The Tipping Point: High Court Applebee’s Ruling Could Hike Payroll Costs

A U.S. Supreme Court decision could present companies with “the Herculean task of monitoring and tracking every task performed by every tipped empl...
Marielle SegarraJanuary 19, 2012

Employers of workers who earn part of their pay in tips could face expanding payrolls in the wake of Tuesday’s Supreme Court ruling on an employee wage lawsuit. CFOs of such companies will also need to reconsider their record-keeping practices and their employment strategies as a result of the High Court’s refusal to consider an appeal by Applebee’s.

In effect, the Supreme Court upheld a lower-court ruling that workers who regularly receive tips should be paid full minimum wage under certain conditions. This lower-court ruling, from the 8th U.S. Circuit Court of Appeals, deferred to a Department of Labor handbook that said tipped workers should be paid minimum wage for nontipped work if that work comprises more than 20% of their shifts. The decision is notable, in part, because at least one other circuit court has criticized the rule, declining to apply it.

Several business groups, including the National Restaurant Assn. and the National Council of Chain Restaurants, have lambasted the 8th Circuit Court decision. Such a decision, asserted a brief by the American Hotel and Lodging Assn. (AH&LA), would raise costs and waste time by giving employers “the Herculean task of monitoring and tracking every task performed by every tipped employee.”

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Applebee’s brought the lawsuit to the Supreme Court on the grounds that the 20% rule was not in keeping with the Fair Labor Standards Act. Applebee’s employees and the Department of Labor argued that the 20% rule is valid, because they say the DoL had the right to interpret its regulations as it did in the handbook.

The Court’s denial means the 8th Circuit Court decision stands, and the case against Applebee’s will go to trial. No matter what the final outcome of the Applebee’s suit, the decision to uphold the rule will set a precedent in the 8th Circuit, which includes Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota, says Linda M. Doyle, a partner at McDermott Will & Emery.

The guideline would increase wage obligations by up to $5.12 for every hour a tipped employee does non-tip-producing work, according to the AH&LA. It would also require companies to track these tasks in real time to avoid “a large and unexpected financial obligation at the end of a particular workweek.”

The 8th Circuit Court ruling could have far-reaching effects. Particularly if it’s bolstered by a win by Applebee’s employees, the case might spark similar suits in other states over the 20% rule, Doyle says. Dissent between the circuit courts may ultimately push the Supreme Court to resolve the split, she adds.

To be sure, companies have a few options — though each one presents its own challenges:

  • Undershoot. Don’t allow tipped employees to spend more than 20% of their time on even loosely defined nontipped work, such as setting tables or rolling silverware. Still, that may increase overhead if you need to hire more people to do the nontipped work.
  • Completely separate tipped and nontipped jobs. This will mean either hiring or assigning employees to do nontipped work for minimum wage, and allocating tipped work exclusively to tipped employees. Doing so could increase payroll, tax, and administrative costs.
  • Separate hours more clearly. Pay employees minimum wage for hours of nontipped work and use the tip credit for tipped work. This, like the other options, will add paperwork and may hike payroll and tax costs if companies must hire someone to keep the records. Requiring employees to record their own hours, on the other hand, may be impractical or inadvisable in fast-moving workplaces where customers demand their food, drinks, or luggage quickly. One remedy may be to set aside time at the beginning or end of shifts for tipped workers to do strictly nontipped activity.

Regardless of their chosen strategies, companies should start keeping more careful and thorough records, says Matthew C. Moschella, a partner at Sherin and Lodgen. Unless someone has brought the handbook guideline to court within a certain district, companies that operate in that area should consider the rule valid, he says. And if the Applebee’s case leads to a flurry of tip-credit litigation in other circuits, as it may, these businesses need to have detailed and accurate records to argue their cases, Moschella adds. Keeping these records may be challenging, but they may also be a company’s best defense, he says.