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A November 2012 ruling from the U.S. Department of Labor went a long way in clarifying the difference between imposed charges, which are viewed as wages subject to overtime, and tips, which are discretionary and are not subject to overtime.
The distinction brought a long-sought answer for limousine operators on when a tip is considered mandatory and when it is deemed discretionary.
The message from the DOL was essentially that in order for a tip to be a tip, operators must inform their clients in several ways that the suggested tip is discretionary and not compulsory, and can be raised or lowered or eliminated entirely depending on the level of service provided. It is also critical that chauffeurs are paid their tips in full by their next pay period.
“This is the single most significant victory in the history of the National Limousine Association,” explains Scott Solombrino, owner of Boston-based Dav El Chauffeured Transportation Network and co-chair of the NLA’s Legislative Committee. “Had the Department of Labor not reconsidered our arguments as to why our industry should not be subject to overtime on tips, [at least] 6,000 operators would have been in jeopardy of audits that could have included interest, penalties, and civil lawsuits from current and past employees. The only way we were able to succeed was through the relentless efforts of the NLA’s member contacts to Congress, the efforts of our lobbying firm, Cornerstone Government Affairs, the NLA’s legal team at Keller and Heckman and outside counsel Peter Moser, and the NLA’s Legislative Committee having the political clout to convince the Department of Labor to take the time and carefully review our position.”
Breaking Down the Issue
The issue at hand was whether overtime for chauffeurs should include the invoiced gratuity. The DOL contended that if operators automatically included a tip on a client’s bill, it would be considered a service charge and not a gratuity, and thus subject to overtime. DOL believed there was no discretion in the above described transaction. The key to NLA’s argument was that with most operators there is indeed discretion on tips. The industry provided the DOL with hundreds of invoices, contracts, and examples of where tips were discretionary to the customer.
For transportation companies with corporate accounts, the DOL position would have been a nightmare in not only calculating overtime but also in billing the client. Additionally, if audited, damages could go back three years including penalties and interest. The simple remedy for the industry would have been for companies to no longer include tips on a customer’s bill and cause drivers to fend for themselves on tips. Unfortunately, without lucrative tips, many chauffeurs may have migrated from the luxury-for-hire transportation industry to other jobs.
The Department of Labor sent a letter to the NLA which confirmed that they will not take an inflexible approach that invoiced gratuities can never be tips. Instead, according to the NLA, they have adopted an “it depends” approach. Basically, if the client does not have the right to raise, lower, or eliminate the tip depending on the level of service provided, the charge is viewed to be an imposed fee and not a tip. If customers can — at their own discretion — increase, decrease, or remove the gratuity, then it is a tip. The chauffeur will need to receive the entire tip amount and the client must be made aware of their ability to raise, lower or remove it.