We recently became aware of a Court case decision that directly impacts the restaurant industry. It changes the rules on tips depending on if you take the tip-credit or not. Due to the complexity of this issue, it is important for you to read the ENTIRE story before acting. You may or may not wish to make any changes based on the information provided. However, if you do choose to make any changes, we recommend that you seek council prior to doing so.
On June 30, the Tenth Circuit Court of Appeals decided a case concerning tipped employees that sets a new legal precedent for employers in the State of Colorado. In Marlow v. The New Food Guy, Inc, the Court decided in favor of the employer, closing the door on claims that tipped employees have a “property right” to tips paid as a result of customer service, as long as the employer pays the employees FULL minimum wage or more. This decision rejects the Federal Department of Labor rule stating tips are the property of the employee and outside of a legal tip pool, the employer can’t direct where that money goes.
Last year, the Ninth Circuit Court of Appeals ruled in a very similar case (Oregon Restaurant & Lodging Association v. Perez) that tips were the property of the employee and outside of a legal tip pool, the employer couldn’t direct where those tips went. Additionally, the Court determined that tips could only be shared with regularly tipped positions and not the back-of-the-house staff, regardless of the hourly rate paid to tipped employees. Because this was the most recent ruling on tips and tip pools, the CRA and labor attorneys suggested following the Ninth Circuit’s decision.
What has changed is the fact that restaurants in Colorado (and several other states) are subject to the Tenth Circuit Court of Appeals and that Court has just handed down a new ruling disagreeing with the ORLA case. This new ruling changes how restaurants in Colorado may want to handle tips and tip pools.
As long as tipped employees are paid full minimum wage (not tipped minimum wage) or more by the employer, the employer can decide how tips are distributed. This means that in Colorado tipped employees currently must make $9.30 an hour and $13.95 for overtime, or more (note- this rate will increase every January 1). If your tipped employees are paid at least this much, then you as the employer can decide how tips will be distributed and can share them with the back of house or managers, and the business can even keep some or all of the tips. Keep in mind, however, that we still have the requirement in Colorado statute, C.R.S. § 8-4-103 (6), allowing an employer to assert claim to, right of ownership in, or control over tips only if the employer posts a printed card at least 12 inches by 15 inches in size with letters one-half inch high in a conspicuous location at the place of business. The card must contain a notice to the general public that all tips or gratuities given by the patron are not the property of the employee, but instead belong to the employer. If the employer does not post a printed card detailing tip ownership as described above, the employer may not exert any control over tips designated for an employee under Colorado law. For those of you who do business over the phone or email, such as the catering business in the Marlow case, you may want to include this same notice in your catering agreements as well.
We don't know. A group of restaurants and trade associations (including the NRA) have petitioned the Supreme Court to take up the ORLA case. This case now directly contradicts it. If the Supreme Court decides to take up this issue and rules in a certain way, restaurants will have to go back to only sharing tips with regularly tipped employees. Currently, it is not clear if the Supreme Court is even going to take up the case and if they do, it could be years before there is a ruling.
For all of these reasons, you may want to take a more conservative, wait-and-see approach and keep your business model as is. However, some employers may want to adopt the above-outlined steps. This is the time for you to reach out to your business advisers to determine the best solution for you and your employees.
If you have any questions about tip pools, wage and hour issues, or questions about this new precedent, please contact Nick Hoover by email or call 303-830-2972.