Tips on tips

In 2012, Steve and Eve Goodheart opened up “Steve and Eve’s,” a restaurant specializing in American comfort foods — pot roast, meat loaf, fried chicken, macaroni and cheese, casseroles and the like. The portions were big and people loved it. The business was a huge success.

Steve and Eve acted as the restaurant managers, and they hired two assistant managers who managed the kitchen and did most of the cooking. The Goodhearts also hired three shift supervisors who ran the front of the restaurant when they weren’t there. The assistant managers hired the cleaning, bussing and wait staff, who mostly were students who worked for a year or two.

The Goodhearts created a great working atmosphere. Each employee was part of the team and was taught everyone else’s job. While people were hired for specific jobs, if anyone was overwhelmed or had a problem, anyone on the team could pitch in and help. Supervisors often took orders, served, bussed tables and cleaned up in the kitchen.

Consistent with this team atmosphere, tips were pooled on every shift and were split among all employees except the owners and assistant managers. Steve & Eve’s customers, especially their regulars, were great tippers. In addition, their customers often celebrated special events there, and Steve & Eve’s had an automatic “service charge” of 20 percent for groups of six or more customers.

All of the tipped employees, except the shift supervisors, were paid the Massachusetts minimum wage of $3 per hour for highly tipped employees, and the shift supervisors received $6 per hour. With tips, the cleaning and wait staff averaged about $14 per hour and the shift supervisors averaged about $17 per hour. For that kind of money, these tipped employees were happy to work as many hours a week as they could get.

Willie Whistleblower

Willie Whistleblower was one of the newest employees. He was a student at a local college and was hired as a server. He resented having to do anything but wait on tables, but he was willing to work double shifts regularly, often working 55-60 hours per week, and averaging about $650 weekly.

One day, there was a crisis in the restaurant. Three of the cleaning and bussing staff had called in sick for a shift. One of the assistant managers asked Willie to help out by bussing some tables and cleaning up around the kitchen. Willie refused. The assistant manager fired Willie on the spot. Willie left the restaurant and went directly to his father’s best friend, a lawyer. Next thing you know, Steve & Eve’s received a letter threatening a class action lawsuit for their violation of the Massachusetts Wage Act and the Massachusetts Tip Law.

Eve asked around and quickly found Larry Lawyer who was familiar with these complicated laws. They arranged a meeting. The Goodhearts learned that, under the Tip Law, tips could be shared only among those employees who served food or beverages directly to patrons, or who cleared tables, and had no managerial responsibility. So splitting tips with the shift supervisors, even though they did a lot of the same work as the servers and clearing staff, was illegal.

The law also required that the 20 percent “service charge” could be paid only to wait staff employees, so pooling and sharing these tips with non-wait staff employees was illegal. In addition, the I.R.S. required that these service charges be considered “wages” for FICA tax purposes and for computing an employee’s rate of overtime pay. On those weeks when Willie worked overtime, Steve and Eve should have included Willie’s portion of the service charges as part of his regular rate of pay in order to compute his overtime rate.

The bottom line was that Willie had a valid claim for unpaid tips and for overtime pay. These were substantial claims that included triple damages plus payment of Willie’s legal fees. Larry Lawyer recommended that the Goodhearts try to settle quickly by paying Willie every penny he was owed and paying his legal fees. The Goodhearts agreed and after reluctantly paying more than $15,000 to Willie and his lawyer, the problem was settled out of court.

Business owners: If you have a policy of pooling tips, make sure that no portion is paid to anyone with any level of supervisory authority, and if you automatically add a mandatory percentage of a bill as a “service charge,” be sure to adjust your employees’ hourly overtime rate weekly on account of the mandatory tips received.

Jan Glassman is the founder of Daily General Counsel™, www.DailyGeneralCounsel.com, a Boston-based startup that provides very affordable legal services to small businesses and startups that otherwise could not afford a highly experienced business lawyer and would “go it alone.” DailyGC™ lawyers spend a full business day at their clients’ places of business, working directly with owners to resolve their most pressing sales, operations, employment and other legal/business problems. Prior to founding DailyGC™, Jan was General Counsel for a national management consulting firm that served small businesses throughout the United States. Follow Jan Glassman on Twitter @DailyGC