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SDNY Judge Takes on Tip Theft With a Dash of Common Sense

Whenever my family orders takeout, my wife has a habit of asking the delivery person if they will be keeping the entire tip we give them or if they have to give some or all of it to management.  Most of them have limited English skills, which adds a little challenge – and humor – to the ritual (“will-this-go-to-you?”), but more often then not my wife is told that the tips will be going directly to them.

My wife needs to give them the tip first, and then ask.  She’s more likely to get an honest answer.  Based on my experience, very few tipped restaurant employees see all of the tips they lawfully earn.  For a number of different reasons, tips are the least respected form of compensation an employee can earn; they are treated like gyro meat  and carved down in thin slices.

The most common illegal practice involves owners sticking their fingers in the tip jar, a practice known as tip skimming. Payments such as these are the equivalent of a house fee, often justified as a means of paying the restaurant’s overhead such as administrative expenses or monthly lease payments.  However, an employer’s practice of passing the expense of an enterprise off on an employee by making deductions from their pay is illegal under the Fair Labor Standards Act regardless of how an employee earns their wage, and regardless if any wages received are straight time pay or overtime pay.

Other forms of tip theft include failing to implement a lawful tip credit, permitting employees who do not customarily and regularly receive tips to participate in a tip pool, failing to pay the tipped minimum wage, failing to pay overtime or deducting from an employee’s tips the expense of cash register shortages, walk-outs, and breakage.

Notably, deductions can be made for the costs of credit card processing fees, but only under narrow circumstances.  Specifically, since credit card sales and the accompanying tips must be reduced to cash at the end of the night, deductions can be made from a tipped employee’s tips for credit card processing fees because they are the ones supposedly benefiting from the transaction.  The particular topic of permitting deductions from tips for credit card processing fees has caused grumbling among plaintiffs’-side labor and employment lawyers for years, mainly because the law that has developed allows for credit card processing fees to be passed through in their entirety to employees (usually 3%) while their employers reap similar benefits from the transaction and make no contribution.

Enter Judge Alison J. Nathan, newly minted district court judge in the Southern District of New York.  In Allende, et al. v. PS Brother Gourmet, Inc., et al., S.D.N.Y., No. 11-cv-5427, 02/01/13, Judge Nathan ruled that an Indian restaurant’s practice of deducting the full amount of service fees charged by third-party food delivery websites like Seamless Web or Grub Hub violated the law.  In a well-reasoned opinion, Judge Nathan held that the fees at issue in Allende (processing fees, commissions, and advertisement fees) differed from credit card processing fees at issue in prior cases.  Specifically, these fees were not required to reduce credit card tips to cash and, instead, appeared to serve no other purpose than to shift the restaurant’s cost of using the web-delivery service to its employees.  The Court denied summary judgment and, while the case is proceeding, it is very likely to settle before any more law is made on these issues. Still, even if the case goes away, Judge Nathan’s opinion will likely circulate well beyond the life of the case.


Christopher Davis is an experienced employment litigator specializing in class actions, overtime wage recovery, discrimination, whistleblower retaliation, and Wall Street bonus disputes. Before entering private practice, Mr. Davis served as an Assistant District Attorney in the Manhattan District Attorney's Office where he prosecuted violent crimes as a member of the Sex Crimes Unit.

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