Your Employees Want the Service Charge Reclassified as a Tip. Doing It Creates a Wage and Hour Problem.

The short answer

Final Treasury and Internal Revenue Service regulations implementing the deduction for tip income published April 13, 2026 and took effect June 12, 2026. They define which payments qualify, and they exclude automatic gratuities and service charges. Hospitality employers across South Florida are being asked by staff to reclassify service charges as tips so the money qualifies. Doing that does not make it a tip for tax purposes, and it can create a wage and hour problem that did not exist before.

What the regulations do

The final regulations establish a list of occupations that customarily and regularly received tips on or before December 31, 2024, and require that a qualified tip be voluntary, determined by the payor, and not subject to negotiation. They cover card and electronic tips, address tip pools and the participation of managers and supervisors, and exclude tips arising from specified service businesses. The deduction is capped at twenty-five thousand dollars with a phase-out based on income.

Most importantly for an operator: automatic gratuities and service charges are excluded.

Our take: the tax question and the wage question are different questions with different answers

The distinction the regulations draw is the same one wage and hour law has drawn for decades, and that is not a coincidence.

A tip is money the customer decides to give, in an amount the customer chooses. A service charge is money the house imposes. Under wage and hour law, that difference determines whether the money belongs to the employee, whether it can be counted toward the minimum wage through a tip credit, who may share in it, and how overtime is calculated. Service charges are generally the employer's revenue, which the employer may distribute, and amounts distributed are wages that must be included in the regular rate for overtime.

So an employer that responds to staff pressure by relabeling a mandatory service charge as a tip is making three changes at once, only one of which was intended:

●      It does not achieve the tax result. The regulations look at the substance. A charge the house imposes is not voluntary and not payor-determined, whatever it is called on the check.

●      It may create a tip credit problem. If the employer takes a tip credit, the composition of the tip pool and who participates in it are regulated. Adding house-imposed money to that pool, or adding participants, can invalidate the credit and expose the employer to the difference for every hour worked.

●      It may create an overtime problem. Service charge distributions are wages that belong in the regular rate. Recharacterizing them as tips removes them from that calculation, and if the recharacterization is wrong, the overtime was underpaid.

There is a further trap worth naming. The Department of Labor's public fact sheet on tipped employees still recites the twenty percent and thirty continuous minute limits from a rule that was vacated in litigation, with no mention of the vacatur. An employer relying on that fact sheet for tip credit compliance is relying on a document that does not reflect current law.

We should be clear about scope. This is a tax development, not a wage and hour rulemaking, and we found no Department of Labor tip credit rulemaking in the past year. The reason it belongs on an employment page is that the tax change is driving employers to make wage and hour decisions.

What it means practically

If staff have asked about reclassifying service charges, the answer is that the label does not control and the change carries risk in a different body of law. If you want employees to capture the deduction, the route is to make the payment a genuine tip, which means making it voluntary and customer-determined, and that is a pricing and operations decision, not a payroll relabeling.

When to call a lawyer

Before changing how any charge appears on a guest check or in payroll, and before revising a tip pool.

Why this is not a do-it-yourself problem

Here the client is being asked by their own employees to make a change that sounds like payroll administration and is actually a decision under two statutes at once. Whether a payment is a tip or a service charge determines who owns it, whether a tip credit survives, and how overtime is calculated, and the label on the check does not control any of it. This is also an area where the government's own published guidance is out of date, which means the compliance answer cannot be looked up.

Talk to us

This firm defends employers in wage and hour litigation, including Fair Labor Standards Act collective actions, and advises on the pay practices that generate them. Before you change how a charge appears on a guest check or in payroll, discuss your matter with our attorneys.

Sources

●      Internal Revenue Bulletin 2026-18, containing T.D. 10044

●      Department of Labor Fact Sheet 15A, tipped employees under the FLSA

Disclaimer

This post discusses publicly reported legal developments for general informational purposes. It is not legal advice, it does not create an attorney client relationship, and it does not reflect the firm's position in any pending matter. Outcomes depend on the specific facts and the governing law of the relevant jurisdiction.

The Federal Non-Compete Ban Is Dead. The Agency That Wrote It Is Still Coming After Non-Competes.

The short answer

The Federal Trade Commission abandoned its defense of the 2024 rule that would have banned nearly all non-competes nationwide, and formally removed the rule from the Code of Federal Regulations effective February 12, 2026. It then began enforcing against non-competes case by case, including consent orders reaching more than eighteen thousand employees at a single company. The existential threat to restrictive covenant programs is gone. A narrower and better-aimed threat replaced it.

What happened, in order

September 4, 2025. The Commission issued a request for information on employer non-compete agreements, with comments due November 3.

September 5, 2025. The Commission voted three to one to dismiss its appeals and accede to vacatur of the rule. The vacatur rested on a holding that the Commission had exceeded its statutory authority.

September 10, 2025. The Chairman issued warning letters to several large healthcare employers and staffing firms, urging review of non-competes covering nurses and physicians.

November 2025. A final consent order against a pet cremation company required it to stop enforcing non-competes covering roughly eighteen hundred employees.

February 12, 2026. The Federal Register document removing the rule from the Code of Federal Regulations published and took effect.

February and June 2026. Consent orders against a building services company over no-hire agreements, and against a pest control company, the latter ending non-compete enforcement against more than eighteen thousand employees.

Our take: the exposure moved from everyone to a specific kind of employer

The instinct after a rule is vacated is to conclude the subject is closed. That instinct is wrong here, and the difference between the rule and what replaced it is the whole point.

The rule was categorical. It would have voided nearly every non-compete for nearly every worker. Its defeat means a Florida employer can build a restrictive covenant program without hedging against a federal ban, including under Florida's own statutory framework and the newer garden leave provisions.

The enforcement is targeted. Look at what the Commission actually charged: blanket covenants applied to rank and file service workers across an entire national workforce, and no-hire agreements between companies. Those are the fact patterns, and they are common in exactly the industries South Florida is full of, including healthcare staffing, building services, pest control and hospitality.

Two points that clients consistently get wrong.

A covenant can be enforceable under Florida law and still be a federal problem. Florida's statute asks whether there is a legitimate business interest and whether the restriction is reasonable in time and area. The Commission's theory is a competition theory under its own statute. Passing the first test does not answer the second.

No-hire and no-poach agreements between companies are within the scope. Many employers do not think of an agreement with a vendor or a competitor not to hire each other's people as a non-compete at all. The consent orders treat that conduct as within reach.

The practical direction is narrow tailoring and role differentiation. A covenant that binds an executive with access to strategy and customer relationships is defensible. The same covenant applied to every hourly employee in a national workforce is the thing the Commission has been buying consent orders about.

We would be candid that this enforcement posture depends on the composition of the Commission and could change. That is an argument for tailoring covenants to what you actually need to protect, which is good practice regardless of who is enforcing.

When to call a lawyer

Before rolling out a covenant across a workforce, before entering any agreement with another company about hiring, and on receipt of any inquiry from the Commission.

Why this is not a do-it-yourself problem

A restrictive covenant program now has to satisfy two different bodies of law with different tests, and passing one does not answer the other. Tailoring covenants by role, drafting them to a legitimate business interest, and keeping employer-to-employer hiring agreements out of the enforcement theory are drafting judgments that require knowing both frameworks. The employers named in the consent orders were not outliers; they were using standard forms across standard workforces.

Talk to us

HDD Law Firm drafts and litigates non-compete and other restrictive covenant agreements, and represents both employers and executives in those disputes. If you are rolling out covenants across a workforce, or you are an executive bound by one, discuss your matter with our attorneys.

Sources

●      FTC, Commission files to accede to vacatur of the Non-Compete Clause Rule (September 5, 2025)

●      Federal Register, removal of the Non-Compete Rule from the CFR (February 12, 2026)

●      FTC non-compete enforcement page

●      FTC, final order prohibiting non-compete enforcement, Gateway Services (November 2025)

Disclaimer

This post discusses publicly reported legal developments for general informational purposes. It is not legal advice, it does not create an attorney client relationship, and it does not reflect the firm's position in any pending matter. Outcomes depend on the specific facts and the governing law of the relevant jurisdiction.

Your Arbitration Agreement May Not Cover Your Drivers, Even If They Never Leave Florida

The short answer

On May 28, 2026, a unanimous Supreme Court held that a worker who moves goods only within one state can still fall within the Federal Arbitration Act's transportation worker exemption, and therefore cannot be compelled to arbitrate under that statute. For any Florida employer whose workers move goods on a final or intermediate leg of an interstate journey, this is the most consequential arbitration decision in years.

What the Court held

In Flowers Foods, Inc. v. Brock, No. 24-935, Justice Gorsuch wrote for a unanimous Court that a worker who transports goods on an intrastate leg of an interstate journey can qualify for the exemption without crossing state lines or interacting with vehicles that do. What matters is whether the worker plays a direct and necessary role in moving goods across state lines, not whether the worker personally crosses a border.

Our take: check the goods, not the job title

The exemption has always been read to cover interstate transportation workers. What employers assumed, reasonably, was that a driver who never left the state was not one. That assumption is now wrong.

The workers this reaches are more numerous than the phrase "transportation worker" suggests: route drivers and distributors, last-mile delivery, port and airport drayage, warehouse-to-store transfer, and bakery and beverage distributors. In South Florida, where goods arrive by ship and air and are then moved locally, that is a large category.

The consequence is not merely that one arbitration agreement fails. If the exemption applies, the Federal Arbitration Act does not supply the enforcement mechanism at all, which means the agreement and any class action waiver in it may be unenforceable under federal law, and a collective action the employer thought was foreclosed is live.

The mitigation is available and most agreements do not have it. The Federal Arbitration Act is not the only arbitration statute. The Florida Arbitration Code is an independent basis for enforcement, and the exemption is a feature of the federal statute rather than a general prohibition on arbitrating these disputes. An agreement that expressly invokes Florida law as an alternative basis, with a severability clause, is in a materially better position than one that recites only the federal act. Many form agreements recite only the federal act.

We should be candid that this is not a complete answer. Whether state arbitration law can be used to enforce an agreement the federal statute exempts is itself contested, and the argument has not been definitively resolved. But an agreement that preserves the argument is better than one that does not.

What it means practically

Employers should identify which categories of workers plausibly move goods in interstate commerce, review the arbitration agreements covering them, and add an express state-law fallback with severability. This is a drafting fix, and it is cheap compared to defending a collective action that the agreement was supposed to prevent.

For an executive or a worker, the exemption is narrower than it sounds. It turns on the goods and the role, not on the label in the employment agreement.

When to call a lawyer

Before your next arbitration agreement is rolled out, and immediately on being served with a collective action by workers you assumed were bound to arbitrate.

Sources

●      Flowers Foods, Inc. v. Brock, No. 24-935 (U.S. May 28, 2026), Supreme Court slip opinion

Disclaimer

This post discusses publicly reported legal developments for general informational purposes. It is not legal advice, it does not create an attorney client relationship, and it does not reflect the firm's position in any pending matter. Outcomes depend on the specific facts and the governing law of the relevant jurisdiction.