A Miami restaurant’s mandatory 18% service charge did not constitute a “tip” under the Fair Labor Standards Act (FLSA) and therefore was properly applied toward satisfying the FLSA’s employee wage requirements, the U.S. Court of Appeals for the Eleventh Circuit recently held, affirming summary judgment in favor of the employer. Compere v. Nusret Miami, LLC, 2022 U.S. App. LEXIS 7293 (11th Cir. Mar. 18, 2022). The Eleventh Circuit has jurisdiction over the federal courts in Alabama, Georgia, and Florida.

The Law

Department of Labor (DOL) regulations defining what constitutes a “tip” expressly provide that mandatory service charges are not tips. The central characteristic of a tip is customer discretion: If the customer decides whether to leave a gratuity, and if so the amount of that gratuity, then it is considered a tip under FLSA regulations. Conversely, if the employer imposes a fee that the customer has no choice but to pay (unless, for example, the employer waives the fee to resolve a complaint about the service provided), the fee is not a tip and the employer may use it to satisfy its wage obligations.

The Lawsuit

Since its opening five years ago, Nusret Miami (“Nusret”), an upscale steakhouse in Miami, Florida, has added a mandatory 18% “service charge” to customer’s bills, after which it redistributes those charges to certain employees to cover the restaurant’s minimum and overtime wage obligations. The employees who receive a portion of the service charges are very well paid, sometimes earning in excess of $100,000 per year and, if the 18% fee constituted a legitimate service charge, then undisputedly the restaurant satisfied its minimum wage and overtime obligations to these employees.

A group of tipped employees filed suit against the restaurant, asserting that Nusret failed to properly pay them minimum wage and overtime pay, and forced them to participate in an illegal tip pool with non-tipped employees, all in violation of the FLSA. The plaintiffs’ primary argument was that Nusret’s service charge was, in fact, a tip and therefore could not be used to satisfy the restaurant’s minimum wage and overtime obligations. In support of this argument, the plaintiffs asserted that Nusret failed to include the service charges in its gross receipts and failed to report the revenue for federal income tax purposes. The restaurant countered that the 18% fee was a legitimate service charge and that it properly had met its wage obligations under the FLSA. The district court agreed with the employer and granted it summary judgment.

The Appeal

On appeal, the Eleventh Circuit affirmed summary judgment for the restaurant. In support of its decision, the Court of Appeals cited 29 C.F.R. § 531.52(a), which explains that the critical feature of a tip is that the sole discretion lies with the customer as to whether it is to be given and, if so, in what amount. In this case, customers undisputedly had no say as to whether they had to pay Nusret’s 18% service charge. Moreover, DOL regulations specifically identify mandatory service charges as an example of a fee that is not a tip.

The Eleventh Circuit rejected the plaintiffs’ argument that the service charges had to be treated as tips unless Nusret included them in their gross receipts and reported them for tax purposes, finding this assertion to be “irrelevant.” The Court of Appeals likewise rejected the plaintiffs’ argument that the service charge was not mandatory because, for example, management could remove it as a means of resolving a customer complaint.  Reiterating that to constitute a tip, the discretion to pay it must lie with the customer and not the employer, in this case Nusret’s customers unarguably had no such discretion. Thus, the 18% fee was a legitimate service charge and the restaurant properly applied it to satisfying its wage obligations.

The Takeaway

The Eleventh Circuit’s ruling reaffirms that true service charges do not constitute tips under the FLSA and, in the case of retail or service establishments, may be used to satisfy an employer’s minimum wage and overtime obligations. Employers also should review state law, which may treat such charges as a form a tips regardless of who retains the discretion to impose or pay them, though such laws could be preempted by federal law.