and does not include the employer’s profit. Further, any facility provided that is “primarily for the benefit or convenience of the employer” is not a reasonable cost. The Department of Labor regulations unequivocally state that the cost of laundering employee’s uniforms is unreasonable, and thus cannot qualify as a facility for which an employer may take credit towards the minimum wage. Thus, any costs deducted from Ettorre’s paychecks for laundering her aprons violated the FLSA. The Fifth Circuit also examined how much of the linen fee could be allocated to the unlimited fountain drinks, which could have been a reasonable deduction. But Russos failed to produce any records to substantiate the costs of unlimited fountain drinks. Because the Fifth Circuit could not delineate a permissible deduction (i.e., the unlimited fountain drinks) from the impermissible deduction (i.e., laundering), it concluded that the entire linen fee should be treated as an impermissible deduction.
Regarding the liquidated damages award, the Fifth Circuit held that Russos failed to show it acted in good faith in failing to notify Ettorre of the tip credit and making invalid deductions from her paycheck. Thus, an award of liquidated damages was appropriate.
Final thoughts.
Employers who take the FLSA tip credit or who make deductions from employee for uniform cleaning fees must ensure they comply with the FLSA. This case demonstrates the potential liabilities of failing to comply with the FLSA.
Tip credit notice.
When an employer elects to take the FLSA tip credit, it must inform tipped employees of its use of the tip credit, including: (1) the amount of the employee’s cash wage; (2) the amount of the tip credit claimed by the employer; (3) that the amount claimed may not exceed the value of the tips actually received; (4) that all tips received must be retained by the employee except for a tip pooling arrangement limited to employees who customarily and regularly receive tips; and (5) that the tip credit shall not apply to any employee who has not been informed of all of these requirements. An employer may not take the tip credit for any period of time during which the employer fails to comply with these requirements.
Cost of laundering uniforms.
If an employer requires employees to wear clean uniforms, the financial burden of maintaining these clean uniforms may not be imposed on the employees if to do so would reduce their wages below the minimum wage.
This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-attorney relationship between the Texas Hospitality and Non-profit Law Center, PLLC and any recipient.