Defense Discovery Subpoenas to Plaintiffs’ Former and Current Employers

To the extent that defendants seek “any and all . . .” documents relating to plaintiffs’ relationships with their former employers, courts have consistently rejected such requests as “overly broad on their face.”  See, e.g., Barrington v. Mortgage IT, Inc., 2007 U.S. Dist. LEXIS 90555 (S.D. Fla. Dec. 10, 2007) (rejecting subpoenas duces tecum which sought “any and all documents, files and records, reflecting or relating to the employment” of the plaintiff as “overly broad on their face”); Badr v. Liberty Mutual Group, Inc., 2007 U.S. Dist. LEXIS 73437 (D. Conn. Sept. 28, 2007) (holding that defendant’s subpoena of “any and all” records relating to plaintiff was overbroad and limiting the subpoena to documents relating to prior claims or complaints against plaintiff’s coworkers); Richards v. Convergys Corp., 2007 WL 474012 (D. Utah Feb. 7, 2007) (quashing overbroad subpoena duces tecum  directed to plaintiff’s former employer that sought “all documents in your possession or control regarding the employment of” the plaintiff); Richmond v. UPS Service Parts Logistics, 2002 U.S. Dist. LEXIS 7496, at *13 (S.D. Ind. Apr. 5, 2002) (holding that a  discovery request for the plaintiff's entire personnel file was “on its face” overbroad); Franzon v. Massena Mem. Hosp., 189 F.R.D. 220, 222 (N.D.N.Y. 1999) (finding that defendant's discovery request for "any and all documents" without limitations is overbroad).

In addition to being facially overbroad, courts have found that such subpoenas can have a “chilling effect” on a plaintiff’s decision to assert his or her legal rights.  See Rivera v. NIBCO, Inc., 364 F.3d 1057, 1065-66 (9th Cir. 2003) (recognizing that discovery that would cause a chilling effect on plaintiffs seeking to enforce their employment rights is an unreasonable burden and therefore affirmed the district court’s protective order); EEOC v. Bice of Chicago, 229 F.R.D. 581, 2005 U.S. Dist. LEXIS 15959 (N.D. Ill. 2005) (barring discovery seeking immigration status of employment discrimination plaintiffs because such discovery was oppressive, a substantial burden on the parties and the public interest and would have a chilling effect on victims of employment discrimination coming forward to assert claims). 

Moreover, when presented with such “overly broad” requests, courts have consistently rejected the requests on the grounds that they could be obtained through less obtrusive and intrusive means.  See Graham v. Casey's Gen. Stores, Inc., 206 F.R.D. 251, 254 (S.D. Ind. Mar. 18, 2002) (granting motion to quash subpoenas to present and former employers for plaintiff’s medical records in a discrimination case, since, while the plaintiff’s medical history is important to her disability discrimination claims, defendant could have obtained the records from her medical providers and had no need to take the more intrusive step of seeking this medical information from her employers); Conrod v. The Bank of New York, 1998 U.S. Dist. LEXIS 11634 (S.D. N.Y. July 30, 1998) (holding that documents the subject of a “broad subpoena” might have been obtained from plaintiff via less intrusive means); see also Collins v. Midwest Medical Records Assoc., Inc., 2008 U.S. Dist. LEXIS 18368, at 6 (E.D. Wis. Feb. 7, 2008) (granting plaintiff’s motion for a protective order and quashing defendant’s subpoena while noting “[i]f MMRA is unable to obtain the information it seeks directly from Collins, MMRA is free to file a motion to compel.”). 

We previously posted on this issue here, but as it relates to the instant post, it bears restating that courts have also held as a “general rule” that plaintiff’s prior job performance is irrelevant in employment cases. See Laffey v. Janssen, 2006 U.S. Dist. LEXIS 14833 (M.D. Fla. 2005) (excluding evidence of prior performance for the same employer). See also Neuren v. Adduci, Mastriani, Meeks & Schill, 43 F.3d 1507, 1511 (D.C. Cir. 1995) (holding that because plaintiff’s difficulties with interpersonal relationships at her prior job was irrelevant, the district court improperly admitted such evidence); Zenian v. District of Columbia, 283 F. Supp. 2d 36 (D.D.C. 2003) (holding that evidence of prior employment cannot be introduced in the attempt to prove that plaintiff acted consistently with his prior conduct); Fyock v. American Public Gas Ass’n, Civ. No. 2008 CA 006454 B (D.C. Sup. Ct. Apr. 24, 2009) (finding that defendant’s proffered justification for the discovery of plaintiff’s employment records—including that it is “standard practice” and that such discovery would "shed light on Plaintiff’s termination of previous employment” and “lead to discovery of admissible evidence"—failed to demonstrate how plaintiff’s employment records were relevant or discoverable).

And courts have consistently prevented discovery of employees’ character. See Neuren, 43 F.3d at 1511 (holding that the district court improperly admitted evidence of plaintiff’s difficulties with interpersonal relationships at her prior job); Zubulake v. UBS Warburg, LLC, 382 F. Supp. 2d 536 (S.D.N.Y. 2005) (holding that using plaintiff’s prior job performance to show plaintiff was insubordinate and uncooperative at the job he was terminated from was inadmissible propensity evidence); Fyock, Civ. No. 2008 CA 006454, at p. 9-10 (“As to Plaintiff’s employment with [his former employers], this Court finds that even if the Plaintiff’s employment records did contain evidence suggesting that Plaintiff had a problem with his emotional behavior during his employment with [his former employers], such information is irrelevant to Plaintiff’s claims of age discrimination, breach of contract and promissory estoppel.”).

Namely, such evidence would not be admissible at trial as its only purpose would be an attempt to prove that the employee acted consistently with his character as evidenced by his prior employment. See Neuren, 43 F.3d at 1511 (holding that the district court improperly admitted evidence of plaintiff’s difficulties with interpersonal relationships at her prior job); Zenian, 283 F. Supp. 2d at 40 (D.D.C. 2003) (“If the District is offering the [prior employment] evidence to show that plaintiff has always been a bad employee, it is doing exactly what it cannot do: introduce evidence of a person’s character to prove that his behavior on one or more occasions was consistent with that character. Fed.R.Evid. 404(a). … That, of course, is exactly what a litigant cannot do.”).

Character evidence is also generally considered not to be an element of any claim or defense in employment cases. See Zubulake, 382 F. Supp. 2d at 539 n.1 (“Plaintiff’s character is not an essential element of any claim or defense in an employment discrimination case. The prohibitions of Rule 404(b) therefore apply.”). See also EEOC v. HBE Corp., 135 F.3d 543, 553 (8th Cir. 1998) (plaintiff's character was not an essential element of his retaliatory discharge claim).

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Courts Split as to Whether to Apply Twombly and Iqbal to Affirmative Defenses

In the wake of the Supreme Court’s decisions in Twombly and Iqbal, federal courts around the country have addressed whether this newly articulated pleading standard applies to affirmative defenses, with varying results: 

See Hayne v. Green Ford Sales, Inc., 2009 U.S. Dist. LEXIS 119886 *6-7 (D. Kan. Dec. 22, 2009) (“A few courts have rejected the heightened pleading standard for affirmative defenses.  The majority of courts addressing the issue, however, have applied the heightened pleading standard announced in Twombly, and further clarified in Iqbal, to affirmative defenses.”) (internal citations and footnotes omitted).  See also, e.g., Barnes v. AT&T Pension Benefit Plan, 2010 U.S. Dist. LEXIS 62515 (N.D. Cal. June 22, 2010) (“The court can see no reason why the same principles applied to pleading claims should not apply to the pleading of affirmative defenses which are also governed by Rule 8.”); Hcri Trs Acquirer, LLC v. Iwer, 2010 U.S. Dist. LEXIS 41552 (N.D. Ohio Apr. 28, 2010) (“[T]he pleading requirements for affirmative defenses are the same as for claims of relief.”); Cosmetic Warriors Ltd. v. Lush Boutique, L.L.C., 2010 U.S. Dist. LEXIS 16392 *4 (E.D. La. Feb. 1, 2010) (“a defendant must plead an affirmative defense with enough specificity or factual particularity to give the plaintiff fair notice of the defense that is being advanced”); OSF Healthcare Syst. v. Banno, 2010 U.S. Dist. LEXIS 7584 *3 (C.D. Ill. Jan. 5, 2010) (citing Twombly and Iqbal, the court concluded that “the affirmative defense, as pled, must offer enough facts to show the defense is plausible on its face”); CTF Dev., Inc. v. Penta Hospitality, LLC, 2009 U.S. Dist. LEXIS 99538, *7-8 (N.D. Cal. Oct. 26, 2009) ("Under the Iqbal standard, the burden is on the defendant to proffer sufficient facts and law to support an affirmative defense"); Fogel v. Linnemann (In re Mission Bay Ski & Bike, Inc.), 2009 Bankr. LEXIS 2495 at *15-16 (Bankr. N.D. Ill. Sep. 9, 2009) (“Affirmative defenses are pleadings and so are subject to all pleading requirements under the Federal Rules…. That means affirmative defenses must meet the notice-pleading standards of Rule 8(a) as the Supreme Court recently interpreted them in Bell Atlantic Corp. v. Twombly… and Ashcroft v. Iqbal.”); Sales Board v. Pfizer, 2009 U.S. Dist. LEXIS 69714 at *19-20 (D. Minn. Aug. 10, 2009) (holding that Iqbal applies to affirmative defenses and stating that affirmative defenses must be based on factual allegations that give rise to the relief requested); Kaufmann v. Prudential Ins. Co. of Am., 2009 U.S. Dist. LEXIS 68800 at *2 (D. Mass. Aug. 6, 2009) (holding that “the court is inclined to think that a defendant has the same Rule 8 obligations with respect to notice pleading as does a plaintiff”); Shinew v. Wszola, 2009 U.S. Dist. LEXIS 33226 *10 (E.D. Mich. Apr. 21, 2009) (in striking affirmative defenses, the court held that the “proposed amended pleading offered by Defendants in this case is the very essence of boilerplate labels and conclusions which the court in Twombly found insufficient. I conclude that the Supreme Court has established a general standard of pleadings matters upon which the pleader assumes the burden of proof.”); Gibson v. Officemax, Inc., 2009 U.S. Dist. LEXIS 127111 (W.D. Okla. Jan. 30, 2009) (unpublished) (“[T]his Court holds that affirmative defenses other than the failure to mitigate damages are subject to the pleading requirements of Rule 8, F.R.Civ.P. and Bell Atlantic Corp[.] v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007)… Thus, unless the factual basis for an affirmative defense is clear from the face of the complaint, e.g., where the claim asserted is clearly barred by the applicable statute of limitations, in which case the mere statement that the claim is barred by that statute is sufficient, a defendant must allege a sufficient factual basis or bases for his or its affirmative defense to show that the defense is plausibly viable on its face or sufficient factual matter from which a court can infer potential viability.”); Aspex Eyewear, Inc. v. Clariti Eyewear, Inc., 531 F.Supp. 2d 620, 623 (S.D.N.Y. 2008) (the “Second Circuit has … held that affirmative defenses which amount to nothing more than mere conclusions of law and are not warranted by any asserted facts have no efficacy”); Greenheck Fan Corp. v. Loren Cook Co., 2008 U.S. Dist. LEXIS 75147 (W.D. Wis. 2008) (extending Twombly to affirmative defenses); Safeco Ins. Co. of Am. v. O'Hara Corp., 2008 U.S. Dist. LEXIS 48399 at *1 (E.D. Mich. June 25, 2008) (Twombly standards apply to affirmative defenses); Stoffels ex rel. SBC Tel. Concession Plan v. SBC Commc'ns, Inc., 2008 U.S. Dist. LEXIS 83135 (W.D. Tex. 2008) (extending Twombly to affirmative defenses); T-Mobile USA, Inc. v. Wireless Exclusive USA, LLC, 2008 U.S. Dist. LEXIS 50165 *5 (N.D. Tex. 2008) (“An affirmative defense is subject to the same pleading requirements as is the complaint” and thus “formulaic recitation of the elements of [the affirmative defense] will not do.”); Holtzman v. B/E Aerospace, Inc., 2008 U.S. Dist. LEXIS 42630 *6 (S.D. Fla. May 28, 2008) (concluding that the “same logic [of Twombly] holds true for pleading affirmative defenses – without alleging facts as part of the affirmative defenses, Plaintiff cannot prepare adequately to respond to those defenses”); Home Mgmt. Solutions, Inc. v. Prescient, Inc., 2007 U.S. Dist. LEXIS 61608 (S.D. Fla. 2007) (extending Twombly to affirmative defenses); United States v. Quadrini, 2007 U.S. Dist. LEXIS 89722, at *4 (E.D. Mich. Dec. 6, 2007) (holding that Twombly’s plausibility standard applies to affirmative defenses).

But see Holdbrook v. Saia Motor Freight Line, LLC, 2010 U.S. Dist. LEXIS 29377 (D. Colo. Mar. 8, 2010) (holding that Twombly and Iqbal are no the standard for affirmative defenses); Charleswell v. Chase Manhattan Bank, N.A., 2009 U.S. Dist. LEXIS 116358 (D. V.I. Dec. 8, 2009) (“This Court concludes that the pleading standards articulated in Twombly and Iqbal do not extend to affirmative defenses. Twombly interpreted Rule 8(a)(2), which states that a pleading must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2).  Rule 8(c)(1), which provides for affirmative defenses, states only that “a party must affirmatively state any avoidance or affirmative defense.” Fed. R. Civ. P. 8(c)(1). There is no requirement under Rule 8(c) that a defendant “show” any facts at all. Thus, the Court rejects plaintiffs' arguments on this issue.”); First Nat'l Ins. Co. of Am. v. Camps Servs., Ltd., 2009 U.S. Dist. LEXIS 149, at *4-5 (E.D. Mich. 2009) (holding that Twombly is not the standard for affirmative defenses); First Nat’l Ins. Co. of Am. v. Professional Pool Techs, LLC, 2009 U.S. Dist. LEXIS 149, at *5 (E.D. Mich. 2009) (holding that “Twombly’s analysis of the ‘short and plain statement’ requirement of Rule 8(a) is inapplicable to [motions to strike affirmative defenses]”); Romantine v. CH2M Hill Eng'rs, Inc., 2009 U.S. Dist. LEXIS 98699, *1 (W.D. Pa. Oct. 23, 2009) (declining to apply Twombly to either affirmative or negative defenses); Am. Resources. Ins. Co. v. Evoleno Co., LLC, 2007 U.S. Dist. LEXIS 55181 at n. 7 (S.D. Ala. 2007) (holding that Twombly is not the standard for affirmative defenses); Westbrook v. Paragon Sys., Inc., 2007 U.S. Dist. LEXIS 88490, at *1-*3 (S.D. Ala. Nov. 29, 2007) (refusing to apply Twombly to a motion to strike affirmative defenses by distinguishing Rule 8(c) from Rule 8(a); holding that Twombly’s plausibility standard does not apply to affirmative defenses).

 

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Iqbal and Twombly Plausibility Pleading Standard Rejected by State Supreme Court

The Washington State Supreme Court in an en banc unanimous opinion issued on June 24, 2010, in McCurry v. Chevy Chase, 2010 Wash. LEXIS 534 (Wash. June 24, 2010), refused to adopt the Supreme Court’s plausibility pleading standard set forth in its Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, __ U.S. __, 129 S. Ct. 1937 (2009) decisions.  In doing so, it stated as follows:

“The new Fed. R. Civ. P. 12(b)(6) standard [under Twombly and Iqbal] effectively reads ‘plausible’ into the rule, as follows: ‘failure to state a [plausible] claim upon which relief can be granted.’  This adds a determination of the likelihood of success on the merits, so that a trial judge can dismiss a claim, even where the law does provide a remedy for the conduct alleged by the plaintiff, if that judge does not believe it is plausible the claim will ultimately succeed.

The Supreme Court's plausibility standard is predicated on policy determinations specific to the federal courts. . . .  Neither party has shown these policy determinations hold sufficiently true in the Washington trial courts to warrant such a drastic change in court procedure.
Nor has either party here addressed countervailing policy considerations. . . .

Currently this court lacks the type of facts and figures (specific to the Washington trial courts) that were presented to, and persuaded, the United States Supreme Court to alter its interpretation of Fed. R. Civ. P. 12(b)(6). . . .

Even if such facts and figures had been presented, this court would be hesitant to effectively rewrite [Washington Civil Rule] 12(b)(6) based on policy considerations.  The appropriate forum for revising the Washington rules is the rule-making process.  This process permits policy considerations to be raised, studied, and argued in the legal community and the community at large.”

Thanks to the Constitutional Law Prof Blog for calling this interesting and important decision to our attention.

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The Treatment of Tips under the FLSA: Taxes

Employers are entitled to a credit on social security and Medicare taxes paid on tipped income that brings an employee’s hourly rate over the standard minimum wage.  This credit only applies to tips received by food and beverage employees.  The tip credit is added to an employer’s profits and is thus subject to income tax liability.  See Ronald L. Noll, Accountant’s Corner: Take Advantage of the Tip Credit, available at http://www.restaurantreport.com/departments/ac_tipcredit.html (last visited June 10, 2010); Credit for Portion of Employer Social Security Paid with Respect to Employee Cash Tips (IRC 45 B Credit), available at http://www.irs.gov/businesses/small/industries/article/0,,id=98463,00.html (last visited June 10, 2010).

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The Treatment of Tips under the FLSA: Importance of State Law

The analysis of tip issues does not end with the FLSA.  Practitioners need to research applicable state law.  This portion of this paper is not intended to be exhaustive regarding state rules pertaining to tips, but rather to underscore the admonition that there may be an applicable state law that needs to be considered.

California, as early as 1917, enacted legislation prohibiting employers from taking any portion of an employee’s tips.  That 1917 law was declared unconstitutional, and it was not until 1975, after repeated unsuccessful attempts, that the California legislature enacted legislation prohibiting the practice of “tip credits.”  The California Labor Code § 351 offers greater employee protections than the FLSA, and the courts have ruled so far that the FLSA does not “preempt” the California rules.  See, e.g., Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4^th 557, 567 (1996); Skyline Homes, Inc. v. Dep’t of Indus. Relations, 165 Cal. App. 3d 329, 250-251 (1985).

California has held that “tip pooling,” so long as it is “fair and reasonable,” is not an illegal “taking” of the employee’s “sole property.”  Leighton v. Old Heidelberg, Ltd., 219 Cal. App. 3d 1062 (1990).

The California Supreme Court is considering whether there is a private right of action under § 351.  Lu (Louie Hung Kwei) v. Hawaiian Gardens Casino, Inc., 170 Cal. App. 4th 466 (Cal. Jan 22, 2009).

In a California case against Starbucks, the California court overturned the trial court’s ruling that the company pay nearly $106 million to some 120,000 baristas because supervisors were unlawfully allowed to share tips.  See Chau v. Starbucks Corp., 174 Cal. App. 4th 688, 2009 Cal. App. LEXIS 870 (Cal. Ct. App. June 2, 2009).

In New York, no portion of a mandatory service charge may be distributed outside of the non-supervisory wait staff if the customer reasonably believed that the charge constituted a gratuity.  See, e.g., Samiento v. World Yacht, Inc., 10 N.Y.3d 70 (N.Y. Feb. 14, 2008).  In New York, Judge Swain of the Southern District granted summary judgment to Starbucks in an action similar to the Chau case from California.  In re Starbucks Employee Gratuity Litig., 264 F.R.D. 67 (S.D.N.Y. Dec. 16, 2009).  In this case, the plaintiff baristas contended that Starbucks had violated the New York state wage and hour statutes by splitting tips intended for baristas with shift supervisors, handing out tips on a weekly basis instead of a per-shift basis, and failing to distribute tips to baristas-in-training.

The Connecticut Supreme Court, in a case involving class certification, had as the substantive basis a dispute involving “tip credit” under the Connecticut wage statute.  See Palmer v. Friendly Ice Cream Corp., 285 Conn. 462 (Feb. 12, 2008).

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The Treatment of Tips under the FLSA: Tip Pooling

The FLSA provides for tip pooling—employees’ contributing their tips to a general pool which is then shared by other employees.  29 U.S.C. § 203(m); see also 29 C.F.R. § 531.54.  Management can require employees to participate in a tip pool; but, if it does so, it must inform the employees of the FLSA’s tip pooling provisions.  Kilgore v. Outback Steakhouse, 160 F.3d 294, 303-04 (6th Cir. 1998) (holding that Outback was permitted to require its waiters to pool tips with hosts).  Cf. Leighton v. Old Heidelberg, Ltd., 219 Cal. App. 3d 1062 (Cal. Ct. App. Apr. 24, 1990) (holding that a mandatory tip pooling policy was not prohibited by California statute, promoted fairness, and ensured an equitable distribution of tips).  Tip pooling differs from tip sharing.  Tip sharing occurs when an employee earning tips voluntarily shares them with other employees.  For example, a waiter voluntarily splitting his tips with a busboy/girl and bartender constitutes tip sharing.  There are no regulations relating to voluntary tip sharing between employees.  Rousell v. Brinker International, Inc., 2008 U.S. Dist. LEXIS 52568, at *75 (S.D.Tex. July 9, 2008) (holding that employees may share tips with other workers who are not customarily and regularly tipped if they do so “free from any coercion whatever and outside any formalized arrangement or as a condition of employment”); WH Admin. Op. (Oct. 26, 1989); WH Admin. Op. (Mar. 26, 1976).

The Kilgore court explained:

Hosts at Outback are “engaged in an occupation in which they customarily and regularly receive tips” because they sufficiently interact with customers in an  industry (restaurant) where undesignated tips are common. Although the parties dispute exactly how hosts spend their time working at Outback, hosts do perform important customer service functions: they greet customers, supply them with menus, seat them at tables, and occasionally “enhance the wait.” Like bus persons, who are explicitly mentioned in 29 C.F.R. § 531.54 as an example of restaurant employees who may receive tips from tip outs by servers, hosts are not the primary customer contact but they do have more than de minimis interaction with the customers. One can distinguish hosts from restaurant employees like dishwashers, cooks, or off-hour employees like an overnight janitor who do not directly relate with customers at all. Additionally, the fact that Outback prohibits hosts from receiving tips directly from customers provides some evidence that Outback hosts work in an occupation that customarily and regularly receives tips.

160 F.3d 294, 301-302 (6th Cir. 1998) (brackets and ellipses omitted; quotations in original).

In order for mandatory tip pools to pass muster under the FLSA, they must meet the following two requirements.

1.      Participating employees must customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), busboys/girls and service bartenders.  Only those tips that are in excess of tips used for the tip credit may be contributed to a pool.  Tipped employees cannot be required to contribute a greater percentage of their tips than is customary and reasonable.  Kilgore v. Outback Steakhouse, 160 F.3d 294, 301 (6th Cir. 1998) (holding that hosts could participate in a tip pool because they were “engaged in an occupation in which [they] customarily and regularly received tip” although they were not allowed to personally accept tips); Zhao v. Benihana, Inc., 2001 U.S. Dist. LEXIS 10678 (S.D.N.Y. May 7, 2001) (holding that a manger’s disciplining of a plaintiff-employee for violating the tip pooling agreement between the servers and the chefs indicated that management “instituted or adopted the tip sharing agreement as a matter of restaurant policy and that the tip pool was therefore not voluntary” and thus in violation of the FLSA because it was mandatory and included ineligible employees); Bonham v. Copper Cellar Corp., 476 F. Supp. 98, 101-02 (E.D. Tenn. 1979) (finding a tip pool arrangement was mandatory and, therefore, invalid because the managers urged waitresses to share 15 percent of their wages with bartenders, busboys, and kitchen personnel (non-tipped employees) and spoke personally with waitresses when they did not comply); Marshall v. Krystal Co., 467 F. Supp. 9, 13 (E.D. Tenn. 1977); Elkins v. Showcase, Inc., 704 P.2d 977, 989 (Kan. 1985).  See also Dep’t. of Labor Wage and Hour Div., Op. Ltr. 1997 DOLWH LEXIS 55, at *4 (Nov. 4, 1997) (suggesting that a tip pool is invalid when a tipped employee is required, as a condition of his or her employment, to share tips with non-tipped employee); U.S. Department of Labor Wage And Hour Division, Field Operations Handbook, 30d04(c) (1988), available at http://www.dol.gov/esa/whd/foh/index.htm.  Some courts have placed significance on whether an employee regularly interacts with customers in determining whether an employee is eligible to participate in a tip pool.  Myers v. Copper Cellar Corp., 192 F.3d 546, 550 (6th Cir. 1999) (finding that salad preparers could not participate in a tip pool because they did not have any direct contact with diners, could not be seen by patrons, and had duties akin to those classified as food preparation or kitchen support work); Elkins v. Showcase, Inc., 704 P.2d 977, 989 (Kan. 1985) (holding that bartenders who were located behind a wall had no interaction with customers were not regularly tipped employees who could participate in a tip pool arrangement and, therefore, the employer could not utilize the tip credit for those employees).  On the other hand, other courts have not placed the same significance on customer interaction and have held that employees who do not interact with customers can participate in tip pools.  Lentz v. Spanky’s Rest. II, Inc., 491 F.Supp.2d 663 (N.D. Tex. 2007) (noting that nothing in the tip credit provision requires employees who participate in a tip pool to have direct interaction with customers and holding that “expediters,” who helped prepare plates in the kitchen but did not interact with customers, could participate in the tip pool); Louie v. McCormick & Schmick Rest. Corp., 460 F. Supp. 2d 1153, 1163 (C.D. Cal. 2006) (holding that restaurants may require servers to share tips with bartenders, regardless of whether bartenders provide direct or indirect services to a particular server's customers); Etheridge v. Reins Int’l California, Inc., 172 Cal. App. 4th 908 (Cal. Ct. App. Mar. 27, 2009) (holding that employees who did not provide “direct table service” could still participate in tip pools).  See also 29 U.S.C. § 203(m) (2009) (there is no explicit requirement in the tip credit provision that employees who participate in a tip pool interact directly with customers).

2.      Management employees must not participate in the tip pool.  Morgan v. SpeakEasy, 625 F. Supp. 2d 632 (N.D. Ill. Sept. 20, 2007); Dominguez v. Don Pedro, 2007 U.S. Dist. LEXIS 6659 (N.D. Ind. Jan. 25, 2007); Chung v. New Silver Palace Rest., Inc., 246 F. Supp. 2d 220 (S.D.N.Y. 2002) (holding that defendants violated the statutory requirement that tipped employees be allowed to retain all tips received by requiring plaintiffs to share tips with individuals the court found to be employers); Ayres v. 127 Rest. Corp., 12 F. Supp. 2d 305 (S.D.N.Y. 1998) (holding that when a portion of tips went to a restaurant’s general manger through a tip pooling arrangement, the employer did not meet the FLSA’s requirement that “all tips received by an [an] employee have been retained by an employee”).

The Ninth Circuit in Misty Cumbie v. Woody Woo, Inc., 2010 U.S. App. LEXIS 3686 (Feb. 23, 2010), held that a tip pooling arrangement in which the majority of the tips were redistributed to the kitchen staff was valid under the FLSA.  Key to this decision was the fact that the employer paid the servers an hourly wage great equal or greater than the state minimum wage.  The court found the fact that the employer was not taking a “tip credit” to be the decisive factor in upholding the tip pool.  Id. at *10.

The FLSA does not mandate how tip pool contributions should be split among participating employees.  However, the Department of Labor has stated that a required tip pool contribution of more than 15% of an employee’s tips may not be valid.  Elkins v. Showcase, Inc., 704 P.2d 977, 981 (Kan. 1985) (following WH Admin. Op. (Sept. 5, 1978)).  On the other hand, the Sixth Circuit has held that there is no statutory or regulatory authority for the DOL’s position that a more than 15% contribution to tip pool is excessive.  Kilgore v. Outback Steakhouse, 160 F.3d 294 (6th Cir. 1998) (“The [c]ourt can find no statutory or regulatory authority for the Secretary’s opinion that contributions in excess of 15% of tips or 2% of daily gross sales are excessive”).  See also Dole v. Continental Cuisine, 751 F. Supp. 799 (E.D. Ark. 1990).

For purposes of tip credit and minimum wage calculations, pooled tips are considered to be the property of the employees receiving them, not the employees who contributed them to the tip pool.  29 C.F.R. §531.54. 

If an employee challenges the validity of a tip pool, the employer has the burden of proving it complies with the FLSA.  Barcellona v. Tiffany English Pub, Inc., 597 F.2d 464, 467 (5th Cir. 1979) (holding that TGI Friday’s restaurant had the burden to prove a valid tip pool arrangement upon the questioning of the waiters who believed they were being denied the statutory minimum wage).

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The Treatment of Tips under the FLSA: Notice Requirements for Use of Tip Credits

The FLSA requires that employees be informed of how tips will be credited toward minimum wage and that all tips be retained by employees.  In Kilgore v. Outback Steakhouse,160 F.3d 294 (6th Cir. 1998), the Sixth Circuit held that providing employees with a tip policy page explaining how tips would be credited toward minimum wage is sufficient to meet the notice requirement for tip credits.  The court remanded the case with respect to three employees who claimed they had either not been given notice or been discouraged from reading the notice.


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The Treatment of Tips under the FLSA: Employer Deductions from Tip Credits

     Tip credits are subject to the same deductions from wages as normal, non-tip wages.  Deductions to cover cost of transaction charges of tips paid by credit card (as opposed to tips left in cash) are allowed.  Myers v. Copper Cellar Corp., 192 F.3d 546, 554 (6th Cir. 1999) (“The employer has an obvious legal right to deduct the cost of converting the credited tip to cash.”); Gillis v. Twenty Three East Adams Street Corp., 2006 U.S. Dist. LEXIS 12994 (N.D. Ill. Mar. 6, 2006) (ruling that pub did not violate FLSA by deducting from tips received by server an amount no greater than necessary to reimburse the pub for its expenses in processing credit card tip collections).  Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, then the employer may pay the employee the tip, less that percentage.  This charge on the tip may not reduce the employee’s wage below the required minimum wage.  The amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.


      In Reich v. Priba Corp., 890 F. Supp. 586 (N.D. Tex. 1995), the district judge posited, following a bench trial, that the employer had failed to prove that its standard 20% deduction from its waitresses’ credit card tips (see id. at 595) was reasonably compensatory.  The trial bench stated: 


 

“The court also concludes that Cabaret Royale failed to satisfy its burden of proving that the deductions from the waitresses’ tips for credit card processing fees were reasonable.  Cabaret Royale presented no documentation or records to support its contention that a percentage of the withholding covered the reasonable costs of credit card processing.  Cabaret Royale's arrangement with the waitresses appears to be nothing more than an impermissible shift to its employees of its costs of doing business.  The FLSA does not permit an employer to transfer to its employees the responsibility for the expenses of carrying on an enterprise.”

Id. at 596 (citations omitted).  Accordingly, proof that the employer’s standard deduction from its employees’ credit card tips reasonably compensated the employer only for no more than the overall costs of processing credit card tips, rather than other costs of doing business, would have safeguarded the employer’s statutory tip credit.

A compulsory charge for service, for example, 15% of the bill, is not a tip.  Such charges are part of the employer’s gross receipts.  Where service charges are imposed and the employee receives no tips, the employer must pay the entire minimum wage and overtime required by the Act.

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The Treatment of Tips under the FLSA: Dual Employment

If an employee is engaged in duties for which tips are received as well as duties for which tips are not received, the issue of whether the tip credit can only be taken for the time spent performing tipped duties arises.  The DOL regulation that addresses this circumstance, 29 C.F.R. § 531.56(e), provides that so long as a tipped employee is doing work related to the tipped duties, a tip credit is permitted. The regulation, by way of example, references a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.  The employer of this waitress may take tip credit for all of these duties because the duties for which a tip is usually not received (setting tables, etc.) is related to the duties for which a tip usually is received (waiting tables).  See Pellon v. Bus. Representation Int’l, Inc., 528 F. Supp. 2d 1306, 1313 (S.D. Fla. 2007) (holding additional non-tipped duties skycaps performed to be incidental to their duties as skycaps where there was no “clear dividing line” between these duties and those that clearly were performed for tips), aff’d, 291 Fed. Appx. 310 (11th Cir. 2008); Townsend v. BG-Meridian, Inc., 2005 U.S. Dist. LEXIS 45200, at *6-7 (W.D. Okla. 2005) (holding that the employer could apply the tip credit towards the time the plaintiff-waitress spent while performing cashier and phone receptionist duties, in addition to the time she spent serving tables, because such duties were "merely related duties incident to her waitress position").  But see Dole v. Fred Bishop & Carol Bishop, 740 F. Supp. 1221, 1228 (S.D. Miss. 1990) (finding that the time waitresses spent cleaning and preparing food before the restaurant opened was easily separable from the time spent performing waitressing duties and, therefore, the waitresses were entitled to the full statutory minimum wage during these periods of time). 

DOL’s Field Operations Handbook (available at http://www.dol.gov/whd/FOH/FOH_Ch30.pdf ) contains guidelines for determining how much non-tipped work can be assigned to an employee before the employer can no longer take the tip credit for non-tipped duties.  The Handbook (Section 30d00e) indicates that employees who spend more than 20% of their time on general preparation and maintenance work cannot be considered tipped employees for the time spent doing general preparation and maintenance.  

In a 1985 opinion letter (Dep’t of Labor, Wage & Hour Div., Op. Letter FLSA-854 (Dec. 20, 1985)), the Department addressed the issue further, stating that the tip credit could be taken for “preparation work or after hours clean-up if such duties are incidental to the waiter or waitress’s regular duties and are assigned generally to the waiter/waitress staff. However, where the facts indicate that specific employees are routinely assigned to maintenance work or that tipped employees spend a substantial amount of time performing general preparation work or maintenance, we would not approve a tip credit for hours spent in such activities.”  Several years later, in 1988, DOL’s Handbook contained the 20% rule, which defined when general preparation or maintenance work had become substantial.  

In Fast v. Applebee’s Int’l, Inc., 2009 U.S. Dist. LEXIS 67564 (W.D. Mo. Mar. 4, 2010), appeal docketed, No. 10-1725 (8th Cir.), the principal contention is Applebee’s argument that the district court incorrectly used a task-based analysis rather than an occupation-based analysis in determining whether plaintiff-bartenders were tipped employees.  In its opening brief to the Eighth Circuit, Applebee’s argues that the FLSA’s tip credit requires an occupation-based analysis.  Applebee’s relies upon the language of the statute (§ 203(t)), which refers to “an occupation” as well as the record-keeping regulation (29 C.F.R. §516.28(a)(4) and (5)), which also uses the terminology “occupation.”

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