United States: Seventh Circuit Serves Up Employer-Friendly Recipe For Compensating Tipped Employees

Last Updated: July 26 2016
Article by Gerald L. Maatman Jr. and Jennifer A. Riley

Seyfarth Synopsis:  The U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises, in which the court rejected Plaintiff's theory and affirmed a district court's order granting summary judgment in favor of Defendants.

Many employers, particularly in the hospitality industry, pay tipped employees less than the minimum wage.  They do so anticipating that tipped employees will receive tips from customers that push employees' income above minimum wage.  The FLSA and many state laws allow such a practice – often referred to as taking a "tip credit" – so long as employers meet certain conditions.

The vague nature of the statutes and regulations governing the tip credit, coupled with a lack of developed case law interpreting such statutes and regulations, has created fertile ground for litigation.  In particular, some plaintiffs' wage & hour lawyers have sought to feast on unsuspecting restaurateurs who require tipped employees to perform side work – from wiping tables to cutting fruit to polishing brass.  Plaintiffs argue that such tasks invalidate the tip credit because they put servers, bartenders, and other tipped employees in a "dual job" or second occupation that employers must compensate at minimum wage.

Last week, the U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises  (7th   Cir. July 18, 2016), in which the court rejected Plaintiff's theory and affirmed a district court's order granting summary judgment in favor of Defendants.

The Seventh Circuit held that Defendants properly took the tip credit for time servers spent performing side work duties and that Defendants properly informed servers of their intention to take the tip credit by distributing an employee handbook and displaying a DOL poster.  The decision represents a significant victory for hospitality industry employers, particularly the significant number that require servers to perform end-of-shift and beginning-of-shift side work duties at the tip credit rate of pay.

Factual Background

In 2010, Plaintiff-servers brought suit against Walker Brothers contending that the restaurants violated federal and state minimum wage laws in two ways:  (1) by incorrectly using the tip credit to pay servers less than minimum wage while requiring them to perform duties unrelated to their tipped occupation; and (2) by failing to inform the servers of their intent to apply the tip credit to the servers' wages.

Walker Brothers owns six restaurants in the Chicago suburbs that operate under the name "The Original Pancake House."  Upon hire, Walker Brothers provides servers with an employee handbook that states, among other things, that the restaurants apply a tip credit that reduces servers' hourly wages 40% below minimum wage.  The restaurants also display DOL-approved posters explaining the tip credit in well-traveled areas.

In addition to serving customers, servers perform side work tasks that vary, among other things, by the station to which they are assigned.  Defendants required servers, for instance, to wash and cut strawberries, mushrooms, and lemons; mix applesauce and jams, restock bread bins and replenish dispensers of milk; fill ice buckets; brew tea and coffee; wipe toasters and tables; wipe down coffee burners and woodwork; dust picture frames; and occasionally polish brass.

After the district court granted class certification, the restaurants moved for summary judgment.  The district court granted their motion finding that the side work tasks were "incidental to the regular duties of the server (waiter/waitress)" and that Walker Brothers provided notice of the tip credit by giving servers an employee handbook and displaying posters approved by the Illinois DOL.

The Seventh Circuit's Opinion

The Seventh Circuit affirmed the district court's judgment in favor of Walker Brothers in all respects and, in doing so, rendered an important decision for the hospitality industry.  Most significantly, the Seventh Circuit found Plaintiff's position that none of their side work was related tipped work as "untenable."  It held that servers engaged in making coffee, cleaning tables, and several other activities that the DOL provided as examples of duties that could be performed by persons paid at the tip credit rate.  The court reasoned "[t]hat some of our plaintiffs' tasks may be performed by untipped staff at other restaurants does not make them unrelated as a matter of law"; rather, the "right question" is whether the tasks are "related" or "incidental" to tipped duties.  The Seventh Circuit noted that the "most problematic" duties were "wiping down [coffee] burners and woodwork and dusting picture frames," but because the DOL gave "cleaning and setting tables" and "occasionally washing dishes or glasses" as examples of related duties, it could not categorically exclude "clean up tasks" from the definition of duties related to a server's tipped occupation.  In any event, the Seventh Circuit concluded that it need not decide what to make of wiping woodwork or dusting picture frames because, as the record showed, the time spent on such tasks was "negligible."  The Seventh Circuit noted that the law "does not convert federal judges into time-study professionals and require every minute to be accounted for."  Given the flexible standards imposed by the DOL, the possibility that a few minutes a day were devoted to keeping the restaurant "tidy" did not require the restaurants to pay the normal minimum wage for those minutes.

The court also rejected Plaintiff's "notice" claim, holding that Walker Brothers was able to satisfy all elements of the notice requirements of the statute by combining different documents that it posted or provided to servers.

Implications For Employers

The Seventh Circuit's decision in Schaefer is a significant victory for the restaurant industry.  Before the Seventh Circuit's decision, few courts had addressed tip credit claims, and little favorable law existed to validate employers' regular practice of using servers to perform incidental side work tasks.  As a result of this decision and a growing body of district court decisions favoring restaurant employers, restaurant employers may be able to breathe a little easier.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Gerald L. Maatman Jr.
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