Dipping Into Tip Pool Costs Restaurant Chain Chickie's & Pete's Millions

Author: Michael Cardman, XpertHR Legal Editor

February 21, 2014

In the latest example of the federal government's ongoing efforts to aggressively enforce wage and hour laws, the Philadelphia-based restaurant and sports bar chain Chickie's & Pete's has agreed to pay more than $6.8 million in back wages and damages for violations of the Fair Labor Standards Act (FLSA).

The settlement, which will be distributed among 1,159 current and former employees at nine of the chain's locations, follows what the US Department of Labor's Wage and Hour Division (WHD) called one of its "largest investigations" in recent years.

"Tipped workers deserve better and this action shows that the Department of Labor is ready to stand up for them," US Labor Secretary Thomas E. Perez said in a statement.

Under the FLSA, an employer may pay tipped employees such as a wait staff and bartenders a cash wage of $2.13 per hour, as long as the employees receive enough in tips to cover the difference between the $2.13 cash wage and the federal minimum wage of $7.25 per hour. (Many states also have their own rules for tipped employees, which often vary depending on state minimum wages; but the settlement involved only violations of the FLSA.)

According to the WHD, Chickie's & Pete's servers and bartenders were paid only a flat rate of $15 per shift at most locations, which often did not cover the minimum cash wage of $2.13 per hour. In addition, Chickie's & Pete's did not pay the employees overtime at one and one-half times their regular rate of pay when they worked more than 40 hours in a workweek.

The FLSA also allows an employer to institute a tip pool to distribute tips among employees. Employers may not retain any of the employees' tips for any other purpose. But, according to the WHD, the owner of Chickie's & Pete's skimmed 60 percent of the funds in a tip pool into which servers were required to contribute between 2 percent and 4 percent of their daily sales.

"This amount had come to be known as 'Pete's Tax' and was required to be paid to the manager in cash at the end of each shift, even if the server received all tips on credit cards and therefore did not have cash on hand," according to the WHD. "In some cases, the company required employees to use their own money to contribute to this pool by withdrawing cash from a nearby ATM or borrowing from another server."

Although few cases are as large as the Chickie's & Pete's settlement, employers can expect that the WHD will continue to pursue violators of the FLSA. Last year, the Obama administration requested more money to enforce the FLSA, and chances are good it will do the same again this spring.