Labor & Employment Law Daily Bartender’s entitlement to overtime depends on whether ‘service charge’ was commission or gratuity/tip
Friday, September 7, 2018

Bartender’s entitlement to overtime depends on whether ‘service charge’ was commission or gratuity/tip

By Marjorie Johnson, J.D.

A jury should decide whether a bartender was correctly classified as exempt from the FLSA’s overtime requirements under the exception for commissioned employees of retail or service establishments since triable issues existed as to whether the “service charge” automatically placed on customers’ bills was a commission or a gratuity/tip, and whether the bartender was compensated using a “bona fide” compensation rate. In addition to recommending denying both parties’ cross motions for summary judgment on the bartender’s FLSA claim, a federal magistrate judge in Florida also recommended allowing the bartender’s state-law claim for lost wages to advance to trial (Alban v. 2K Clevelander LLC, August 28, 2018, Louis, L.).

Compensation formula determined pay. The bartender worked at the employer’s establishment for two-plus years, where he was paid based on a compensation formula that took into account both hours worked and sales totals. The employer claimed that the formula used the total funds accrued by all bartenders and distributed it equally by hours worked, prior to allocations made to or from other service “pools” (such as the bussers and the food and liquor runners). It further claimed that its commission system was exempt from the FLSA’s overtime requirements.

“Service charge” included in calculation. Each customer’s bill included an automatic 18-percent “service charge” (later increased to 20 percent), which was a key part of how the bartenders’ pay was calculated. While the employer claimed that it was a “commission” since it was mandatory and applied to every customer bill, the bartender claimed it was a discretionary “gratuity” or “tip.” The customer bills also included a line for “additional service charge,” which allowed the customer to add an additional gratuity. There was conflicting evidence whether these additional sums were treated as commissions and commingled into the service “pools.”

Overtime hours. The bartender, who claimed he was denied overtime pay, was paid approximately $189,000 for his two-plus years of employment. According to the employer’s calculation, he worked about 4,600 hours, and was thus paid at a rate of $41.19 per hour—above the minimum wage and overtime rates. However, he claimed that these calculations were based on an erroneous number of hours and challenged the employer’s method of calculating his hourly wage. He also claimed that because the service charge was a gratuity, it should not have been included in the hourly rate calculation.

Was the “service charge” a commission? The central dispute of the bartender’s FLSA overtime claim was whether he was correctly classified as exempt under the Section 207(i) exception for commissioned employees of retail or service establishments.This exemption would apply if his regular rate of pay exceeded the applicable overtime rate and more than half of his compensation represented “commissions” on goods or services. Resolving this dispute required a determination of whether the “service charge” constituted a commission or a gratuity/tip since the 207(i) exemption couldn’t be met if wasn’t a commission. Because triable issues existed on this issue, summary judgment was not warranted, the magistrate stated.

“Tipping Procedure.” In arguing that the service charge was discretionary and not a “commission,” the bartender pointed to the employer’s “Tipping Procedure” which stated that the customer “has the right to increase or decrease the service charge based on their perception of the service that was provided. These tips will be allocated based off of the procedural steps listed below…” He also provided evidence that the employer could and did remove the service charge from the check by means of a button on the register.

On the other hand, the employer presented evidence that the service charge was built into each customer’s check and only a supervisor could remove it, but offered no evidence establishing how often the charge was in fact waived. It also offered testimony of its corporate representative that the charge was mandatory and that the Tipping Procedure was never implemented.

Bona fide commission rate? A triable issue also existed, according to the magistrate, as to whether the bartender’s commission stemmed from the application of a “bona fide commission rate.” Notably, in a similar case involving the same defendant and attorneys, but a different plaintiff, the court denied the defendant’s motion for summary judgment on its 207(i) affirmative defense because it failed to adduce sufficient evidence that it paid the plaintiff using a “bona fide commission rate.” The evidence here did not compel a different result.

Other than describing the detailed formula it allegedly applied, the employer failed to present documentation showing that it applied it as described. Conversely, the bartender contended that the formula included tips since, if a customer gave an amount as “additional service charge” and paid by credit card, that amount was captured with the automatic service charge. Thus, it appeared non-commissioned tips were commingled in with the rest of the pool.

Unpaid wages claim. The employer was also not entitled to summary judgment on the bartender’s claim for unpaid wages under Florida law, the magistrate stated, since it had asserted that the claim had been “rendered moot” by the nature of its 207(i) exemption, and that issue was in fact still in dispute. The magistrate also recommended denying the bartender partial summary judgment on this claim, in which he sought a finding from the court that he was “owed unpaid wages in excess of $100 from the first 6 months of 2016.” Though he proffered evidence that showed a discrepancy in the hours worked, he failed to adduce sufficient proof of his entitlement to unpaid wages, or critically, in what amount. However, the magistrate judge recommended entry of an order that his hours were understated on the employer’s wage calculation spreadsheets.

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