Federal Court Rules Restaurant Violated FLSA by Skimming Servers' Tips — What Tipped Workers Need to Know

If you're a server or tipped worker and your employer takes a cut from your tips - whether they call it a "supply fee," a "house charge," or anything else - a federal court just confirmed what the law has long required: your tips are yours.

On March 3, 2026, Chief United States District Judge Reed O'Connor of the Northern District of Texas granted partial summary judgment in favor of the plaintiffs in Dugan v. Reservoir Restaurant Inc., No. 4:23-CV-01219-O. The court found that the restaurant violated the Fair Labor Standards Act in two independent ways: by charging servers a per-shift fee out of their tips to cover business supplies, and by failing to prove it operated a lawful tip pool. The result is that the restaurant owes its former servers the full difference between what they were paid and the federal minimum wage — plus an equal amount in liquidated damages.

What Happened in This Case

The plaintiffs are all former servers at Reservoir Restaurant in the Fort Worth area. Like many restaurant workers, they were paid $2.13 per hour — the reduced "tipped employee" wage that the FLSA allows when an employer takes a "tip credit." The idea behind the tip credit is simple: if a server earns enough in tips to make up the difference to the $7.25 federal minimum wage, the employer can pay less than minimum wage out of pocket.

But the tip credit comes with strings attached. One of the most important is that the tipped employee must be allowed to keep all of their tips. That's where Reservoir Restaurant ran into trouble.

Every shift, the restaurant took a flat $1.00 from each server's tips to cover the cost of silverware, pens, and similar supplies. On top of that, the restaurant required each server to contribute either 3.25% or 2.25% of their total sales into a tip pool. The servers sued, arguing both practices violated the FLSA.

The restaurant conceded that it charged the $1.00 fee. It also conceded that the servers did not retain all of their tips. Its only defense on the tip pool was an affidavit from its authorized agent - but in a prior deposition, that same agent admitted he didn't actually know which employees received the pooled money and that the restaurant kept no records of how tips were distributed. The court found the affidavit conclusory and insufficient, and ruled in the servers' favor on both claims.

Because the restaurant paid only $2.13 per hour and lost its right to the tip credit, it now owes $5.12 per hour for every hour the plaintiffs worked, plus an equal amount in liquidated damages. The restaurant offered no evidence that it acted in good faith, so the court declined to reduce the damages.

If You're a Tipped Worker: What This Means for You

If you work at a restaurant, bar, salon, or any other business where you earn tips and your employer pays you less than the full minimum wage, your employer is using a tip credit. That's legal but only if your employer follows the rules. And one of the biggest rules is that you get to keep your tips.

Here's what's not allowed: your employer cannot dip into your tips to cover the costs of running the business. That means charges for broken glasses, walkouts, register shortages, uniforms, supply fees, or "silverware fees" are illegal when they come out of a tipped employee's earnings. If your employer is doing this, they've likely forfeited the tip credit entirely - meaning they owe you the full minimum wage for every hour you've worked.

Tip pools can be legal, but only when every dollar goes to employees who customarily and regularly receive tips - think bartenders, servers, and similar workers who interact with customers. If your employer is distributing pooled tips to kitchen managers, owners, or back-of-house staff who don't customarily receive tips, the tip pool may be unlawful. And critically, your employer bears the burden of proving the pool is legal. If they can't, they lose the tip credit.

Workers who might have claims include:

• Restaurant servers whose employer deducts fees from their tips for supplies, breakage, or walkouts

• Tipped employees required to contribute to a tip pool where the money goes to non-tipped workers, managers, owners, or where the employer can't account for where the money went

• Any tipped worker paid below minimum wage whose employer isn't following the tip credit rules

• Workers at bars, salons, hotels, or other service businesses with similar practices

FLSA claims can reach back two years — or three years if the violation was willful. Your employer may also be required to pay your attorney's fees, which means you may be able to pursue your claim without out-of-pocket costs. If this sounds like your situation, the most important thing you can do right now is talk to an attorney.

The Legal Landscape and Why This Case Matters

Dugan is a clean and well-reasoned application of established Fifth Circuit precedent on the tip credit, and it offers useful lessons for both case evaluation and litigation strategy in FLSA tip cases.

The court's analysis rests on two independent grounds for liability. First, the $1.00 per-shift fee. The FLSA permits employers to count toward wages the cost of furnishing employees with "board, lodging, or other facilities" but only when those facilities benefit the employee, not the employer. 29 U.S.C. § 203(m)(1); 29 C.F.R. § 531.3(d). Supplies like silverware and pens are classic examples of items that primarily serve the employer's business. The court relied on Ettorre v. Russo's Westheimer, Inc., No. 21-20344 (5th Cir. 2022), where the Fifth Circuit held that a biweekly "linen fee" deducted from servers' paychecks violated the tip credit as a matter of law. The same principle applied here. The defendant effectively conceded the point, acknowledging that if Ettorre controls, partial summary judgment was appropriate.

Second, and more broadly applicable, the court rejected the defendant's tip pool defense. The FLSA's exception allowing tip pooling is narrow: pooled tips must be distributed exclusively among employees in occupations that customarily and regularly receive tips. The employer bears the burden of proving its pool meets this requirement. Montano v. Montrose Restaurant Associates, Inc., 800 F.3d 186, 189 (5th Cir. 2015). Here, the defendant's sole evidence was an affidavit from its authorized agent asserting that all pooled tips went to bartenders, bussers, and hosts. But the court found the affidavit conclusory and, more importantly, contradicted by the agent's own deposition testimony, in which he admitted he did not personally know where the money went and that no records were kept. The court applied the well-settled rule that conclusory affidavits cannot create genuine issues of material fact and granted summary judgment on this basis as well.

The liquidated damages ruling is also noteworthy. Under 29 U.S.C. § 260, an employer can avoid liquidated damages by showing it acted in good faith and had reasonable grounds for believing its conduct was lawful. The burden is on the employer. Here, the defendant offered nothing - no evidence of legal consultation, no compliance efforts, no argument whatsoever. The court accordingly treated the absence of good faith as undisputed. This stands in contrast to Alvarez v. NES Global, where the employer's documented compliance efforts (outside counsel, a DOL questionnaire, a favorable agency determination) successfully defeated liquidated damages. Dugan is a reminder that the good-faith defense requires affirmative proof, and silence is fatal.

Practice implications worth noting:

The case is a strong reminder that the tip credit is an affirmative defense, and the burden of proof rests squarely on the employer. Plaintiffs don't need to disprove the tip credit - they only need to point to gaps in the employer's evidence. This framework, drawn from Celotex and reinforced by the Fifth Circuit in Ettorre, makes tip credit cases particularly well-suited for summary judgment practice on the plaintiff's side.

For attorneys evaluating potential tip cases, Dugan highlights the importance of discovery on the employer's recordkeeping (or lack thereof). A defendant who kept no records of how tips were distributed and whose own agent cannot identify specific recipients is a defendant who cannot carry its burden. Deposition testimony locking down these admissions is critical.

The damages structure here is also worth noting. Because the tip credit was invalidated, the measure of damages is the full tip credit amount — $5.12 per hour ($7.25 minus $2.13) — for every hour worked, doubled as liquidated damages. For a restaurant with multiple servers working full schedules over a two- or three-year limitations period, this adds up quickly.

This blog post is for informational purposes only and does not constitute legal advice. If you have questions about your employer's tip practices or your wage rights, please contact our office for a consultation.