E-Alerts

Employers Cannot Afford To Ignore These Tips And Traps For Compliance With The Massachusetts Tip Pooling Law

October 2011 by Sara Goldsmith Schwartz

Employers with tipped employees should carefully review the Massachusetts Tip Pooling Law to ensure that they are not only in compliance with the Massachusetts Tip Pooling Law, but also minimizing their exposure to the rash of lawsuits under this statute. Employers that ignore this statute’s requirements – and the practical challenges imposed by the flood of tip pooling litigation – are paying as much as $15 million to resolve the claims.

The Massachusetts Tip Pooling Law was amended in 2004 to impose increased requirements on employers with tipped employees. Covered employers include restaurants, caterers, hotels, and salons, and any employer with wait staff, bartenders, and other service employees who work “in an occupation in which employees customarily receive tips or gratuities, and who provide service directly to customers or consumers” (such as bellhops, baggage handlers, hairdressers, and taxicab drivers).

Unfortunately, the Tip Pooling Law is more complicated than it might seem. Thus, even employers that make a good faith effort to comply with the law have found themselves on the losing end of a lawsuit or paying a costly settlement.

The good news, however, is that employers can reduce the risk of liability under the Massachusetts Tip Pooling Law by familiarizing themselves with the law, and ensuring that they are in compliance with its mandates. Perhaps most importantly, as described below, employers should take the practical steps that will make plaintiffs’ attorneys think twice before pursuing a Tip Pooling claim against employers.

Tip Pooling Cases Are Expensive!

Employers sued by employees under the Tip Pooling Law pay substantial damages or settlements for violations of the Tip Pooling Law. The violations often include the common practices of managers participating in the tip pool and charging “administrative” or “service” fees to customers without clearly documented “disclaimers” to the customers. Thus, in the past few years:

A Massachusetts spa that charged an 18% “service charge” to patrons, but did not remit the service charge to employees, agreed to pay a $14.75 million settlement to approximately 600 massage therapists, yoga teachers, estheticians, hair stylists, waiters, and other employees.
A limousine company that charged an 18% “service charge” agreed to pay more than $1 million to settle claims for tips by limousine drivers.
In October 2011, a Massachusetts resort agreed to pay $7 million to settle two class actions, comprised of approximately 700 food, beverage and spa workers who worked at the resort over a 10 year period. The plaintiffs alleged that the resort collected service charges on hotel bills, but failed to remit the service charges to employees.

In other recent cases, the final bill is unknown, but the legal fees continue to accumulate:

In February 2011, the Massachusetts Court of Appeals held that simply designating an 18 or 19% charge on private function bills as an “administrative fee” was not enough to meet the requirements of the safe harbor provision, and sent the case back to the trial court, where it is still pending.
In March 2011, a federal court in Massachusetts held that shift supervisors at Starbucks were prohibited from sharing in tip pools, and the court certified a class of approximately 2,500 potential class members seeking payment of the tips that were paid to shift supervisors.

Thus, employers ignore the Tip Pooling Law at their economic peril.

Tip Pooling 101: The Employer’s Obligations

The Tip Pooling Law is intended to ensure that service employees receive all monies that customers intend to leave as a tip. To accomplish this goal, the Tip Pooling Law imposes several obligations on employers with tipped employees.

Specifically, the Tip Pooling Law prohibits employers with tipped employees from:

(1) taking a payment or deduction from a tip given to an employee by a patron, or retaining tips given to the employer for distribution;

(2) maintaining a tip pool wherein any portion of the pooled tips is distributed to any person who is not a wait staff employee, bartender, or other service employee; and

(3) charging a service charge or tip to a patron and then failing to remit the collected service charge or tip to the employees who provided service to the patron.

Examples of employees who are not wait staff, bartenders, or other service employees, and therefore, may not participate in a tip pool, include managers or “back-of-the-house” employees, such as cooks, who do not directly provide service to patrons.

Employers are prohibited from keeping any service charge because customers traditionally view such a charge as a tip. There is a “safe harbor” for other types of fees, but unfortunately, the harbor isn’t safe.

The Safe Harbor – But Beware Legal Sludge Just Below The Surface

The Tip Pooling Law includes an important “safe harbor provision” for employers that charge a fee that is not intended to be a tip. The safe harbor provision states that employers may charge a “house or administrative fee” in addition to or instead of a service charge or tip, without violating the Tip Pooling Law. However, the statute requires that it may do so only “if the employer provides a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge for wait staff employees, service employees, or service bartenders.”

Unfortunately, this apparently straightforward safe harbor is now being filled with legal sludge. In short, plaintiffs’ counsel have pushed this safe harbor language to an illogical extreme in pending litigation, and thus, the safest course of action for employers may be to eliminate all service, house, and administrative fees.

However, if that is not possible, then (as discussed below) we have several practical tips for modifying the policies and procedures for house and administrative fees in order to minimize risk under the Tip Pooling Law.

Penalties

Employers found to have violated the Tip Pooling Law must pay costly damages that include much more than the disputed tips. Specifically, an employee lawsuit would typically seek up to three years of unpaid wages (i.e., the tips that the employees should have received), and successful plaintiffs are entitled to treble damages, attorneys’ fees, and costs. In addition, the employer may be liable for fines of up to $25,000. Thus, as suggested by the settlements described above, employers have more than ample financial incentive to make sure that their practices and written policies are in compliance.

Practical Tips For Avoiding Tip Pooling Law Liability

Employers can minimize the chances of being held liable under the Tip Pooling Law by following these practical suggestions:

Implement a clear tip pooling policy in writing, and ensure that it is followed consistently.
Pay out all tips that employees receive from patrons.
Pay out tips only to eligible employees. Do not allow supervisors or managers to share in tip pools.
If possible, eliminate all administrative or house fees.
If the employer must charge administrative or house fees, then take one or more of the following steps to reduce the risk of litigation:

Provide a written description of the “administrative fee,” stating that the fee does not represent a tip or service charge for wait staff employees, service employees, or service bartenders. This written description should be consistent and should appear on any document that a patron is likely to see, including menus, bills or invoices, and signage.
Have each patron sign a document acknowledging that that the administrative fee is not a tip. If a contract is utilized, then be sure to include in the contract a provision stating that the patron acknowledges the administrative fee is not a tip to service employees.
If the administrative fee or house fee is a percentage of the total bill (which may traditionally be viewed as a tip), consider making the administrative or house fee a flat fee, instead of a “tip-like” 18%.

Distribute the proceeds of any and all “services charges” collected.
Conduct training for managers to ensure compliance with the law and the employer’s policy and practices.

As always, please do not hesitate to contact an attorney at the Firm with any questions regarding tip policies or practices, or compliance under the Tip Pooling Law.