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Watch those tips

Tip-pooling policies rife with legal landmines


Tipping seems to be a fairly simple process: A customer leaves a few bucks on the table, or writes in a couple extra dollars on the receipt, and that's the amount that goes to the wait staff.


Yet, as any server can attest, tipping can be surprisingly complex - and, to be sure, customers could say the same thing. In recent years, this complexity has made its way into the legal arena, thanks to a growing number of lawsuits over what is known as "tip pooling."

In a tip pool, money from a shift's tips are pooled together and distributed to workers who serve customers as a way to ensure that a tip is distributed to anybody who helped make that diner's experience satisfactory.

Yet tip pools have been the object of a growing number of class-action lawsuits from staff concerned that restaurants have been funneling some of that money to managers or charging fees that make a customer think a tip is unnecessary.

"It seems as though it's simple, but the definitions are not all that clear," said Carolyn Richmond, an attorney with the New York firm of Fox Rothschild.

Traditionally, tips go to the servers and others who come in direct contact with the customer. Federal labor law governs how companies can distribute tips, and so do many state laws, which are often tougher and thus trump federal requirements. State laws vary considerably, however, which makes it more difficult for restaurants to ensure they are in compliance. Indeed, attorneys say the first step any company should make in developing a tip pool, or ensuring its compliance, is to check with its local state restaurant association.

Tip pooling has long been a concern at restaurants, but a handful of recent decisions have put the issue to the forefront. Starbucks lost one lawsuit against its baristas last March. And in October, a luxury spa in Massachusetts reached a $14.75 million deal to settle a tip-pooling lawsuit filed by its employees.

Richmond said the lawsuits have become more common in recent years, not because tip pooling is any greater of a concern, but because plaintiffs' attorneys have realized the potential these cases hold. "It's the flavor of the month," she said.

One of the major issues surrounding tip pooling concerns "service charges," or gratuities - the issue that got the Massachusetts hotel, Canyon Ranch, into trouble. Service companies where tips are common, like restaurants or hotels, must distribute those fees to servers if they could be construed as a replacement for a tip.

For instance, if a restaurant charges a gratuity for a large group, that gratuity should go to the wait staff, bus boys and others who serve the customers and would otherwise receive a tip. At Canyon Ranch, however, an 18-percent service charge allegedly covered any tips customers would have given massage therapists or yoga instructors. Employees in their lawsuit said they received little, if any, of that revenue.

Attorneys advise restaurants or other companies with service charges call it a "facility fee," or something else that doesn't imply that the charge would replace a tip. "If you're going to charge a facility fee, call it a facility fee," said David Robinson, an attorney with the Boston law firm of Ruberto, Israel & Weiner. "You can't mislead patrons into thinking it's a gratuity. And if it's ambiguous at all, you will have to pay."

Another problem is who gets the fee. In many states, only employees who deal with customers can get access to tip pools. Chefs and line cooks cannot get a share of those funds, Richmond said, and neither can managers or anybody else who oversees employees.

One problem with that requirement is the often-ambiguous names of the employee - a worker may be considered a supervisor without any real management responsibilities, for instance. "It's a fine line to decide whether someone can pay attention to the tip pool," Richmond said. "Look and see who has the direct contact with the guest. If it's clear that you work in the back part of the house, you can't be in the tip pool. If you are a manager or an agent, you can't take tips."

Last year, a judge in California ruled that Starbucks illegally gave shift supervisors at the coffee chain a share of the tip pool because those employees also served customers. The judge later awarded the staff $100 million, including back tips plus interest.

Other issues also cause problems. In some states, notably California, a company cannot take out credit card processing fees from tips left on a credit card bill - increasingly common among companies looking to cut their own costs in a recession. Other states, like New York, allow such charges.

Overall, the best way for a company to keep itself out of hot water is to develop a good tip-pooling policy, with the help of the state's restaurant association. Then take that policy to an attorney - regularly. "They should have a lawyer review the tip policy regularly, because sometimes the law changes regularly," Robinson said.

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