Employer Claiming Tip Credit Cannot Offset Credit Card Tips With Optional Expenses: Fifth Circuit

Practical Law Legal Update w-002-6808 (Approx. 5 pages)

Employer Claiming Tip Credit Cannot Offset Credit Card Tips With Optional Expenses: Fifth Circuit

by Practical Law Labor & Employment

Background

Perry's Restaurants LLC (Perry's) paid its servers who received customer tips a base salary of $2.13 per hour. When customers paid tips with a credit card, Perry's retained 3.25% of the tip to offset credit card issuer fees and other costs it incurred in collecting and distributing the tips. Perry's voluntarily paid its charged tips to servers in cash each day, a practice that began in response to server request.

Perry's argued that it had two primary costs in converting servers' charged tips to cash:

Credit card issuer fees such as swipe fees, charge backs, void fees, and manual-entry fees.
Expenses related to acquiring cash to pay the tips to its servers, including paying for armored vans to transport cash to the premises three times per week (which was done for security purposes).

A group of servers initiated a collective action alleging that Perry's violated the FLSA by charging its servers the 3.25% offset fee. The district court held that Perry's may offset credit card issuer fees, but that:

Perry's' 3.25% offset violated the FLSA because it exceeded the cost of the company's credit card issuer fees.
Perry's was not permitted to include as part of the offset amount:
- the cash-delivery expense, because paying servers in cash was a business decision, not a fee attributable to the cost of dealing in credit; and
- costs incurred as a result of ordinary operations only indirectly related to Perry's' tip policy.
Perry's failed to prove fees related to cancellation of transactions and manual entry of credit card numbers.

Perry's appealed to the Fifth Circuit, arguing that it did not violate the FLSA.

Outcome

The Fifth Circuit affirmed the decision of the district court, holding that:

Perry's violated § 203(m) because its 3.25% deduction exceeded the direct costs of collecting credit card tips for its tipped employees.
The district court did not err in:
- certifying a second conditional class;
- declining liquidated damages to the plaintiffs; and
- declining to extend the statute of limitations from two to three years, since the FLSA violation was not intentional.
The district court abused its discretion by declining to award attorney's fees to the plaintiffs.

The Fifth Circuit noted that:

Under § 203(m), an employer can only claim a tip credit if a tipped employee retains all tips he receives (Montano v. Montrose Rest. Assocs., 800 F.3d 186, 189 (5th Cir. 2015)).
In the only circuit court decision to previously address the issue that arose in Steele, the US Court of Appeals for the Sixth Circuit stated that:
- an employee does not receive a charged tip under § 203(m) until "the debited obligation is converted into cash";
- regulations make it clear that a charged gratuity only becomes a tip once the employer has liquidated it and transferred the proceeds to the employee (29 C.F.R. §§ 531.52 and 531.53);
- an employer has the right to deduct the cost of converting the credited tip to cash; and
- deductions can exceed the expense incurred in collecting gratuity as long as the employer can prove that in the aggregate, it is reasonably reimbursed for no more than its expenditures associated with credit card tip collection.
(Myers v. Copper Cellar Corp., 192 F.3d 546, 553-54 (6th Cir. 1999).)
After the Myers decision, the DOL amended the interpretation of its regulations to allow employers to deduct an average offset for credit card issuer fees as long as the employer does not reduce the amount of credit card tips paid to the employee by an amount "greater than the amount charged to the employer by the credit card company" (see U.S. Dept. of Labor Wage and Hour Division Opinion Letter FLSA2006-1).

The Fifth Circuit found that:

Perry's:
- only had the legal right to deduct costs that were required to collect credit card tips;
- conceded that its 3.25% offset always exceeded the total credit card issuer fee, sometimes by as much as $39,000 in a year, thus violating § 203(m); and
- was incorrect in arguing that an employer may deduct additional expenditures associated with credit card tips and still maintain a tip credit.
Unlike in Myers, where the Sixth Circuit allowed the employer to offset tips to cover costs associated with credit card tip collections, particularly required credit card fees, Perry's offset tips to pay for non-required fees that were not directly attributable to its cost of collecting credit card tips.
Costs imposed by credit card companies may be levied on tipped employees because they reflect charges by an outside entity, but costs that an employer decides to accrue by its own internal business decision should not be imposed on tipped employees and "must be considered the normal administrative costs of [the employer's] restaurant operations" (U.S. Dept. of Labor Wage and Hour Division Opinion Letter FLSA2006-1)).
Perry's made its own non-required business decisions that were not directly attributable to its cost of dealing in credit when it decided to:
- pay tips in cash to employees daily rather than bi-weekly; and
- have trucks deliver cash three times per week to decrease security concerns.

Practical Implications

This case clarifies that for employers seeking a tip credit that to comply with the FLSA, they cannot withhold a percentage of employees' tips exceeding the direct costs of collecting credit card tips for the tipped employees. In addition, an employer is responsible for covering costs that result from internal business decisions that are considered the normal costs of running a business, and imposing those costs on the tipped employees is a violation of § 203(m) of the FLSA.

Employer Claiming Tip Credit Cannot Offset Credit Card Tips With Optional Expenses: Fifth Circuit | Practical Law