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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.
Leading Up to the Ruling
Those industry members who have attended the NLA’s annual Days on the Hill know how much work goes into planning and scheduling appointments with the right people. Through the years of walking the halls of Congress, the NLA and its members are a recognized entity in Washington, D.C. This issue has been on the forefront for over two years. Cornerstone Government Affairs, the NLA’s lobbying firm, has been relentless since last year’s Day on the Hill. The 2012 Day on the Hill included a meeting with the DOL to discuss the overtime on tips issue and to make the appeal that if invoiced tips were deemed to be wages versus tips, the limousine industry business model would have been in jeopardy and chauffeurs’ incomes would be hurt.
Richard Kane, owner of International Limousine Service Inc. in Washington, D.C. and co-chair of the NLA Legislative Committee, says, “The meeting at the 2012 Day on the Hill with the DOL was very disappointing. We had to go back to the drawing board to better educate the DOL so that it understood the nature of our business and what our clients are expecting from us. We needed to explain to the DOL that often the paying customer and passenger [are] two different people. Customers want the gratuity on the bill for their convenience. Helping DOL understand the complexities of how transportation companies conduct business allowed them to take a second look and find a solution under the circumstances.”
Following NLA Day on the Hill, the NLA supplemented its legal team with noted labor attorney Peter Moser who accompanied NLA leaders to a follow-up meeting with the DOL. After a series of meetings and providing significant follow-on materials to the DOL, the industry was rewarded with results.
“We made an excellent case to DOL and all of our documentation backed up our position,” NLA President Diane Forgy says. “The industry now has a much clearer path for remaining compliant on this issue.”
Country Club Crux
A key central element involved in the favorable ruling was a 1996 DOL opinion letter related to private clubs. Its premise was that club members could prescribe a set tip amount to automatically be added to all of a member’s club transactions. Despite being added automatically, the tip was a tip because the amount was set by the club member. This opinion letter helped strengthen the NLA’s argument that tips are tips as long as the customer still maintains the right to add, lower, or remove that gratuity. The similarities between the chauffeured transportation industry and country clubs are striking. Clients set up an account and allow their guests to make purchases on that account. For example, if a club member has clients playing golf at his country club, he would not expect his client to pay the gratuity out of pocket while the member is footing the bill for the golf. The same goes for luxury transportation. Often, transportation service is provided for clients or guests and the payer does not want their clients or guests to have to deal with or even think about how the bill is being paid. The invoiced gratuity is a convenience to the client and is set between the transportation company and the paying client when the account was arranged.
What Was at Risk?
Generally, it is understood that if operators are not able to bill tips to customers, then chauffeurs would make less money. Companies would have changed their pricing policies to eliminate the gratuity. Essentially this would increase the exposure to unreliable gratuity situations and many chauffeurs would either make less money or exit the industry.
Gary Buffo, owner of Pure Luxury Limousine in Petaluma, Calif., and first vice president on the NLA Board of Directors, believes that this is a major win for the industry. “Clients have always had the discretion to take out the gratuity,” he says. “Our industry is operating on such small margins as it is. There isn’t enough profit in a job to add to it. What the NLA did was take the lead on resolving a problem and saving the industry a great deal of heartache. This ruling not only helps us but it also helps our chauffeurs.”
How Do You Protect Yourself Moving Forward?
The DOL ruling is only a guideline. Companies will need to do their own legwork to protect themselves. In their letter to the NLA, the DOL cited case law and previous DOL opinions which they used to determine their interpretation. That letter as well as the NLA guidance (see URL links below) should be shared with an attorney who is well versed in the labor law in each operator’s individual state and make sure that the language used on all written and verbal communications with clients meets the requirements of that state. Operators should speak to a qualified attorney who understands how it applies to federal and state wage and hour rules.
It is imperative that billed chauffeured clients are aware that the included tip is completely at their discretion and can be added to, lowered, or removed at any time by them.
“The NLA was the only national organization that took up this issue for the chauffeured transportation industry,” Kane says. “We were passionate about this issue because a negative result would have [hurt] all of our members working under any operating model. We received a good guidance tool for the future from the DOL.”
Related Topics: chauffeur gratuities, Dawson Rutter, Department of Labor, Diane Forgy, DOL issues, employee wages, federal regulations, Gary Buffo, National Limousine Association, Richard Kane, Scott Solombrino
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