Chauffeur Gratuity Guidelines: Discretionary Vs. Mandatory

Posted on December 12, 2012

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.

5. What should I do now to protect my business?

The following steps seem prudent in light of the DOL’s letter:

  • “Recommended Tip Only” - Consistently refer to the invoiced tip percentage as a recommended tip or gratuity only; avoid any implication that it is a negotiated or fixed charge.
  • Billing Disclaimer - Include a clear explanation on invoices confirming the customer’s voluntariness and discretion with regard to tips. Language should confirm that the recommended tip percentage has been added for the customer’s convenience, and should track the regulatory text by stating, for example, that “Whether a tip is to be given, and its amount, are matters determined solely by the customer.”
  • Customer Contracts - Contracts should refer to the paying entity as the “customer” (as opposed to the rider who is the “recipient of services”) and should refer to the tip percentage as a “recommended” amount only. Include the same disclaimer language confirming voluntariness and discretion. Avoid any suggestion that the tip percentage has been “negotiated” as the amount must at all times remain at the customer’s discretion.
  • Other Documentation - Be consistent. Include the same disclaimer language and terminology across all customer paperwork and communications. E.g., reservation sheets, trip tickets, internal emails, etc.
  • Mean What You Say – Documentation can be helpful, but it must be consistent with the reality; what matters is whether the customer truly has full discretion regarding tips.
  • Internal Communication - Consider issuing a written notice to drivers confirming that the tips they receive are always at the discretion of the customer. This will help avoid misunderstandings and will also add to the evidence of discretion.
  • Training – Consider training supervisory personnel on this important issue. Without an appropriate understanding, internal documentation and communications may end up appearing inconsistent with customer discretion (e.g., payroll records or hiring paperwork might mislead drivers into believing that they are entitled to a fixed percentage, almost like a commission).
  • Track Variations in Payment - Keep evidence of instances where a customer pays less or more than the recommended tip amount. It is critical to establish these variations in payment as it shows actual exercise of discretion.
  • Deal With Subsequent Adjustments – Often drivers are paid before the customer actually pays the invoice. If drivers are paid a fixed percentage regardless of what the customer eventually pays as the final tip amount, it might appear inconsistent with the notion of tips. Consider how to make appropriate after-the-fact clawbacks or adjustments.

6. But I don’t classify my drivers as non-exempt employees; does this issue even apply to me?

The overtime-rate concern (i.e., that a re-characterization of tips as wages will result in a higher overtime rate for drivers) only applies to drivers who are classified as non-exempt employees. However, given the increased scrutiny over wage and hour issues in this industry – particularly over driver classification issues such as “exempt vs. non-exempt” and “independent contractor vs. employee” -- the NLA strongly urges members who choose to classify their drivers as exempt or as independent operators to consult labor counsel in order to ensure that such classification is correct.

7. Who can I contact if I have questions?

If you have any questions, please contact a labor and employment attorney well-versed in wage and hour laws and the unique issues presented by the chauffeured transportation industry. You may also contact the NLA at (856) 596-3344. The NLA cannot provide legal advice but will assist with general questions and referrals..

Related Topics: chauffeur gratuities, chauffeur tipping, DOL issues. Department of Labor, National Limousine Association, wage lawsuits

Comments ( 3 )
  • Ron Tucker

     | about 5 years ago

    Last line should say: How much of a tip did they receive?

  • See all comments
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