In Dugan v. Reservoir Restaurant Inc., a $1 deduction just cost a restaurant its entire tip credit. A federal court handed the plaintiffs (a class of servers) a summary judgment win because their employer deducted $1 per shift from their tips to cover items like silverware, pens, and similar supplies.
Here's the setup. The restaurant paid its servers the tipped minimum wage of $2.13 per hour, relying on the FLSA's tip credit to bridge the gap to the $7.25 federal minimum wage. But every shift, the restaurant also took $1 directly from the servers' tips to reimburse the business for operating supplies.
That's where things went sideways.
The FLSA allows employers to count certain "facilities" toward wages—think meals or lodging. But the law draws a bright line: employers cannot shift the ordinary costs of running the business onto employees.
Silverware? Pens? General restaurant supplies?
Those are the employer's costs.
The court had little trouble concluding that forcing servers to cover those expenses violated the FLSA's tip credit rules. And when an employer violates those rules, the consequence is severe: the tip credit disappears entirely.
That means the restaurant must now pay the servers the full minimum wage for every hour worked, not the tipped rate. Because the servers were paid only $2.13 per hour, the employer now owes $5.12 per hour in back wages—plus an equal amount in liquidated damages.
All because of a $1 deduction.
The lesson for employers of tipped workers is straightforward. If you want to take advantage of the tip credit, tipped employees must keep their tips—period, with very limited exceptions. Even small deductions tied to ordinary operating costs can blow up the entire arrangement.
Saving a dollar per shift feels awfully petty. It also isn't worth sacrificing the entire tip credit over.