Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On March 18, 2022, the U.S. Court of Appeals for the Eleventh Circuit1 upheld a district court’s decision2 that an 18% service fee charged at the upscale Miami steakhouse of celebrity chef Nusret Gökçe was not a “tip” and was properly used by the restaurant to satisfy its minimum wage obligations under the Fair Labor Standards Act (FLSA), and to satisfy the requirements of the Section 207(i) FLSA exemption, which relieves retail and service establishments from the obligation to pay overtime to commission-based employees under certain circumstances.3
While neither service charges nor tips are defined by the FLSA, the Department of Labor (DOL) regulations define a tip as an amount presented by a customer as a form of gratuity in recognition of a service performed for the customer.4
The Lawsuit and The District Court’s Decision
In Compere v. Nusret Miami, LLC, a group of service employees filed a collective action involving FLSA minimum wage and overtime claims5 against celebrity chef Nusret Gökçe—also known as “Salt Bae”—and the entity that operates the Nusr-Et Steakhouse, an upscale restaurant in Miami, Florida.
On May 31, 2020, the U.S. District Court for the Southern District of Florida granted the defendants summary judgment as to all claims. The district court agreed with Nusret that the 18% fee that was automatically imposed on the bills of restaurant patrons was mandatory and not “discretionary” as suggested by the plaintiffs. The 18% service fee could not be negotiated or changed by any customer and customers were made aware of the 18% service fee via the restaurant’s menus.
The district court rejected the plaintiffs’ argument that the service charge was a tip because managers could occasionally remove the service charge as untenable. The district court noted that it is the voluntary nature of a sum directed towards a specific employee that is the crucial element of a tip. Thus, the 18% fee was not “discretionary,” as customers did not pay the service charge directly to the plaintiffs, could not negotiate the amount of the service charge, and did not have a say with regards to who ultimately received the service charge.
Since the charge was not a tip, the district court held that the restaurant could use the charge to meet its minimum wage obligations under the FLSA and establish the requirements of the Section 207(i) FLSA exemption, which exempts certain retail and service establishments from having to pay overtime wages if the following conditions are met: (1) the employee’s regular rate of pay is in excess of one and one-half times the minimum hourly rate; and (2) if more than half the employee’s compensation for a representative period (not less than one month) represents commissions on goods or services.6 The district court found the exemption applied as the restaurant is a service establishment, the restaurant paid the plaintiffs more than one and one-half times the governing minimum wage, and more than half of the plaintiffs’ compensation was derived from the service charges. As the district court noted, many of the plaintiffs, including the lead plaintiff, earned over $100,000 a year and their regular rate of pay never dipped below the governing minimum wage requirements under Florida or federal law.
The Eleventh Circuit’s Decision
On appeal, the Eleventh Circuit faced the dispositive issue of whether the 18% fee was a voluntary tip or a compulsory service charge. If the fee was a tip, then the FLSA barred the restaurant from using the tip to satisfy its wage obligations under the FLSA. On the flipside, if the fee was not a tip, but rather an obligatory service charge, then the restaurant could treat the service charge as wages, which may be used in its entirety to meet the restaurant’s minimum wage obligations under the FLSA and for purposes of establishing the 207(i) overtime exemption.
The appellate court held the service charge was not a tip under the FLSA, as interpreted by its accompanying DOL regulations. The appellate court recognized that a tip is a customer’s “gift or gratuity,” which was not the case with the restaurant’s non-negotiable service charge, as the customers never controlled the amount of the charge or where it was headed. Even a DOL regulation explains that a “compulsory charge for service . . . imposed on a customer by an employer’s establishment, is not a tip.”7
The fact that managers could sometimes remove the service charge for a dissatisfied customer was irrelevant. The appellate court focused its inquiry on the voluntary nature of a tip and whether or not a guest had control to negotiate the service charge. In this regard, the customers had no control or ability as to whether to pay the 18% service charge, could not remove it from a bill, paid it directly to the restaurant, and could not direct who received the service charge. The appellate court noted its decision is in line with a recent Fourth Circuit Court of Appeals decision, where a restaurant’s automatic gratuity of 20% for parties of six or more was not classified as a tip and could be used to satisfy minimum wage and overtime obligations, despite managers’ having the sole authority to, and did occasionally, remove the service charge from a customer’s bill.8
The appellate court also rejected the employees’ argument that service charges were in reality “failed service charges” because they were not treated as part of the restaurant’s gross receipts for income tax purposes. In rejecting this argument, the appellate court noted that the plain language of the FLSA does not require an employer to submit income tax returns to comply with its provisions, including to satisfy the requirements of the Section 207(i) exemption. The appellate court expressly noted that it would not expand the FLSA to include additional recordkeeping requirements, where such requirements are not mandated by the FLSA. However, where charges are never collected by the employer, such as where the fees are paid directly to dancers in clubs, the fees would not be considered service charges as they had never been collected by the employer and could not, therefore, have been redistributed as wages to employees.9
The Importance Compere Has on Other Cases in the Eleventh Circuit
In 2021, a federal district court recognized that competing decisions existed due to the differences in how courts interpret whether a fee is discretionary or mandatory.10 The Eleventh Circuit’s holding in Compere provides important guidance for courts faced with the issue of whether a certain fee is a tip under the FLSA and how to determine whether that fee is discretionary or mandatory. Compere is one of the first appellate decisions to weigh in on this issue.
Compere is also notable in that it is the first appellate decision to squarely address whether a service charge must be included as part of an establishment’s gross receipts for tax purposes to constitute a valid service charge. While the appellate court noted that it would not impose additional record keeping requirements, the appellate court expressly noted that it provided “no opinion on whether Nusret complied with federal tax law in its treatment of the service charge on its tax returns.” Rather, its “holding is simply that Nusret’s tax returns are irrelevant to determining whether the service charge is a tip.”
What Should Employers Expect After Compere
While the holding in Compere interprets mandatory service charges that were collected and redistributed by the employer as not constituting tips under federal law, employers must still look at the context in which the charges or fees were imposed and must look at how service charges and tips are defined in laws and regulations at the state and local levels. For example, a California Court of Appeal considered a patron’s subjective intent important to the determination of whether a mandatory fee was or was not a gratuity.11 In New York, the focus appears to turn on what a “reasonable customer” would understand the charge to be.12
Overall, employers should consult with their employment counsel for guidance on potential issues surrounding the treatment of service charges and to assist them in developing a compliant compensation plan.
1 Compere v. Nusret Miami, LLC, No. 20-12422, 2022 WL 816682 (11th Cir. Mar. 18, 2022).
2 Compere v. Nusret Miami, LLC, No. 19-20277, 2020 WL 4464627 (S.D. Fla. May 31, 2020).
3 Littler Attorney Miguel A. Morel served as co-counsel for the Defendants.
4 29 C.F.R. § 531.52(a).
5 The FLSA requires an employer to pay its employees the minimum wage for all hours up to 40 in a workweek, and at a rate not less than 1.5 times the regular rate of pay for any hours exceeding 40 in a workweek. 29 U.S.C. §§ 206(a)(1), 207(a)(1).
6 29 U.S.C. § 207(i).
7 29 C.F.R. § 531.55(a).
8 Wai Man Tom v. Hospitality Ventures LLC, 980 F.3d 1027, 1038 (4th Cir. 2020).
9 McFeeley v. Jackson St. Ent., LLC, 825 F.3d 235, 245–46 (4th Cir. 2016).
10 Rosell v. VMSB, LLC, No. 20-20857, 2021 WL 4990913, at *9 (S.D. Fla. June 22, 2021).
11 O'Grady v. Merch. Exch. Prods., Inc., 41 Cal.App.5th 771 (2019).
12 Ahmed v. Morgan's Hotel Group Mgt., LLC, 74 N.Y.S.3d 546, 547 (N.Y. App. Div. 1st Dept. 2018); Samiento v. World Yacht Inc., 883 N.E.2d 990 (N.Y. 2008).