Wai Man Tom v. Hospitality Ventures LLC, 18-2509

CourtUnited States Courts of Appeals. United States Court of Appeals (4th Circuit)
Writing for the CourtQUATTLEBAUM, Circuit Judge
Citation980 F.3d 1027
Parties WAI MAN TOM, Plaintiff - Appellant, and Brandon Kelly, on behalf of himself and all others similarly situated, Plaintiff, v. HOSPITALITY VENTURES LLC, d/b/a Umstead Hotel and Spa; Sas Institute, Inc.; NC Culinary Ventures LLC, d/b/a Ãn Asian Cuisine, Defendants – Appellees, and Ann B. Goodnight, Defendant.
Docket NumberNo. 18-2509,18-2509
Decision Date24 November 2020

ARGUED: Gilda Adriana Hernandez, LAW OFFICES OF GILDA A. HERNANDEZ, PLLC, Cary, North Carolina, for Appellant. John R. Hunt, STOKES WAGNER, ALC, Atlanta, Georgia, for Appellees. ON BRIEF: Charlotte Smith, LAW OFFICES OF GILDA A. HERNANDEZ, PLLC, Cary, North Carolina, for Appellant. Arch Y. Stokes, Jordan A. Fishman, STOKES WAGNER, ALC, Atlanta, Georgia, for Appellees.

Before AGEE and QUATTLEBAUM, Circuit Judges, and Thomas S. KLEEH, United States District Judge for the Northern District of West Virginia, sitting by designation.

Affirmed in part, vacated in part and remanded by published opinion. Judge Quattlebaum wrote the opinion, in which Judge Agee and Judge Kleeh joined.

QUATTLEBAUM, Circuit Judge:

In this appeal, we are required to apply statutory provisions of the Fair Labor Standards Act ("FLSA") and accompanying regulations to workers in the restaurant industry. Ãn Asian Cuisine ("Ãn"), an upscale sushi restaurant in Cary, North Carolina, paid its servers an hourly rate plus tips and automatic gratuities, which generally consisted of twenty percent of the bill for parties of six or more. When combined, the hourly wage, tips and automatic gratuities almost always exceeded the FLSA's minimum-wage and overtime requirements. The Appellants (the "Employees") claim, however, that the tips and automatic gratuities cannot be considered in determining whether Ãn met its FLSA obligations because they were paid through an unlawful tip pool. Tip pools must only include employees who customarily and regularly receive tips. Ãn, according to the Employees, included in its tip pool employees who did not meet that criteria. Therefore, the Employees claim Ãn violated the FLSA, entitling them to damages, attorneys’ fees and costs.1

The district court disagreed and entered summary judgment in favor of Ãn. It determined that the automatic gratuities were not tips but instead commissions, which, according to the court, entitled Ãn to invoke a statutory exemption to the FLSA's requirements— 29 U.S.C. § 207(i) ("the 7(i) exemption"). The district court held that the automatic gratuities satisfied the requirements of the 7(i) exemption for most weeks at issue here and, for those that it did not, the tip pool was valid as a matter of law.

We agree with the district court that the automatic gratuities were not tips. But, for the reasons set forth below, we conclude the district court erred in its application of the 7(i) exemption. Accordingly, we affirm in part, vacate in part and remand the case to the district court for consideration of that exemption consistent with this decision. Further, to the extent that, on remand, Ãn's tip pool remains relevant to its FLSA obligations, we conclude that there are genuine issues of material fact as to whether all of its participants customarily and regularly receive tips and, thus, whether the tip pool was lawful.


We begin with some basics about the FLSA. Congress enacted the FLSA in 1938 in order "to protect all covered workers from substandard wages and oppressive working hours."

Barrentine v. Arkansas-Best Freight Sys., Inc. , 450 U.S. 728, 739, 101 S.Ct. 1437, 67 L.Ed.2d 641 (1981). To that end, "the FLSA was designed to give specific minimum protections to individual workers and to ensure that each employee covered by the [FLSA] would receive [a] fair day's pay for a fair day's work’ and would be protected from ‘the evil of overwork as well as underpay.’ " Id. (quoting Overnight Motor Transp. Co. v. Missel , 316 U.S. 572, 578, 62 S.Ct. 1216, 86 L.Ed. 1682 (1942) ) (internal quotation marks omitted).

Although it has many provisions, "[t]he FLSA is best understood as the ‘minimum wage/maximum hour law.’ " Trejo v. Ryman Hosp. Props., Inc. , 795 F.3d 442, 446 (4th Cir. 2015) (quoting Monahan v. Cty. of Chesterfield , 95 F.3d 1263, 1266 (4th Cir. 1996) ). "Thus, the [FLSA] requires payment of a minimum wage and limits the maximum working hours an employee may work without receiving overtime compensation."2 Id . (internal citations omitted). The FLSA currently requires a minimum wage of $7.25 per hour. 29 U.S.C. § 206(a)(1)(C). Furthermore, "the FLSA requires employers to pay overtime to covered employees who work more than 40 hours in a week." Encino Motorcars, LLC v. Navarro , ––– U.S. ––––, 138 S. Ct. 1134, 1138, 200 L.Ed.2d 433 (2018) (citing 29 U.S.C. § 207(a) ). Overtime compensation must be "at a rate not less than one and one-half times the regular rate at which [a covered employee] is employed"—at least $10.88 per hour. 29 U.S.C. § 207(a)(2)(C). For convenience, we will refer to the minimum-wage and overtime requirements as the "FLSA obligations."

The FLSA obligations are simple enough for employees who receive a traditional hourly wage. In those situations, employers satisfy their FLSA obligations by directly paying their employees hourly wages in excess of the statutory minimum-wage and overtime requirements. But things get more complicated in the restaurant industry. There, certain employees—such as servers—are typically paid lower hourly wages, well below the minimum wage. Yet they also receive compensation through tips or gratuities. The question then becomes how do restaurants satisfy their FLSA obligations? More specifically, can tips and/or gratuities be used to satisfy those obligations and, if so, what FLSA rules govern how this should be done? Unfortunately, the FLSA provides only limited guidance.

Generally, the FLSA characterizes employees’ non-hourly compensation in three different categories that may be relevant to restaurant employees—tips, service charges and commissions. The classification of a restaurant employee's pay determines how, and to what extent, that compensation satisfies the FLSA's minimum-wage or overtime requirements. We now discuss each category and how it can be used to satisfy an employer's FLSA obligations.

The FLSA defines a "tipped employee" as "any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips." 29 U.S.C. § 203(t). The accompanying regulations further define "tips" as follows:

A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are amounts determined solely by the customer , who has the right to determine who shall be the recipient of the gratuity.

29 C.F.R. § 531.52 (emphasis added). In addition, that same regulation provides that tips can satisfy the FLSA's minimum-wage requirement by use of the tip credit in 29 U.S.C. § 203(m)(2)(A). Id . The tip credit provision permits an employer to pay tipped employees a reduced cash wage of $2.13 per hour and "take a credit against the minimum wage by using an employees’ [sic] tips as wages." Trejo , 795 F.3d at 447 (internal quotation marks omitted). Thus, for an employee making $2.13 per hour, the employer can utilize a tip credit of $5.12 per hour to meet its minimum-wage obligations. See 29 C.F.R. 531.59(a).

This same tip credit can be applied to an employer's overtime obligations. See 29 C.F.R. § 531.60. To illustrate how this works, an employee working overtime must be paid $10.88 per hour—one and one-half times $7.25. The employer can still use the $5.12 tip credit but not more, meaning the hourly wage for overtime must be $5.76— $10.88 minus a $5.12 tip credit.

Whether for regular wages or overtime wages, an employer must notify its employees in advance if it intends to rely on the tip credit provision to meet its FLSA obligations and must allow employees to retain "all tips received." 29 U.S.C. § 203(m)(2)(A). As described in more detail below, under certain circumstances, employers are permitted to allow "the pooling of tips among employees who customarily and regularly receive tips." Id.

Service charges are not defined in the FLSA. But under FLSA regulations, "[a] compulsory charge for service, such as 15 percent of the amount of the bill, imposed on a customer by an employer's establishment, is not a tip ...." 29 C.F.R. § 531.55(a). Instead, it is a service charge. Id. Further, service charges "may be used in their entirety to satisfy the monetary requirements of the [FLSA]" if they "are distributed by the employer to its employees." Id . § 531.55(b). So, compensation that qualifies as service charges can satisfy the FLSA minimum-wage and overtime obligations.

Finally, the third category of compensation is commissions on goods or services. For commissions, the FLSA instructs that:

No employer shall be deemed to have violated [ 29 U.S.C. § 207(a) ] by employing any employee of a retail or service establishment for a workweek in excess of the applicable workweek specified therein, if (1) the regular rate of pay of such employee is in excess of one and one-half times the minimum hourly rate applicable to him under [ 29 U.S.C. § 206 ], and (2) more than half his compensation for a representative period (not less than one month) represents commissions on goods or services. In determining the proportion of compensation representing commissions, all earnings resulting from the application of a bona fide commission rate shall be deemed commissions on goods or services without regard to whether the computed commissions exceed the draw or guarantee.

29 U.S.C. § 207(i). As the corresponding regulation explains, the 7(i) exemption "was enacted to relieve an employer from the obligation of paying overtime compensation to certain...

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