A recent class-action lawsuit accuses a Phoenix-based coffee shop, Bikini Beans Coffee, of stealing wages from employees. The claims allege that owners kept tips and deducted pay as punishment, bringing employees earnings below minimum wage. Additionally, the claims state that employees were threatened that they would be charged for job training if they quit within a given time frame.
In its defense, Bikini Beans stated that the pay deduction and loss of tips were part of a fully informed contract agreement signed by employees at the time of hire. This agreement showed that employees agreed to lose their tips if they were late to work. It also stated that expenses for training an employee amount to $300, and if an employee leaves the company within a 180-day period or is terminated, that $300 would be reimbursed to the company and taken out of the employee’s final paycheck.
So, what are the legalities surrounding these types of agreements? Though that can vary from state to state, there are some consistencies enforced by the Fair Labor Standards Act.
Can an Employer Justify Withholding Tips?
If an employer pays tipped employees a full minimum wage rate without utilizing “tip credit” (using tips to get to minimum wage), then tip pooling (the division of tips between front-of-house employees and back-of-house employees who don’t usually get tips) is allowed. However, if an employer pays an employee a rate that is less than minimum wage, the purpose of the tips would be to “make up” the difference in base pay to ensure minimum wage is met.
It would be against state and federal law for an employer to withhold tips if the result would cause the employee to be paid less than minimum wage when all tips and base pay are totaled. Employers who withhold tips from an employee who relies on tips to meet minimum wage requirements could be fined $1,000 per occurrence and may also face additional fines or damage payments beyond the amounts that were illegally withheld.
Arizona law permits employers to claim a tip credit of $3.00 an hour. As such, employees that work primarily for tips can be paid a minimum of $9.00 an hour, as long as they make enough in tips to meet minimum compensation requirements of at least $12.00 an hour.
General Rules Regarding Tipping
– Withholding of Tips: Per the FLSA, a tip belongs to the tipped employee even where the employer takes a tip credit. Of course, the employer can offset the required base pay by using tip calculation, but the tips should never belong to the employer.
– Tip Pooling: Though tips belong to employees, that does not preclude valid tip pooling arrangements among employees. The FLSA does not dictate a maximum contribution amount tip pools, but the employer is required to tell employees about any tip pooling requirement their business enforces.
– Multiple Positions: If an employee alternates roles for the same employer—one that receives tips and one that does not, for example, as a hostess and waitress—the tip credit applies only to the hours worked in the tip receiving position.
– Mandatory Service Charges: A mandatory service charge of, for example, 15 percent for parties greater than six people is not a tip. Money distributed to employees under service charges should not be counted as tips.
– Credit Card Fees: When a tip is charged on a credit card, and the credit card company charges a percentage on each sale, the employer may pay the employee the tip minus that percentage.
Docking Pay as Punishment
In some states, an employer may deduct money from a nonexempt employee’s paycheck for coming to work late. This is not applicable to exempt employees. However, the deduction must be proportionate to the wage that would have been earned during the time lost due to the lateness. When the loss of worked time is 30 minutes or less, an entire 30-minute deduction can be taken.
The FLSA permits employers from reducing a nonexempt worker’s hourly wage as a disciplinary action only if the reduction does not force the employee’s pay below minimum wage. This can mean you may need to allow an employee to make up time loss time in a pay period.
Reimbursement for Training Expenses
Whether or not employees are required to reimburse employers for costs of job training is an issue that is still up in the air. Case law on this issue has varied over the years.
In USS POSCO Industries v. Floyd Case, an employee who entered into a voluntary training program to advance his career signed an agreement committing to reimburse his employer if he was subsequently fired with cause or if he resigned within 30 months of the training. He argued that both state law and the FLSA protected him, but the court was not persuaded. They determined that the voluntary nature of the training, and the agreement, made the requirement enforceable, awarding the employer a portion of training costs and an additional amount in legal fees.
However, courts have ruled against employers on this issue as well. A 4th District Court of Appeals provided an unpublished opinion, stating that former police officers who left the LAPD could not be required to reimburse the city for their training, despite their prior agreement. The court decided that the extensive and expensive training was essentially employer-mandated and thus, the reimbursement contract was deemed unenforceable.
Generally, it is very difficult for an employer to recover employee training expenses, and, depending on the cost of the training, the legal fees may not make the pursuit worth it.
Avoiding Wage & Hour Claims
If you’re going to attempt to implement employment agreements that affect compensation, here are a few important things to consider:
– At Will: Any wage or training reimbursement agreements should be entered into voluntarily, especially if the terms may be debatable in light of the FLSA.
– Written Agreement: For current employees and new hires alike, any agreement should be made prior to implementation of a new program or prior to the employee beginning the employment. They should also be given the opportunity to review the agreement with counsel.
– Specificity: Agreements should specify the terms that will govern and circumstances that may lead to deductions or reimbursement requests. For example, employer-mandated training should be carved out in a reimbursement clause.
– Compliance with State and Federal Law: Be aware of agreements to terms that violate minimum wage or overtime requirements as well as improper deductions. Also, if applicable, make distinctions between exempt and non-exempt employees to avoid claims for back wages. Lastly, be mindful of any relevant collective bargaining agreements.
In the case of Bikini Beans, based on the facts disclosed thus far, they seem to have met many of the requirements under the FLSA for such agreements. A representative for Bikini Bean issued the following statement: “…We value all our employees and offer a generous compensation package with a minimum base wage of $10 plus tips which allows all our employees to make significantly more than the state and federal minimum wage.”
They further emphasized that the company amended its contracts in early 2020 and no longer includes the $300 training fee reimbursement clause.
Navigating wage agreements that are unique or more complicated than standard agreements can be tricky, and, if not done right, can cost your business dearly in damages, back pay, and attorney’s fees. Employers will ultimately have to decide for themselves, with the help of experienced counsel, whether adopting wage agreements is a smart move for their business.
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This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
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