Operator Succeeds With No Tips Pay Structure

Posted on August 8, 2012 by LCT Magazine

The chauffeured transportation industry faces one of its most serious and direct business challenges to date on the issue of whether chauffeur gratuities, or tips, should be considered wages subject to overtime pay.

Lawsuits and/or federal Department of Labor audits in recent years have burned at least a handful of companies nationwide, who have had to spend massive sums in legal fees, compliance costs, and/or civil settlement payouts. The trifecta of a pro-union Presidential administration, aggressive and prowling trial lawyers, and a revenue-starved federal government are creating a perfect storm battering the limousine industry.

While the National Limousine Association is working with the DOL to clarify or modify wage/gratuity rules, there is an option that can help deter the audit pitchforks and class action mob torches. I’d like to outline one of those alternatives for companies that use an employee-based (W-2) business model.

But first, it helps to step back and see how things ought to be, at least for establishing an ideal. Tipping has existed for centuries — a voluntary gift of cash given directly to a person providing a service. One old English definition of a “tip” is an acronym that stands for “To Insure Promptness.” To be logical about it, a tip or gratuity is a private, voluntary transaction in a free-market economy between customer and service provider. If we are to be true to the concept of a private sector, a tip should not even have to be reported to the government. Tipping a waiter or a chauffeur is no different than handing cash to a spouse, a relative, a friend, or a man on the street, for that matter. Don’t ask, don’t tell.

What also ought to be is for private sector companies to be free to handle gratuities as they see fit, sans government interference and oversight. Companies should be able to choose the types of gratuities they want to allow, free of taxes and overtime pay: Mandatory, pass-through, recommended, or optional. Customers of course should be free to choose which company and gratuity arrangement to patronize.

However, what ought to be is not necessarily the way things are or will be. So now let’s go from the philosophical to the practical: While cash is king, it’s not always convenient in our cyber-connected, globalized, debt-financed world, despite ATMs on every block. So gratuities are now routinely placed on credit cards. And that’s where the problem starts. Once it’s documented, it’s not private. And taxing authorities love records. To alter a line from President Ronald Reagan: If it moves [electronically], the government taxes it.

There is also the need for convenience, a major selling point of chauffeured transportation. Corporate accounts are full of frequent business travelers who prefer not having to carry cash for every ride tip, especially when using chauffeured vehicles multiple times a day or in a week. Pre-designated gratuities allow companies to pay on behalf of their travelers, sparing them from filing tips on expense reports. Unlike taxicab patrons, chauffeured clients never have to touch their wallets.

That practice, however, compounds the problem of credit card records: Does a supplemental payment ahead of a service rendered still qualify it as a gratuity given in gratitude for service? What if the gratuity is “recommended” or “optional,” requiring consent before or after the ride? Better legal and regulatory minds must figure out the nuances on those questions, while limousine operators should support NLA efforts to get gratuities exempted entirely from overtime wage rules.

As I mentioned, there is a lawful option that can protect limousine companies — and restore tipping as a truly private matter. I spoke recently with two Los Angeles employment and labor law attorneys, John Barber and Joe Lordan, both of the employment practices department in Lewis Brisbois Bisgaard & Smith LLP. The attorneys helped one Los Angeles limousine company restructure its chauffeur compensation in 2008 so that it meets California state labor laws, compensates chauffeurs consistently and fairly, and allows the company to still earn a healthy profit. (See below chart).

Notice that there is no mention of a gratuity or tip. Clients are charged a flat rate plus an administrative fee on bills. Chauffeurs are paid an internal service charge that supplements their base wages — all subject to overtime pay and taxes. The fee and the charge are not linked. The company informs chauffeurs in detail about their compensation, while they must sign a chauffeur compensation plan indicating they have been informed. Chauffeurs also are instructed that they will be subject to disciplinary action if they solicit cash tips.

The Los Angeles operator tells me the company remains competitive, stays completely legal, retains a staff of committed, content chauffeurs, and spends far less money on legal help. It’s cheaper to get good legal advice on compliance instead of funding a costly legal defense against crippling lawsuits or paying a phalanx of accountants to tear through records, receipts and receivables for an audit. That approach also avoids the hassle of trying to calculate individual chauffeur gratuities day-to-day based on varied rates and client contracts, says the operator, adding that a no-tipping policy creates a competitive advantage.

Until the national regulatory climate shifts to a more pro-business stance and the government backs off service sector gratuities, service providers will need to seek creative, legal, and fair alternatives to one of the oldest and easiest transactions in the world. But then, no transaction will ever be as free, simple and private as handing cash from the back seat to the front, for a job well done.

--- Martin Romjue, LCT editor

Below is an example of a chauffeur compensation structure that meets strict California labor laws. No tips from customers on any contract or business transactions are collected. Customers get an all-inclusive price.

Class                             Min Wage               ServChg                               Reg pay rate
A                                      $8/hr.                       $4-6/hr.                                $12-14/hr.   
B                                      $8/hr.                       $7–8/hr.                               $15-16/hr.
C                                      $8/hr.                       $9-10/hr.                             $17-18/hr.

Class A: Chauffeurs: New chauffeurs, with less than two years of experience
Class B: Senior Chauffeurs: More than two years with the company and a record of good customer service.
Class C: VIP Chauffeurs: Exceptional in every way.

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