In the current battle to hire and retain good workers, employers have developed creative ways to balance employees’ increased compensation expectations against the costs of running a business. In addition, restaurants using the tip credit have the extra administrative difficulties of making sure their tipped employees are being paid enough in tips to meet the Fair Labor Standards Act’s (FLSA) minimum wage and overtime requirements. A recent federal appeals court opinion reviewed one restaurant’s creative tactic to address the challenges by paying tipped employees their wages from monies collected as part of a mandatory service charge.

Steakhouse uses mandatory service charge to pay employees

Nusret Miami, LLC, is an upscale Miami steakhouse owned by Nusret Gokce, a celebrity chef also known as “Salt Bae.” Since opening in 2017, the restaurant has added a mandatory 18% “service charge” to customers’ bills.

Nusret used the service charges to pay some of its employees. In so doing, the restaurant believed it had complied with 29 U.S.C. § 207(i) of the FLSA (we’ll call it the “207(i) exemption” in this article), which exempts payment of overtime for retail or service establishments if:

• The regular rate of pay is in excess of one and one-half times the employee’s minimum hourly rate; and
• More than half of the employee’s compensation is based on commissions for goods or services.

Nusret met the exemption’s facial requirements. Its payments to the tipped employees ranged from...

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