Working as a server in a restaurant is appealing to many employees because of the potential to increase their earnings through tips.  Presumably, the hope of getting a greater tip due to providing great service motivates a server to deliver better service.  Likewise, a customer will often give a bigger tip to a server who provides exceptional service than to one who is mediocre.  So patrons and servers may be surprised to learn that their tips may end up in a “tip pool” that is shared among all of the restaurant’s employees, regardless of whether or not they are a server, or a type of employee who normally receives tips.   Erica Sargent, a server working in a Houlihan’s restaurant, recently challenged this “tip pool” policy as being in violation of the Fair Labor Standards Act, 29 U.S.C. Sec. 201, et seq., in a class action lawsuit which she filed in the New Jersey District Court against A.C.E. Restaurant Group, Inc., d/b/a Houlihan’s, on behalf of herself and others similarly situated.

The plaintiffs allege that “[t]he FLSA and its regulations permit tip pooling or tip sharing only when it is ‘limited to employees who customarily and regularly receive tips.’” 29 CFR Sec 531.59 (b). Therefore, the plaintiffs argue, Houlihan’s “tip pooling” policy violates that provision, since it requires sharing of all tips with employees who do not “customarily and regularly receive tips,” such as kitchen workers and hostesses.  Because Houlihan’s “tip pool” is unlawful, the plaintiffs further assert that Houlihan’s is therefore unlawfully receiving a “tip credit,” which allows for employers to pay “tipped employees” a rate lower than the federal minimum wage, which is then supplemented by the employee’s retained tips to meet the minimum wage. Therefore, the plaintiffs are seeking to recover the difference between the hourly rate they received by defendants and the federal minimum wage.

This issue was raised last year in a similar class action suit filed in the New Jersey District Court in Castaldo v. McLoone’s Asbury Park, LLC, 2015 U.S. Dist. LEXIS 67644 (D.N.J. May 26, 2015). However, the parties in that matter settled the matter before the Court made any findings or rulings. Other cases which have so far considered this issue in the Third Circuit are from Pennsylvania. In evaluating this issue last year, the District Court for the Middle District of Pennsylvania denied the defendant’s motion to dismiss, holding that “to properly participate in a tip pool a restaurant employee must have direct customer interaction” which is “a fact intensive inquiry [that] requires the benefit of a fully developed factual record.” Ford v. Lehigh Valley Rest. Group, Inc., 2014 U.S. Dist. LEXIS 92801, *13 (M.D. Pa. July 9, 2014).  It will be interesting to see how the New Jersey District Court addresses this issue in Sargent v. A.C.E. Restaurant Group, Inc., d/b/a Houlihan’s.

By Francine Foner, Esq. and Ty Hyderally, Esq.

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