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Legal Alert

New Minnesota Supreme Court Decision Protects Tip Income and Deductions from Employee Earnings

August 22, 2013

Businesses that employ workers who receive tips as part of their income will want to know about a new Minnesota Supreme Court decision that provides employees with new protection of their gratuities. The case dealt with a restaurant operator's practice of requiring employees to use their tips to cover register shortages and pay for customers who leave without paying their tabs or without signing credit card receipts. The employees objected to their tips being used for these reasons and filed a class action lawsuit, complaining that these practices amounted to unauthorized deductions from their wages in violation of Minnesota law. The Supreme Court sided with the employees, placing employers in the hospitality and other industries featuring tipped income on notice that they cannot make deductions from those gratuities without a voluntary, signed written authorization from the employee.

The Decision
The Supreme Court's decision, in Karl v. Uptown Drink, involved a restaurant group with approximately 750 servers, bartenders, and security guards. In response to the employees' claims that the employers were making unlawful deductions from their tips, the employers argued that the employees had not suffered deductions because the employees had decided to cover the cash shortages rather than face disciplinary action for failing to correctly handle cash. At the trial, the jury agreed with the employers, and by the time the employees reached the Supreme Court, two lower courts had let the jury verdict stand. The reasoning was that even after the employees covered the losses with their tips, they were still making more than the minimum wage.

The Supreme Court, however, made two key findings in support of the employees. First, gratuities are wages under the Minnesota law that regulates when, how, and under what circumstances employers may lawfully make deductions to cover indebtedness. Second, the Supreme Court held that it did not matter that the employees still made more than minimum wage after the deductions from their tips. Rather, the tips are part of the employees' wages, and regardless of what they have left after the deductions, the money belongs to the employees unless and until they agree in writing to give some of it back to cover a debt.

Our Recommendations
For all employers, Minnesota tightly regulates and limits deductions from employee pay. The public policy is to protect employees from unfair pay practices that affect what they have earned. By extending the definition of wages to include tips, Karl v. Uptown Drink makes that point. There are legal ways for employers to make deductions, but they require following established rules that require employees to authorize those deductions in writing. Employers should review their wage deduction policies and practices immediately to ensure compliance with this decision and the various state laws that regulate deductions from employee wages and tips.

This case should serve as a reminder to employers that wage and hour litigation has increased and employers may want to audit their policies and practices for compliance prior to litigation. While Karl v. Uptown Drink involved the application of Minnesota law, many states have their own rules governing pay practices, including those involving deductions from employee earnings.

We Can Help.
Maslon's Labor & Employment Group can answer any questions employers have about this important new legal development, including providing suggested language for employer communications, application forms, and conditional job offers.New Minnesota Supreme Court Decision Protects Tip Income and Deductions from Employee Earnings


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