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On March 24, 2026, the Western District of Texas handed down a $21 million judgment against defendant Perry’s Restaurants. The case, Paschal et al. v. Perry’s Restaurants Ltd. et al, serves as a stark reminder that missteps in tip pool compliance can strip employers of the tip credit, double damages exposure, and impose liability that reaches individual owners.
Overview of FLSA Tipping Rules and the Tip Credit
Under the Fair Labor Standards Act (“FLSA”), employers are permitted to pay tipped workers as little as $2.13 per hour—far below the federal minimum wage of $7.25—on the assumption that tips will make up the difference. This is known as the “tip credit.” In exchange for these cost savings, employers must follow certain strict rules governing the treatment of employee tips. Certain of these rules govern tip pool arrangements.
Generally speaking, a tip pool is a system where a percentage of tips received by employees are collected and redistributed among a group of workers. Some employers require participation in tip pools while others make it optional.
Under the FLSA, if an employer takes a tip credit, then a mandatory tip pool can only include employees who “customarily and regularly receive tips”. Determining whether an employee “customarily and regularly receives tips” requires examining the extent to which the employee engages with customers. An employer that requires tipped employees—who are already earning well below minimum wage in base pay—to share their tips with non-tipped workers loses its right to the tip credit altogether. At that point, the employer becomes liable for the full minimum wage for every employee.
Case Background
On January 11, 2022, Plaintiffs Candice Paschal (“Paschal”) and Pedro Zarazua, Jr. (“Zarazua”) filed a collective action lawsuit in the Western District of Texas Austin Division against Perry’s Restaurants, Ltd. and Christopher V. Perry (collectively, “Perry’s”). Christopher Perry is the sole owner, CEO, and President of Perry’s Restaurants, Ltd. Paschal and Zarazua alleged Perry’s violated the FLSA by maintaining a mandatory tip pool that required tip-eligible servers to share tips with employees who were not tip-eligible. Perry’s operates restaurants at thirteen locations across Texas, all of which implemented the same tip pool policy: servers were required to remit 4.5% of their total sales each week to a mandatory pool. The pool was then distributed to other staff, many of whom worked shifts before the restaurant opened to the public. During those shifts, employees had little to no customer interaction.
On November 10, 2025, following a bench trial, the Western District of Texas Austin Division issued its Findings of Fact and Conclusions of Law. Therein, the Court held that Perry’s violated the FLSA by distributing mandatory tip pool funds to employees who did not “customarily and regularly receive tips.” Because Perry’s failed to demonstrate these employees were tip-eligible, the Court ruled that including them in the mandatory tip pool rendered the entire pool unlawful—and stripped Perry’s of its right to claim the tip credit. The Court further found that Perry’s violations were willful; extending the statute of limitations from two to three years. The Court based its “willfulness” finding largely on Perry’s actual knowledge of FLSA requirements. The Court also determined that Perry’s failed to demonstrate good faith, noting that Perry’s did not seek legal advice before including off-hour employees in the tip pool and made no changes to its tip pool practices despite years of related litigation.
The Court’s Final Judgment
On March 24, 2026, Judge Robert Pitman entered a $21 million judgment in favor of 707 opt-in plaintiffs against Perry’s Restaurants Ltd. and Christopher V. Perry, jointly and severally. The Court awarded $3,444,129.48 in unpaid minimum wages, plus an equal amount in liquidated damages; $7,066,889.98 in misappropriated tips, plus an equal amount in liquidated damages; and $263,475.90 for the employer’s share of FICA tax—a total judgment of over $21 million. The Court also ordered Plaintiffs to file a motion for attorneys’ fees, which prevailing FLSA plaintiffs are entitled to recover—in some amount—by statute.
The judgment highlights critical features of FLSA enforcement actions. First, when an employer violates the statute’s tipping provisions, liquidated damages effectively double the recovery. Second, corporate owners and officers (like Mr. Perry) can potentially be found personally liable for FLSA violations—including tip pool violations. Courts have repeatedly interpreted the FLSA’s definition of “employer” broadly to allow individual liability. Factors courts consider when making this determination typically include whether the person: (i) had the power to hire and fire; (ii) supervised or controlled work schedules or conditions of employment; (iii) determined the rate and methods of payment; or (iv) maintained operational control over the business. No single factor is determinative and, ultimately, officers who exercise significant control may be at risk of personal FLSA liability.
What Employers Need to Know
The Perry’s judgment offers several takeaways for employers that utilize tip pools or tip credits under the FLSA.
First, tip pool arrangements should be carefully scrutinized before and during implementation. The central issue in Perry’s was that Perry’s mandatory tip pool included employees who worked shifts with little to no customer interaction. Employers should regularly review the composition of any tip pool to confirm that every participant “customarily and regularly receives tips” based on customer engagement. Failure to do so may jeopardize the employer’s right to claim the tip credit entirely.
Second, employers should understand conditions attached to the tip credit. The tip credit allows employers to pay tipped employees as little as $2.13 per hour, but this benefit is contingent upon compliance with FLSA’s tipping provisions. If ineligible employees inadvertently are included in a mandatory tip pool, the employer risks forfeiting the tip credit altogether and becoming liable for the full federal minimum wage for every employee.
Finally, employers should seek legal counsel before implementing or modifying tip pool arrangements. Given the complexity of the FLSA’s tipping rules and the severity of the penalties for noncompliance, employers should consult with counsel before establishing or altering any tip-sharing or tip-pooling policy. Employers seeking more information may contact Sheppard’s Labor and Employment team for additional insights and strategies.
Disclaimer: This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship. Please contact your Sheppard attorney contact for additional information.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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