Chauffeur Gratuity Guidelines: Discretionary Vs. Mandatory

Posted on December 12, 2012

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The National Limousine Association has prepared an advisory Q&A guideline for limousine operators that further explains a recent letter from the U.S. Department of Labor expalining its policies on chauffeur gratuities.

NEWS: Federal View of Chauffeur Tips Favors Limo Industry Practices

1. Why did the DOL issue a letter to the NLA?

The NLA has been in communication with the DOL for more than a year, advocating for clarification and guidance with respect to the agency’s position concerning invoiced gratuities. Last June, representatives of the NLA including our lobbyists and attorneys sat down with DOL officials in Washington D.C. to explain the industry’s concerns. The DOL’s letter is the direct result of our efforts.

2. Why is the treatment of invoiced gratuities so important?

Many NLA member-companies include a fixed percentage amount labeled “tip” or “gratuity” on customer invoices (typically 15% or 20% of the base fare). This is for the convenience of the customer as well as the benefit of the driver. But plaintiffs’ attorneys have begun to argue that invoiced gratuity percentages do not qualify as “tips” under state and federal law because the customer lacks discretion over whether a tip is to be paid and in what amount (so the argument goes).

If an invoiced gratuity is not a tip, but is instead more in the nature of an imposed service charge, then it means that any monies received and passed through to the driver must be treated as wages. This would result in tax and accounting consequences, and in addition would cause an increase in a non-exempt driver’s overtime rate of pay.

The potential financial consequences for operators are significant.

3. What was the DOL’s position prior to its issuance of the NLA letter?

The DOL was increasingly taking a dim view of invoiced gratuities. The DOL appeared poised to announce an official agency position that invoiced gratuities could never meet the definition of a “tip” under federal wage and hour regulations. This position was based on a misperception that, because bills are often paid by corporate clients who pre-negotiate a tip percentage, the actual recipient of services -- the rider, whom the DOL viewed as the “customer” – lacked sufficient discretion over the tip.

Such an inflexible approach would have resulted in increased exposure through DOL audits and would have bolstered the arguments of plaintiffs’ attorneys, resulting in increased litigation across the country.

Fortunately, the NLA was able to demonstrate to the DOL that in this industry the invoiced client can indeed be properly considered the “customer” for tip payment purposes and that, regardless, the rider does have discretion over the ultimate tip payment. In short, we were able to demonstrate that an invoiced gratuity percentage can indeed be a “tip” and not an “imposed charge.”

4. What exactly does the DOL’s letter say?

The DOL’s letter for the first time confirms that the DOL will not take the inflexible approach that invoiced gratuities can never be tips. Instead, the DOL has adopted an “it depends" approach, giving operators guidance as to the factors that will indicate whether an invoiced gratuity constitutes a tip versus an imposed charge.

Specifically, the letter begins by reciting the federal regulations confirming that the hallmark of a tip is customer discretion:

Whether a tip is to be given, and its amount, are matters determined solely by the customer . . . 29 CFR 531.52

A mandatory service charge or “imposed gratuity” is not a tip. See 29 CFR § 531.55 (“a compulsory service charge . . . imposed on a customer by an employer’s establishment, is not a tip . . .”); see also DOL Opinion Letter FLSA 2005-31 (a chauffeured transportation company’s “imposed gratuity” of 15% was not a tip).

Members should bear in mind the above critical distinction between “discretionary” and “compulsory.”

Most importantly, the DOL letter goes on to affirm the applicability of a very favorable 1996 Opinion Letter which establishes that the mere addition of a percentage tip charge on a customer’s bill does not necessarily mean that the charge is imposed and mandatory. What matters is whether the customer has discretion over whether to pay the tip and in what amount. The factors that can help establish such discretion include:

  • Whether the customer and/or rider are expressly informed that the payment is optional and may be increased or decreased at their discretion;
  • Whether the customer has discretion to pay whatever amount the customer deems appropriate, if any, based on the quality of service provided; and
  • Whether customers do in fact exercise discretion, sometimes paying different amounts than appear on the invoice.

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