11th Circuit: Mandatory Service Charges Are Not Tips

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March 18, 2022

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In Compere v. Nusret Miami, LLC, the Eleventh Circuit Court of Appeals stated that mandatory service charges included on a customer’s bill do not constitute a “gratuity” or tip under the Fair Labor Standards Act (FLSA) and therefore can be used toward the employer’s minimum wage obligations. Generally, federal law prohibits restaurants from using tips to pay minimum and overtime wages to employees, but establishments may apply non-tip charges toward employee wages.

There, a restaurant employer used an 18% mandatory service charge to fulfill the restaurants minimum wage and overtime obligations. Employees claimed that the service charge was really a voluntary tip, and therefore ineligible to be counted toward minimum wage and overtime. Federal regulations state that “[w]hether a tip is to be given, and its amount, are matters determined solely by the customer.” Additionally, a tip is presented by a customer “as a gift or gratuity in recognition of some service performed for the customer.”

In distinguishing the service charges from tips, the court stated that when service charges are automatically applied, they are considered mandatory, even when managers occasionally remove them at the customer’s request. Moreover, the restaurant, not the customer, had the ultimate discretion over the charge, given that customers did not pay the service charge directly to the employees, could not negotiate the amount of the service charge, and did not have a say with regard to who ultimately received the service charge.

Finally, the court noted that whether or not the employer claimed the service charges on their income tax returns were irrelevant to the FLSA’s rules on determining their service charge status. The employees argued that because the charges were not claimed on the employer’s taxes, they were treating them as tips. However, the court refused to infer tax compliance as a requirement for FLSA compliance, where there was no such rule. That being said, the court specifically did not determine whether the employer complied with applicable tax laws.

Action Items

Review compensation structures for tipped employees to ensure compliance.
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Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.