Where Tips End and Wages Begin

One year ago, this blog featured a post that outlined various reasons why the restaurant industry’s use of tips in lieu of guaranteed wages had come to provoke, in the author’s words, “a firestorm of criticism”: that reliance on tips as a significant component of server take-home pay 1) destined many servers to earning a sub-minimum wage; 2) encouraged female servers to tolerate sexual harassment by their customers; and 3) resulted in pay discrimination unrelated to the quality of servers’ work, a consequence of customer biases and their impacts on the amounts tipped.

Since the post’s publication, this firestorm has continued unabated. In fact, Uber even pointed to customer bias as a reason not to add a tipping function to its ride-sharing app, as its competitor Lyft has done. Moreover, recent modeling by FiveThirtyEight illustrates the volatility of tip-based incomes in the restaurant industry, as well as divisions between different classes of restaurants vis-à-vis the tipped amounts that their servers typically earn, which further underscores the question whether tipping can serve as a reliable substitute for set pay.

In this vein, a recent opinion out of the U.S. Court of Appeals for the Tenth Circuit sheds new light on the shortcomings of tipping as a reliable form of compensation, highlighting the dangers posed to employees by the liminal space between “tips” and “wages” under the Fair Labor Standards Act (FLSA).

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What’s the Deal with Tipping?

The institution of tipping has recently evoked a firestorm of criticism. Opponents of tipping point out that many servers earn below minimum wage; that servers, particularly women, often tolerate sexual harassment for the sake of earning better tips; and that tipping is rife with racial and other biases. In response to these criticisms, a handful of restaurants have abolished tipping entirely. Others have replaced it with auto-gratuities (which, due to a new IRS rule, may be on their way out); still others require servers to pool their tips. These piecemeal attempts at reform are unlikely to have a widespread impact, and raise potential problems of their own. This all invites the question – what’s the deal with tipping?

Minimum Wage (or Lack Thereof)

Federal law does not require employers to pay tipped workers the full federal minimum wage. Section 3(m) of the Fair Labor Standards Act (FLSA) permits employers to take part of an employee’s tips as a credit toward its minimum wage requirement. Employers are required to provide a minimum cash wage of $2.13, known as the tipped minimum wage, but may “credit” up to $5.12/hour of an employee’s tips towards meeting the federal minimum wage of $7.25/hour. This is known as a “tip credit.”

Policies are not uniform across states. Some states require employers to pay workers above the federal tipped minimum wage of $2.13/hour, but still permit a tipped minimum wage – ranging from the negligibly higher rate of $2.23/hour in Delaware to $7.75/hour in Hawaii (Hawaii’s state minimum wage is $8.50/hour). A smaller but not insubstantial number of states require employers to pay tipped employees full state minimum wage. A full breakdown of state minimum wage requirements is available here.

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Guest Post: Tipping as Employment Discrimination?

Sachin S. Pandya is Professor of Law at the University of Connecticut.

When does paying workers via tips count as illegal employment discrimination?  Arguments against tip compensation–around for a while (e.g., Scott, 1916)—re-emerged last month (e.g., here and here) after restauranteur Danny Meyer (like some others) decided to ban tipping and raise prices instead.  One of these anti-tipping arguments: Customers of all races tend to tip black restaurant servers far less than white restaurant servers, even after controlling for service quality (Lynn et al. 2008; Brewster & Lynn, 2014).  In turn, some (e.g., Lynn et al., 2008, p. 1057-58) suggest that such a race disparity in tips exposes employers to Title VII disparate-impact liability.  That liability applies if a defendant-employer “uses a particular employment practice that causes a disparate impact on the basis of” race or sex, among other characteristics, 42 U.S.C. § 2000e-2(k)(1)(A)(i), regardless of “the employer’s motives and whether or not he has employed the same practice in the past,” Lewis v. City of Chicago, 560 U.S. 205, 217 (2010).

So, can a race disparity caused by tip compensation amount to Title VII disparate impact liability?  There isn’t much litigation on this issue, but the answer is yes, if we treat tips just like bonuses, commissions, and other kinds of compensation practices used to pay an amount on top of base pay—practices that, according to the EEOC (Title VII’s federal agency enforcer), may generate disparate-impact liability. EEOC Compliance Manual § 10(III)(C)(2).

Although Wang (2014, p. 157-58) doubts it, it’s pretty easy to conclude that a race disparity in tips is caused by the employer’s use of a “particular employment practice.”  But for tip compensation, there can’t be a tip disparity.  Sure, employers don’t control how much their customers tip. But employers do decide whether part of a worker’s pay comes from tips, instead of, say, imposing a flat service charge.  Besides, customer race bias can’t excuse an employer’s legal responsibility for causing a race disparity in tips.  In general, Title VII does not excuse employers who defer to their customers’ racial preferences.

Wang also suggests that a court might treat a disparate-impact challenge to tip compensation—which partly leaves worker pay to customer discretion—like the challenged policy upheld in Wal-Mart Stores v. Dukes, 131 S. Ct. 2541, 2554-57 (2011), which left worker pay and promotion to local store managers’ discretion.  But Wal-Mart—a class action lawsuit—mostly turned on an issue of federal class action procedure.  See, e.g., Gschwind v. Heiden, 692 F.3d 844, 848 (7th Cir. 2012); Tabor v. Hilti, Inc., 703 F.3d 1206, 1221-22 & n. 8 (10th Cir. 2013).  So, Wal-Mart might matter in a Title VII disparate-impact class action filed in federal court against a restaurant chain that lets each restaurant’s local manager decide whether to adopt tip compensation there.  But Wal-Mart doesn’t stop a court from saying that an employer who adopts tip compensation thereby “uses a particular employment practice” under Title VII. Continue reading

Today’s News and Commentary–January 16, 2015

Lawmakers in Washington state have introduced legislation that would raise Washington’s minimum wage to $12 per hour over four years. Washington’s current $9.47 per hour minimum is already the highest in the nation.

The proposal comes as a poll conducted by the prominent polling firm Hart Research Associates revealed that 75% of Americans—including 53% of Republicans—support an increase in the federal minimum wage to $12.50 by 2020, and that 71% of Americans believe the minimum wage for tipped workers should be increased so that all workers are subject to the same wage floor. According to the poll, 63% of Americans support an increase in the minimum wage to $15 by 2020.

Meanwhile, Republican Senator Susan Collins of Maine is rumored to be preparing a bill to increase the federal minimum wage to $9 per hour over three years, with no increase for tipped workers, whose minimum wage has been frozen at $2.13 per hour for two decades. The rumored bill also would not tie the minimum wage to inflation. As reported, Collins’s bill falls well short of the increases most Democrats have been calling for.

On Wednesday federal district judge Richard Leon, an appointee of George W. Bush, struck down the second part of a Department of Labor rule that was designed to extend minimum wage and overtime protections to many home healthcare workers. In Wednesday’s ruling, Leon invalidated the portion of the rule interpreting the Fair Labor Standards Act’s exemption for workers providing “companionship services” more narrowly so as to extend that act’s overtime and minimum wage guarantees to a large number of home healthcare workers. Leon said this interpretation was impermissible. Last month, he struck down the other major provision of the rule, which would have extended FLSA’s protections to home healthcare workers employed by third-party providers. The Department of Labor is considering appealing both decisions.

Democrats in the House of Representatives this week revealed a bold new plan to boost wages and increase tax progressivity that is designed to put more money in the pockets of low and middle income Americans. The far-reaching plan, spearheaded by prominent Representative Chris Van Hollen, would (1) establish a large tax credit for Americans earning less than $200,000 a year, (2) triple the tax credit for child care, (3) grant additional tax advantages to those who save for retirement, and (4) create tax incentives to encourage companies to raise employee pay, among other provisions. The plan suggests Democrats may be shifting toward a new political strategy in the wake of their losses in the 2014 midterm elections. This new strategy focuses on aggressive action to bolster economic conditions for working people. The Democrats’ plan would finance the low and middle class credits with a tax increase on the very wealthiest Americans.

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