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  • Writer's pictureJohn B. Reyna

Service Charges for Kitchen Staff: Be Wary of Overtime Calculations

I’ve seen a trend around the country where restaurants and bars include a menu item where guests can “tip the kitchen.” The following is a modified version of one such menu item that I saw while dining out:

Tip the Kitchen Staff $10

Our Tip the Kitchen Staff program is an optional way for guests to show appreciation directly to the culinary team that prepared your food. 100% of this money goes directly to the kitchen staff. Tell your server you'd like to Tip the Kitchen Staff if you've had a delicious meal.

I'm all for operators increasing kitchen morale and differentiating their restaurants and bars from competitors. However, if this program is not operated correctly, it can result in an improper overtime calculation, one of the most common violations of the Fair Labor Standards Act (“FLSA”).

So, let's examine how the FLSA’s overtime provisions would apply to the above Tip the Kitchen Staff program.

Non-exempt Employees.

The FLSA requires that most employees be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.

However, Section 13(a)(1) of the FLSA provides an exemption from minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, and outside sales employees. How this exemption works is beyond the scope of this article.

For this article, we will assume that the kitchen staff are all non-exempt employees. Thus, their employer is required to pay overtime for all hours worked over 40 hours in a workweek.

Regular Rate of Pay.

The overtime pay due to an employee is based on the employee's regular rate of pay and the number of hours worked in a workweek. The FLSA defines regular rate of pay to include "all renumeration for employment paid to, or on behalf of, the employee," excluding certain types of compensation provided under the FLSA. Payments that are not part of the regular rate include pay for expenses incurred on the employer's behalf, discretionary bonuses, gifts, and payments like gifts on special occasions, and payments for occasional periods when no work is performed due to vacation, holidays, or illness. The regular rate of pay is calculated by dividing the total pay for employment (except for the statutory exclusions) in any workweek by the total number of hours actually worked.

Total compensation in the workweek (except for statutory exclusions) / Total hours worked in the work week = Regular Rate for the workweek.

The Tip the Kitchen Staff program payments to the kitchen staff do not fall under one of the statutory exclusions. Thus, those payments would be included in each kitchen employee's total pay to determine the regular rate of pay.

Potential Issue.

To illustrate how the Tip the Kitchen Staff program could violate the FLSA’s overtime provisions, I'll walk you through examples of the payment being included in and excluded from the regular rate.

Ex. 1. A non-exempt cook is paid $10.00 per hour and receives a $50 bonus in a particular week because of the Tip the Kitchen Staff program. That cook worked 50 hours that week.

$10.00 per hour X 50 hours = $500.00 (total compensation for straight time)

$500.00 + $50.00 (Tip the Kitchen) = $550.00 (total compensation)

$550.00 / 50 hours = $11 (regular rate)

$11 x .5 = $5.50 (half-time premium pay rate)

$5.50 x 10 overtime hours = $55 (overtime pay due)

$550.00 + $55 = $605.00 (total due)

Ex. 2. Same scenario as Ex. 1.

$10.00 per hour X 50 hours = $500.00 (total compensation for straight time)

$500.00 / 50 hours = $10 (regular rate)

$10 x .5 = $5.00 (half time premium pay rate)

$5.00 x 10 overtime hours = $50 (overtime pay due)

$500.00 + $50 (Tip the Kitchen) + $50 (overtime) = $600.00 (total due)

In Ex. 2, the employer did not include the Tip the Kitchen Staff payment in the regular rate of pay. That resulted in an underpayment of $5 in overtime wages, which violates the FLSA. Of course, when wage violations occur, they are usually not in isolation. More than one kitchen employee would likely have a claim for underpayment of overtime wages. So the back pay and fines would likely multiply.

Recovery of Back Wages.

If an employee files a complaint with the Department of Labor, the Department's Wage and Hour Division will investigate. Investigations include, among other things, the examination of time and payroll records and private interviews with specific employees. And an investigation might expose numerous other wage violations that are separate from the Tip the Kitchen Staff program.

If the investigation results in the violations, the DOL can require employers to pay back wages owed to workers and assess an equal amount as liquidated damages.

If an employee brings private civil suit against the employer, the employee can recover the back wages, an equal amount as liquidated damages, attorney's fees, and court costs.

Final Thoughts.

Programs like the Tip the Kitchen Staff example above are creative ways to boost morale; however, employers must properly calculate overtime pay by including all hours worked and using the correct regular rate of pay. Failure to do so may result in fines, court costs, attorney’s fees, and public backlash.

The Texas Hospitality and Non-profit Law Center provides this material for informational purposes only. The firm does not intend for this material to constitute legal advice. Nor does this create a client-attorney relationship between the firm and any recipient.

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