The Fifth Circuit has had tipping on its mind, as the decision of Steele v. Leasing Enterprises, Ltd., represents its second opinion within ten months addressing this pay practice. On the heels of Montano v. Montrose, the Steele decision tackles the question of whether an employer violates 29 U.S.C §203(m) of the Fair Labor Standards Act (FLSA) when it offsets tip credits to recover costs related to processing credit card transactions – essentially passing on some of those costs to the tipped employee. (No. 15-20139), 2016 WL 3268996, (5th Cir. June 14, 2016).

Under §203(m) of the FLSA, employers may only claim a tip credit toward minimum wage if all tips received by a tipped employee are retained by the employee. In Steele, the Fifth Circuit was asked to decide whether a restaurant employer violates this section when it deducts certain fees from tips paid by credit card. The defendant, the restaurant chain Perry’s, retained a flat 3.25% of all credit card tips to offset both credit card issuer fees and other costs which it contends it incurred in collecting and distributing tips (including administrative expenses related to converting the tips to cash for payment on a daily basis, as the employees had specifically requested).

Both parties relied on the only previous circuit decision to address this issue, Myers v. Copper Cellar Corp., 192 F.3d 546 (6th Cir. 1999). In Myers, the Sixth Circuit held that employers had a legal right to deduct the processing costs imposed by the credit card issuer. Perry’s argued that, under the reasoning of Myers, it also had the right to offset its own cash-delivery expenses. The Fifth Circuit disagreed and stated that Perry’s made a “business decision” by responding to employees’ demand to be tipped out in cash each night, instead of folding their tips into their bi-weekly pay checks. These costs were found to be “indirect and discretionary” – as opposed to “direct and unavoidable” costs such as the credit card company fees. Therefore, Perry’s system did not qualify for a tip offset under 29 U.S.C §203(m). However, the Court excused Perry’s from paying liquidated damages and applied the shorter two-year statute of limitations. It found that Perry’s impermissible deduction was effectively less than 1% of the amount tipped, and a Department of Labor investigator at least tacitly advised Perry’s that its offset conformed with the FLSA.  Thus, the violation was held not to be willful, and the good faith defense applied. Employers should nonetheless be aware that, now that this point of law has been settled by the Fifth Circuit, future courts may find that employers should be “on notice” of this provision moving forward.

The Montano and Steele decisions, both authored by Judge Higginson, reflect the growing interest that both courts and the plaintiffs’ bars have taken with respect to tipping practices and the FLSA. Employers would do well to ensure that their tip system scrupulously complies with the FLSA. If you have any questions regarding tip offset practices or wage and hour compliance in general, please contact the authors of this post or your Proskauer attorney.

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Photo of Nicole Eichberger Nicole Eichberger

Nicole A. Eichberger is a partner in the Labor and Employment Law Department and head of the New Orleans office. She is a member of the Class & Collective Actions and Wage and Hour Groups. Nici is an experienced trial lawyer and represents…

Nicole A. Eichberger is a partner in the Labor and Employment Law Department and head of the New Orleans office. She is a member of the Class & Collective Actions and Wage and Hour Groups. Nici is an experienced trial lawyer and represents clients in all types of employment-related matters, from single-plaintiff and complex employment to large, complex class and collective actions alleging discrimination, non-compete violations, and wage and hour disputes.

Nici has significant experience assisting clients in the defense of numerous class and collective actions. She frequently counsels employers, fiduciaries, and trustees on employment, wage and hour and benefit issues.

In addition to her litigation practice, Nici assists in conducting workplace investigations and audits related to discrimination, managerial training, non-competes and employee classification. She is adept to counseling clients on a wide array of issues including reviewing and drafting employee handbooks, wage and hour issues, employee leave and training policies.

She is a member of the Firm’s eDiscovery Group and advises clients on eDiscovery matters, including day-to-day preservation, investigations and litigation strategies.

Nici recently completed a three-year term was on the ABA’s Standing Committee on Pro Bono & Public Service and serves as the Pro Bono Co-Coordinator for Proskauer’s New Orleans office. She is a prolific writer, frequently contributing to Proskauer’s Law and the Workplace Blog and a sought-after speaker on collective/class action topics.