Jimmy John’s franchisee can’t use drivers’ tips for discretionary refunds

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By Joy Waltemath

By Ronald Miller, J.D.

Because a Jimmy John’s franchisee utilized tip money to better its own business position at the expense of its delivery drivers, a federal district court in Indiana denied its motion for summary judgment as to the use of tip credit to meet its minimum wage obligation under the FLSA. Under the employer’s refund policy, it cancelled credit card charges, including tips, to please customers that lodged complaints. Such conduct impermissibly required drivers to subsidize a portion of its refund policy. Similarly, the employer’s use of the tips to support its own refund policy could support a claim for conversion under state law. However, the employee’s claim that the employer made illegal deductions from tips under the Indiana Wage Payment Statute (IWPS) failed (Dayton v. Fox Restaurant Venture, LLC, January 23, 2017, McKinney, L.).

A delivery driver for a Jimmy John’s franchisee brought a collective action to recover unpaid minimum wages. As a delivery driver, the employee was paid on an hourly basis. The employer paid its delivery drivers at less than the minimum wage and took the tip credit against the minimum wage. The employee alleged that the employer unlawfully claimed tip credit because it failed to inform drivers of the tip credit provisions and charged them to cover its own business expenses. According to the employee, the employer’s customer refund policy violated the FLSA by exerting control over delivery drivers’ tips. The employee also alleged individual claims of conversion under state law and for illegally deducted tips and wages under the IWPS.

In response, the employer filed a partial motion to dismiss on three grounds. First, it contended that the employee never actually “received” the credit card tips, which is a prerequisite under the FLSA before money can be considered as a tip. Second, it argued that the employee’s wage claim must fail because tips are not considered “wages” under the IWPS. Finally, it moved to dismiss the employee’s conversion claims because the tips are not “special chattel.”

Tip credit. The employer’s first argument was predicated on whether or not the tip moneys were cancelled prior to the delivery drivers “receiving” the tip. The FLSA permits use of the tip credit if “all tips received by such employee have been retained by the employee.” Here, the employer cited Section531.52 of the Department of Labor regulations, which sets forth the general characteristics of “tips” and states: “Only tips actually received by an employee as money belonging to the employee may be counted in determining whether the person is a ‘tipped employee’ within the meaning of the Act and in applying the provisions of Section 3(m) which govern wage credits for tips.”

Thus, the employer concluded that when a credit card transaction is cancelled pursuant to its refund policy, drivers never actually “received” money and therefore the refund policy did not preclude its entitlement to a tip credit. Here, the employer cited the Sixth Circuit’s decision in Myers v. The Copper Cellar Corporation, to support its position that before an employee can be entitled to attain any funds on account of a charged customer gratuity that debited obligation must be converted into cash.” However, the court concluded that Myers recognized nothing more than an exemption that allows for employers to require tipped employees to contribute to the liquidation of the money received by credit card.

In this instance, the employer was alleged to have use the delivery drivers’ tip money (regardless of how it was paid) for its own discretionary business reason—namely, customer satisfaction. Accordingly, the employer’s refund policy sought to please customers that have lodged a complaint and required drivers to subsidize a portion of this effort.

Employer enriched. An employer must prove that its total deductions from employees’ tip incomes did not enrich it, but merely restored it to the approximate financial posture it would have occupied had it not undertaken to collect credit card tips for its employees. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in Section 3(m): as a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool”). Accordingly, the employer’s argument failed.

State law claims. The employer also sought dismissal of the employee’s claim under the IWPS, which alleged individual claims for illegally deducted tips and wages. Specifically, the employee alleged that the employer appropriated illegal deductions from his tip wages. The IWPS “governs both the frequency and the amount an employer must pay its employee.” Here, the employee asked the court to expand this definition to include tips received by delivery drivers. However, the court observed that the IWPS only deals with wages owed by the employer to the employee, while tips paid to drivers are solely conditioned on the generosity of the customer. Therefore, the employee’s IWPS claim failed as a matter of law.

Conversion. The employee had better luck on his claim for conversion. He argued that the tips were his property and that the employer had no right to convert them without his permission. To state a claim for civil conversion, the misappropriated money must be identified as “special chattel.” The money must be “a determinant sum with which the defendant was entrusted to apply to a certain purpose.” Here, credit card tips were required to pass through the employer before the employee could receive any monetary benefit. Rather than liquidate the money for the employee’s benefit, the employer utilized the tips to support its own refund policy.

Accordingly, the court granted the employer’s partial motion to dismiss with respect to the employee’s claim under the IWPS; but denied the motion with respect to his claims under the FLSA and for civil conversion.

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