Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

As widely reported (including here and here), a bill will be introduced today in the New York Assembly to raise the state’s minimum wage from $7.25 to $8.50, beginning next year. Specifics of the proposed increase are not yet available. This push comes as no surprise to students of the state’s minimum wage, which has historically outpaced the federal minimum but has remained flat with federal law at $7.25 since the national minimum wage reached that level in July, 2009.

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New York’s landmark Wage Theft Prevention Act, which was recently modified and adopted in California, requires employers to issue to all New York employees an annual notice complying with the requirements of New York Labor Law § 195 (as amended by the Act). While the statute was effective in April 2011, the annual notice requirement, which is in addition to the statute’s mandatory new hire notice and other requirements, is applicable for the first time in 2012. The notice must be provided prior to February 1, 2012, and the notice obligations are summarized here. Notice can be provided electronically as long as certain requirements are met.

While there is no mandatory form of notice, the New York State Department of Labor has provided sample forms. In addition to English, the NYSDOL has provided these forms in other languages, consistent with the requirement that the notice be provided in English and also in the employee’s “primary language.” 

Large employers, and employers with a large virtual or remote segment in their workforce, are already wrestling with how to assemble a compliant notice program under the Act.  The absence of clear guidance regarding certain provisions and requirements makes compliance more difficult. However, compliance is paramount, as failure to provide the annual notice constitutes a violation of Section 198(1-b), which, under the Wage Theft Act, can carry with it a penalty of “fifty dollars for each work week that the violations occurred or continue to occur”, among other potential remedies. 

Jackson Lewis attorneys are available to assist employers with compliance efforts, including New York Labor Law compliance experts Richard Greenberg and Craig Roberts.

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Pursuant to New York State Department of Labor guidance and New York case law, incentive compensation is not considered “wages” unless it is “earned.” See generally Truelove v. Northeast Capital & Advisory, Inc., 95 N.Y.2d 220, 225 (2000). Accordingly, disputes over an employee’s entitlement to incentive compensation in New York often turn on whether a particular bonus, or other type of incentive payment has been earned, and thus become “wages” which may not be subject to subsequent forfeiture or nonpayment. Recently, the Appellate Division’s First Department, which sits in review of the trial courts in Manhattan, rejected an executive’s claim under Article 6 of the New York Labor Law for such a payment. Cuervo v Opera Solutions LLC, 2011 NY Slip Op 6197 (1st Dep't Aug. 11, 2011).

In Cuervo, a majority of the appellate panel ruled that because the executive level employee’s offer letter had reserved to the employer the right to modify the commission schedule, the plaintiff had no claim to further commission payments based on the employer’s unilateral modification (provided, of course, that minimum wage and overtime requirements were met). The dissent focused on whether the plaintiff was an executive or administrative employee who would be categorically exempt from the payment-of-wages protections of Article 6 of the Labor Law (and whose entitlement to any further compensation would thus be limited to his remedies under contract law).

As litigation over incentive payments continues to expand, to ensure compliance with the law and avoid costly disputes over incentive compensation. all employers should regularly review their incentive compensation programs and agreements to ensure they clearly state when any such potential incentive compensation is ”earned.”

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New York employers have struggled with the New York State Department of Labor’s view that all gratuities must be distributed on a daily basis, regardless of whether they are collected in cash or via credit card and regardless of employee preference.  Late last week, without notice, the NYSDOL modified this position.  Effective immediately, New York employers may include credit card tips on an employee’s next paycheck, with or without consent of the employee, as long as the tips are provided by the next regular payday. In so stating, the Department also reaffirmed that an employer may subtract a pro-rated share of any fees imposed by the credit card company.  Further, upon request of an employee, a New York employer may even include cash tips in the paycheck as long as the gratuities are specifically noted on the paystub, and the employer maintains the mandated records of gratuities received by employees.   The full text of the NYSDOL’s posting is below.   

Employers with any questions regarding interpretation of, or compliance with, this provision should consult with counsel, due to the significant potential damages arising out of wage and hour violations.

Payment of Tips Received By Credit Card & Cash

When tips are given by customers via credit card, the employer must pay the employee the amount due no later than the next regularly scheduled pay day. The employer may subtract from the employee's tips the pro-rated share of the charge levied by the credit card company. An employer remitting tips to an employee must include a breakdown between the tips and the wages on the employee's wage statement, which must meet all other requirements for wage statements. This position reflects a change in DOL policy as set forth in DOL opinion RO-08-0032 related to this issue. That opinion is hereby rescinded.

When customers pay tips in cash, employers may, as a service to their employees, allow employees to leave cash tips earned over the course of a pay period with the employer. The employer must issue a tip payment for the total amount of those cash tips along with any wage payment for the same pay period. A request by an employee for the employer to provide this service must be voluntary, and the agreement cannot be a pre-condition of employment or a condition of continued employment. The employer must still keep a daily record of the tips earned by each employee provided this service, and have those records available for inspection by the employee and/or the Department. The wage statement provided with the tip payment must contain a breakdown of tips and wages, and meet all other requirements for wage statements.

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Expanded Jackson Lewis coverage of New York’s Wage Theft Prevention Act is now available here. 

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The New York State Department of Labor has provided model forms to comply with the Wage Theft Prevention Act.  Also included are instructions for completing the forms and  Guidelines for complying with the Act’s revisions to N.Y. Labor Law § 195.  The forms are not mandatory but any form utilized must incorporate the mandatory elements.  The forms will be provided in Chinese, Haitian-Creole, Korean, Polish, Russian, and Spanish, though it does not appear that all languages are available yet.  If the DOL has not provided a foreign language translation, the employer may use English only. Notably, the Guidelines do not require the form for exempt employees to identify the exemption under which the employee is classified.  The Act applies to all New York employers. 

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Despite the recent revised Hospitality Wage Order, the culmination of a multi-year process seeking to bring clarity to the at-times murky wage/hour regulations governing New York restaurants, litigation over these issues continues unabated. This phenomenon was ably remarked upon in a recent New York Times editorial by Zagat’s guide founder Nina Zagat. Now, the most recent installment in this lengthy chapter concerns popular midtown-Manhattan restaurants Alto and Convivio, which have closed recently amidst speculation that the closures are related to a wage lawsuit. Counsel for the restaurants has denied this allegation.

Last August, three individuals who worked as an assistant, food runner and busser, respectively, filed a putative collective and class action against the corporate under the FLSA and New York Labor Law, alleging minimum wage violations under the FLSA, misappropriation of gratuities, failure to pay New York’s “spread of hours” premium and failure to pay the required uniform allowance. In December, District Judge Berman granted Plaintiffs’ request for conditional certification under the FLSA, and permitted the circulation of a notice of pendency inviting “similarly situated” employees to join the lawsuit. Reyes v. Altamarea Group, LLC, 2010 U.S. Dist. LEXIS 139132 (S.D.N.Y. Dec. 22, 2010). Since that time, counsel for the named Plaintiffs has filed approximately a dozen consents to join the case against Altamarea pursuant to 29 U.S.C. § 216(b). 

While the actual basis for the closure decision remains confidential and a mystery, it is certainly no secret that class action wage-and-hour litigation continues to be a, if not the, most prominent legal threat to industry employers in New York state, and there is no substitute for reviewing practices with counsel before they become the subject of litigation.

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While the New York State Department of Labor’s new Hospitality Industry Wage Order clarified many wage and hour issues for industry employers, the appropriateness of tip pool participation of certain categories of employee continues to be an area of uncertainty. On January 13, 2011, Federal District Judge Laura Taylor Swain granted summary judgment to Manhattan restaurant Brasserie Ruhlmann (“Restaurant”), on Plaintiffs’ claims that the restaurant violated the FLSA and N.Y. Labor Law (NYLL) by permitting captains and banquet coordinators to participate in the Restaurant’s tip pool. Garcia v. La Revise Assocs. LLC, 2011 U.S. Dist. LEXIS 3325 (S.D.N.Y. Jan. 13, 2011).

The plaintiffs in Garcia were three servers and one busboy at the restaurant, who participated in its tip pool consisting of servers, runners, busboys, captains, bartenders, and the Restaurant's banquet coordinator. The Plaintiffs alleged that tip pool participation of captains, bartenders and the banquet coordinator violated the FLSA and NYLL because these employees were “employers” (or agents of the employer) within the meaning of the law, or in the alternative were not employees who "customarily and regularly receive tips.” 

Judge Swain disagreed, observing that captains played “a substantial role in customers' dining experience at the Restaurant by assisting servers, answering questions, and overseeing food service…” Judge Swain also found that the captains did not set the terms and conditions of employment for the front-of-the-house employees who provided the food service. Id. at * 22-23. This is a vital recognition of the role of non-managerial captains in food service. In finding the banquet coordinator an employee who customarily and regularly receives tips, the Court noted that the banquet coordinator “dealt directly with private party hosts in advance of events for planning purposes and worked directly with the hosts and their guests during the events to ensure their satisfaction.” Id. at * 20.

This decision represents the first substantive judicial direction on the lawful composition of the tip pool in a New York fine dining establishment in over a decade. See Ayres v. 127 Restaurant Corp., 12 F. Supp. 2d 305 (S.D.N.Y. 1998). While industry employers should be gratified by this favorable ruling recognizing the role of captains and banquet coordinators in providing customer services, they should continue to analyze the composition of their tip pool based on the realities of their workplace, not the job titles assigned to the various service positions.  For example, in order to participate in such a pool, captains must not be managerial employees. With respect to banquet coordinators, each business must conduct a thorough analysis of the banquet coordinator’s service and non-service duties in order to analyze whether including the position in any pool is a viable option.

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As reported here and here, the New York Department of Labor will have a full plate in 2011 enforcing both the new Hospitality Industry Wage Order (applicable to industry employers) and the Wage Theft Prevention Act (applicable to all employers in New York). The Hospitality Wage Order modifies many of the rules governing industry employers, and the dangers of non-compliance are magnified by the Wage Theft Act, which increases the penalties for all violations of Labor Law Article 6. Under the Act, liquidated damages for such violations increase from 25% to 100%. The Act also expands the wage notification requirements of New York Labor Law § 195.

In addition to liability for unpaid wages, penalties and attorneys’ fees, New York employers also could be faced with inclusion on the NYSDOL’s “Non-Compliant Labor Standards Employer Search” Internet database. See http://lsempviolations.labor.ny.gov/LSEmpViolations/index.faces. Violators are listed on this web site for six years.

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As previously noted here, New York Governor David Paterson has signed into law the Wage Theft Prevention Act.  The new law amends the New York Labor Law to create new recordkeeping obligations for employers, as well as significantly greater damages for violations of the Labor Law than previously were available.  

An expanded analysis of the Act is now available on www.JacksonLewis.com by clicking here.

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Yesterday, the New York State Department of Labor issued the final version of the new Hospitality Industry Wage Order, as previously discussed here and here. The final Wage Order, substantially revises various long-standing New York industry rules, including, the tip credit amount, permissibility of tip pooling, and spread of hours calculations. The Final Wage Order includes only a few changes from the NYSDOL’s Proposed Order, which was issued for notice and comment in October:

• Defining a “service employee” as an employee “who is primarily engaged in providing direct personal service to guests, patrons or customers and who regularly receives tips from such guests, patrons or customers.”; and

• Revising language industry employers are required to include in bills, contracts or other writings to customers in order to convey the precise nature of any mandatory gratuity or service charge. These regulations are an effort to provide clarity to service charge requirements in the wake of Samiento v World Yacht, 10 NY3d 70 (2008).

We will provide further detailed analysis of the new Wage Order – as well as information about upcoming Jackson Lewis seminars on its implications – on www.JacksonLewis.com shortly.

UPDATE:  On December 16, 2010, the Department announced that the final Wage Order issued on December 15, 2010 had been disseminated in error.  The Department also announced an “implementation period,” under which employers have until March 1, 2011 to reflect the changes required by the new Wage Order in the payroll systems.  However, employers availing themselves of this implementation period must, as of the first pay period after March 1, 2011, retroactively pay any additional wages owed under the new Wage Order for the period from January 1, 2011 until such payments are made. 

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On December 13, New York Governor David Paterson signed into law the “Wage Theft Prevention Act,” a bill which provides new and expanded protections for workers under the New York State Labor Law. 

Among other provisions, the new law (which takes effect in 120 days) includes the following provisions:

·         An increase in the liquidated damages penalty for violations of Labor Law Article 6 from 25% to 100% -- the amount available under the FLSA:

·         Any employee not provided with the new hire “rate of pay” notice required by N.Y. Labor Law § 195 may bring a cause of action to recover $50 for each workweek that such a violation occurs, as well as attorneys fees;

·         The notice previously required by Labor Law § 195 must now be provided to each employee in English and the language “identified by each employee as the primary language of such employee;” and

·         Expanded wage statements which include, among other new requirements, the employee’s basis of pay, whether hourly, piece rate, salary or other basis, and, for non-exempt employees, the applicable overtime rate. Under the new law, any change to an employee’s regular rate must be reflected in the wage statement, or in a revised Labor Law § 195 notice. 

We will provide further details regarding the obligations posed by this new law in the near future on www.JacksonLewis.com.

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As discussed here, a New York appellate court recently upheld the conviction of a corporate officer who oversaw a policy of providing “loans” to employees in lieu of wages. Now, another intermediate New York court has followed suit, affirming the conviction, upon a guilty plea, of Spiridon Anthoulis for “grand larceny in the third degree and failure to pay wages in violation of Labor Law § 198-a(1).” People v Anthoulis, 2010 NY Slip Op 8126 (N.Y. App. Div. 2d Dep't Nov. 9, 2010).

This affirmance of Anthoulis’ conviction ends a saga arising out of a scheme perpetrated by Anthoulis and other principals of 4-A General Construction Corp., and SNA General Construction Corp. between February of 2000 and January of 2004, to illegally pay low wages to workers on construction projects contracted by the New York City Housing Authority (NYCHA), in violation of the state prevailing wage law rates contractors are required to pay employees working on public projects. In all, Anthoulis, the two corporate entities and two other individuals were ordered to pay $9.5 million dollars in fines and restitution, and all three individuals pled guilty to criminal charges, arising out of their failure to pay prevailing wage to the construction workers responsible for kitchen and bathroom renovations on various NYCHA projects. 

The investigation was conducted by the New York State Attorney General’s Office and the Department of Investigation’s Office of the Inspector General for the Housing Authority, and determined not only that the responsible parties had failed to pay prevailing wages, but had submitted sworn documents containing false assertions regarding compliance with prevailing wage. 

All employers, but especially those engaged in public works projects and covered by prevailing wage requirements, must take their wage payment, recordkeeping, and reporting obligations seriously. 

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In addition to the FLSA and New York Department of Labor’s (NYSDOL) Wage Orders, both of which contain minimum wage and overtime requirements, pursuant to Article 8 of the New York Labor Law, employers in New York may be required to pay “prevailing wage” to workers employed on public works projects, (There is a separate prevailing wage provision applicable to covered Building Service employees.) This obligation is triggered where a “public agency [is] party to a contract involving the employment of laborers, workmen, or mechanics, and the contract . . . concern[s] a public works project." Matter of Erie County Indus. Develop. Agency v Roberts, 94 AD2d 532, 465 N.Y.S.2d 301 (1983) affd 63 NY2d 810, 472 N.E.2d 43, 482 N.Y.S.2d 267. Rejecting a recent opinion letter from the NYSDOL, New York’s highest court recently held that charter schools do not satisfy the necessary prerequisite for application of the statute - requirement that a public agency be party to contract involving employment of laborers, workmen, or mechanics. Matter of New York Charter School Assn. v Smith, 2010 NY Slip Op 7375 (N.Y. Oct. 19, 2010).

Smith resulted from an August 31, 2007 NYSDOL opinion letter in which the Department reversed its position taken seven years prior and stated that  “the prevailing wage law mandate of Labor Law § 220 applie[s] to all charter school projects.” Following issuance of the 2007 opinion, the Commissioner of Labor immediately provided notice to charter school organizations of the Department’s intention to enforce the new policy interpretation. Litigation commenced immediately.

In its opinion, the Court of Appeals considered and rejected three separate bases put forward by the Commissioner of Labor for finding that charter schools, by their nature, are “public agencies party to a contract involving the employment” of construction workers:

1)      the charter agreement governing the operation of a charter school is itself a contract with a public entity that contemplates the employment of workers on facility projects;

2)      the charter school itself should be regarded as a public entity for purposes of the prevailing wage law; and

3)      charter schools may be regarded as a third-party intermediary when it enters into a charter school facility contract on behalf of or in place of the chartering entity (usually a school district), pursuant to the charter that created it.

Id. at * 3. 

As to the first argument, the court observed that a charter agreement in New York is “an authorizing agreement under which an agency has determined that an applicant school is competent to be licensed as an educational corporation and nothing more.” Id. at * 4. Thus, the charter agreement is not itself a contract involving the employment of covered workers. In rejecting the second argument, the Court noted that the Labor Law itself defines the four categories of public entity covered by the law: the state; a public benefit corporation; a municipal corporation; or a commission appointed pursuant to law – and that educational corporations were expressly excluded. Id.  Finally, the Court noted that while the Labor Law recently was amended to ensure prevailing wage coverage where “private parties are carrying out public work projects on behalf of public owners,” the amendment was not intended to extend to charter schools. Id. 

Smith highlights both the intricate nature of prevailing wage coverage analysis and, separately, how a modification of position by a state department of labor can cast uncertainty into an entire industry. Employers and counsel must stay abreast of these types of developments to ensure and appropriate and timely response is made. 

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As previously discussed here, the New York legislature recently enacted the Construction Industry Fair Play Act. The law is effective tomorrow. In sum, the law provides that an individual providing services in the construction industry only qualifies as an “independent contractor” under the Act, if s/he meets the following test:

(1) [the worker] is free from control and direction in performing the job, both under his or her contract and in fact; (2) the service performed is outside the usual course of business; and (3) the worker is customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service at issue

This is an example of what is commonly referred to as the “ABC” test for independent contractor status. It is utilized by various state agencies to define who is excluded from employee status for purposes of, for example, workers compensation or unemployment benefits. See generally 22 Berkeley J. Emp. & Lab. L. 295. The use of the phrase “and” requires that all three prongs of the test be met for contractor classification. The result is a very broad definition of “employee.”

The New York State Department of Labor has issued the mandatory posting required to be displayed by covered employers. The poster is available here.

New York construction industry employers must analyze whether they are covered by the Act (necessitating among other things immediate posting of this new NYSDOL poster), and how the Act’s narrow definition of “independent contractor” impacts their classification of workers. This legislation is similar to numerous pieces of legislation in other states. In certain instances, such legislation, and related state initiatives, is not limited to the construction industry.

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Like many states with state wage and hour laws, the New York Labor Law contains certain unique provisions. One such provision is Section 198-c, which addresses an employee’s right to recover “wage supplements” such as reimbursement for expenses, health, welfare and retirement benefits and vacation, separation or holiday pay.. Section 198-c expressly provides that its provisions shall not apply to any person in a bona fide executive, administrative, or professional capacity whose earnings are in excess of nine hundred dollars a week. The New York State Appellate Division, Second Department, reiterated this exclusion this week. Section 198-c’s limitations are a valuable defense for New York employers when defending claims brought by excluded employees for such wage supplements because if such claims are excluded from Labor Law protection, there is no ability for the plaintiff’s counsel to recover attorney’s fees or statutory liquidated damages. See Fraiberg v 4Kids Entertainment, Inc., 2010 NY Slip Op 6158 (N.Y. App. Div. 2d Dep't July 20, 2010). 

The relevant facts in Fraiberg are simple. Fraiberg, the controller of a business that ceased operations, asserted both a contract claim and a Labor Law Claim under Section 198-c for, inter alia, alleged unpaid severance. Affirming the trial court, the appellate court agreed that Fraiberg demonstrated a contractual entitlement to severance. However, reversing the trial court, the Second Department granted summary judgment to the employer on Fraiberg’s claims under Section 198-c for severance, attorneys’ fees and liquidated damages.   The court stated that since plaintiff acknowledged at her deposition that she worked in a bona fide executive, administrative, or professional capacity and earned in excess of $900 per week, the defendant “established that…she could not assert a claim [under 198-c] to compel the payment of the severance package.”

While not relevant to the court’s holding, in dicta, the court stated that the New York State Court of Appeals decision in Pachter v. Bernard Hodes Group, Inc., 10 N.Y.3d 609 (N.Y. 2008) stands for the proposition that executives may bring claims for unpaid wages under Article 6 of the New York Labor Law. Article 6, which includes Section 198-c, allows recovery for any unpaid wages not paid per the parties’ agreement as well an award of liquidated damages and attorneys’ fees.   Many read Pachter as merely stating that the deduction from wages provision of Article 6, specifically section 193, applies to executives but that executives generally cannot assert claims for unpaid wages under Article 6.

Like many other states, New York has detailed state wage and hour laws with many nuances. All employers with New York State operations must ensure they recognize obligations and defenses not only under the FLSA but also applicable state laws.

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Employers with New York State operations must ensure they understand the New York State Department of Labor's current position as to new hire notices and wage deductions.

New Hire Notices

As previously reported here, since October 26, 2009, New York state employers have been obligated to notify all new hires in writing of their hourly rate, overtime rate (if applicable) and payday, and receive a written acknowledgment of such notification.  The Department has issued model forms for various types of pay structures, all of which can be found on the Department's website, but continues to advise employers that use of the model forms is not mandatory.   One of the Department's model forms is directed to new hires the employer intends to treat as exempt employees, and both the form and its accompanying instructions require employers to list the exemption applicable to such employees.  However, this form and its accompanying instructions were not fully consistent with the general guidelines for compliance, also posted by the Department on its website.  Such guidelines simply stated that the exemption “should” be listed; it did not make doing so mandatory.  

Recently, the Department modified its general guidelines and now consistently advises that the exemption must be listed for exempt employees on the new hire notice.  In order to comply with the Department’s position, employers must ensure they carefully analyze the appropriate exemption(s) prior to listing them on any notice to ensure such statement is accurate.   It is important to note however that this new directive goes beyond the statutory requirement contained in Section 195 of the Labor Law, although the statute does provide the Department with the right to issue "requirements as to content and form."  

Wage Deductions

In addition to permitting deductions "in accordance with the provisions of any law or any rule or regulation issued by any governmental agency", Section 193 of the Labor Law permits deductions "for the benefit of employee" as long as such deductions are authorized in writing.   Over the years, the Department, through opinion letters, has advised that this language permits deductions for various issues (such as wage overpayments and repayment of loans) as long as the employer obtained written consent and limited such deduction to 10% of gross wages for the payroll period. 

However, since 2006, based on New York State Court of Appeals’ decision in Angello v. Labor Ready, the Department has consistently narrowed its interpretation of the phrase “for the benefit of the employee.”   For example, in a 2007 opinion letter, the Department stated that in order for a deduction “for the benefit of the employee” to be permissible it must be  a deduction which benefits the employee which is also similar to those enumerated in the statute (i.e., insurance premiums, pension or health and welfare benefits, contributions to charitable organizations, payments for United States bonds, payments for dues or assessments to a labor organization). Thereafter, through opinion letters, the Department modified its prior position as to the legality of certain wage deductions, such as a deduction from a final paycheck to cover used but unaccrued paid time off, and deductions for loan repayments and wage overpayments. The Department now states that such deductions are impermissible regardless of the employee's written consent.  Based on the Department's consistently evolving, highly-protectionist pro-employee position, employers should carefully review their wage deduction practices in New York State.

Every business with New York operations should review these wage and hour compliance issues with counsel to ensure compliance.

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In Samiento v World Yacht, 10 NY3d 70 (2008), the New York Court of Appeals held that whether a labeled service charge is a “gratuity” for purposes of N.Y. Labor Law § 196-d that must be distributed to service staff depends on the “reasonable customer’s” understanding. One of the many questions unanswered by the decision is whether this standard applies only prospectively to § 196-d compliance following the Court’s February 2008 ruling. In a blow to industry employers, the Appellate Division’s First Department, the intermediate appeals court encompassing Manhattan, has ruled that employers can be subject to liability for undistributed service charges prior to the World Yacht decision. Ramirez v Mansions Catering, Inc., 2010 NY Slip Op 4857, 2 (N.Y. App. Div. 1st Dep't June 8, 2010). A New York federal court is currently considering the same issue. 

Generally, the question of retroactivity turns on whether a new judicial decision constitutes “the creation of a new legal principle.” Id. at * 1. If it does not, then it is simply an interpretation of the law, and has retroactive application. In Ramirez, the Court observes that the question answered by World Yacht had been acknowledged but, importantly, not answered by the Court of Appeals’ earlier opinion on the same subject. Id. at * 2 citing Bynog v Cipriani Group, (298 AD2d 164 (2002), affd as mod 1 NY3d 193 (2003). Because the legal issue addressed in World Yacht – namely “whether mandatory service charges could constitute "gratuities" under Section 196-d” – had not been resolved previously, World Yacht “was not a departure from existing law” and did not constitute a “new rule.” Id.  This conclusion ignores the fact that the entire industry generally believed that, consistent with federal law, the combination of using the term “service charge” and taxing the collected monies provided an employer with the right to retain the collected monies in whole or in part.

Food service and hospitality industry employers have been focused on this issue for over 2 years. While all such employers should ensure their current practices fully comply with this decision, at least based on this decision, liability can be imposed for periods prior to February 2008 within the 6 year statute of limitations. 

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As recently discussed here¸ a properly drafted commission agreement is essential in New York (and every state) to minimize exposure to a variety of claims, including claims for alleged unpaid commissions and improper wage deductions. In fact, in New York and other states, a written signed commission agreement is required pursuant to state law, absent which adverse inferences can be drawn.

A counter-example to the Swig Equities decision (see discussion linked above), which demonstrated the value of such an agreement, is the recent decision of the New York state trial court in Nichols v. SG Partners, Inc., 2010 NY Slip Op 30174U (N.Y. Sup. Ct. Jan. 25, 2010). Plaintiffs in Nichols were two former executive recruiters who received a base salary plus commissions. Upon termination they sued to collect alleged outstanding commissions for placements they had made. In their Complaint, they described the employer’s practice in calculating commissions to be to “more or less annually tally the placements made by plaintiffs and make additional payments based upon a percentage of the revenues from the placements.” The employer asserted that no such enforceable oral contract existed, or in the alternative was barred by various defenses to contract formation. 

Because no written contract governed the parties’ agreement regarding, inter alia, when a commission was earned, the Court refused to dismiss as a matter of law Plaintiffs’ claims that the employer breached the oral contract governing payment of commissions. Further, the Court did not dismiss the Plaintiffs’ assertion that the company’s commission payment/reconciliation process constituted an unlawful deduction from wages. Relying on precedent, the Court held that the claim under Section 193 was not duplicative of the claim for breach of contract, even though the claim sought recovery of the same commission compensation. This ruling also revived Plaintiffs’ claims under Labor Law § 198.1-a for a 25% penalty on the owed wages and attorneys’ fees.

Failure to enter into a written commission agreement creates enormous potential exposure for all businesses that employ commissioned staff.

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In a recent decision, the Honorable Eileen Bransten of the Supreme Court of the State of New York, New York County, reinforced to all employers the need to utilized well-drafted commission agreements.  The court considered a claim from a real estate broker alleging that she was not paid commissions and bonuses for sales that she arranged, in violation of her agreement with the employer.   Rejecting her claim, the court pointed to express language in the parties’ agreement stating that the alleged commissions would only have been earned upon a closing and transfer for title, and stated that “parties to a brokerage agreement are free to add whatever conditions they may wish to their agreement, including a condition that the contract of sale actually be consummated before the broker is deemed to have earned his commission.” Root v Swig Equities, LLC, 2010 NY Slip Op 50843U at * 5 (N.Y. Sup. Ct. Feb. 10, 2010).   

The court then went further and, while recognizing the general principle that a “seller cannot avoid liability for a broker’s commission based on the non-occurrence of a condition precedent if the seller is responsible for its non-performance”, cited to existing case law and ruled that “[a] broker may choose to agree that even ‘if the sale falls through because of the seller’s fault, he shall be entitled to nothing.” Id.  The court then turned to the plaintiff’s claim for unpaid commissions under the New York Labor Law.   After stating that any Labor Law claim must be premised on a contractual right to recover commissions, the court rejected plaintiff’s labor law claim stating that “without a contractual right to the commissions [plaintiff] seeks to recover, she fails to state a violation of [the Labor Law].” Id. at * 7. 

This decision reinforces to employers the importance of well-drafted commission agreements with specific condition precedents for the earning of commissions.   In fact, in New York, written commission agreements are mandated and the lack of such an agreement not only limits an employer’s ability to defend a claim for unpaid commissions but also creates a presumption that the terms of employment that the commissioned salesperson has presented are the agreed terms of employment. N.Y. Labor Law § 191(1)(c).

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As previously reported in detail here, in November 2009 then-New York Commissioner of Labor Patricia Smith issued an Order accepting the 2009 Restaurant and Hotel Industry Wage Board’s recommendation to consolidate and modify the Wage Orders currently in effect covering New York restaurant and hotel industry employers. The Department however has yet to issue the proposed text of the consolidated Order which, if enacted, would both impose additional obligations on covered New York employers, as well as provide such employers with additional rights and protections, such as:

• Requiring employers to notify affected employees when taking a “tip credit” under the New York Labor Law (the “Labor Law”);
   
• Requiring an additional hour of pay to be provided to all non-exempt employees whose workday is over 10 hours  (the “spread of hours” requirement) regardless of the hourly wage earned by such employees;
   
• Permitting employers to mandate “tip pooling” under the Labor Law – at present, employers may mandate “tip sharing” (where a tipped employees shares his or her tips with supporting customarily tipped employees, such as busboys) but a tip pool, wherein all tips received are pooled and redistributed amongst customarily tipped employees, must be voluntarily; and
   
• Providing a “wash and wear” exemption to an employer’s obligation to provide a laundry cleaning allowance for mandated “uniforms.”

The Department of Labor’s next step is to submit the proposed Order to the State Register for a 45-day public comment period.

Given this uncompleted, mandatory legislative step, and the potential for public comment leading to further discussion and/or revision, it is unclear when a consolidated Order will take effect. However, it is likely that practices will not need be modified until at the earliest well into Summer 2010. We will continue to monitor the status of the Order and provide updates.

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The Supreme Court dealt a blow to New York wage-and-hour defendants sued in federal court last week, overruling established precedent requiring plaintiffs bringing New York Labor Law (“Labor Law”) class actions in federal court to waive the 25% liquidated damages “penalty” in order to proceed on a class basis.  In Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 2010 U.S. LEXIS 2929 (U.S. Mar. 31, 2010), the Supreme Court applied the age-old test from Erie R. Co. v. Tompkins, 304 U.S. 64 (1938) and held that the state law rule requiring such a waiver is “procedural” as opposed to “substantive”, and has no application in federal court, where opt-out class actions are governed by Federal Rule of Civil Procedure 23. 

Class action Labor Law plaintiffs in federal court now may seek a 25% penalty in behalf of all class members, increasing the potential class-wide damages.  It remains a divided question, unanswered by the higher courts, as to whether any wage-and-hour plaintiff may recover the 25% penalty and the 100% liquidated damages under the FLSA for the same time period.  Compare Yu G. Ke v. Saigon Grill, Inc., 595 F. Supp. 2d 240, 261 (S.D.N.Y. 2008) with Jin v. Pac. Buffet House, Inc., 2009 U.S. Dist. LEXIS 74901 at * 24 (E.D.N.Y. Aug. 24, 2009).

Other states containing class action limitations in their state procedural codes, whose federal courts previously had deferred to the state rule, may now also be subject to class actions in federal court seeking relief under the state’s wage-and-hour laws.   However, the Court did not conclusively state that all such provisions were unenforceable but rather focused its analysis on the intent of the New York provision requiring waiver of penalties.

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In addition to (oftentimes conflicting) state and federal wage laws, employers in particular counties – including such notables as Miami-Dade County (FL), San Francisco County (CA – where the minimum wage of $9.79 is almost $2/hour higher than the state minimum wage) and New York City – must also stay abreast of wage legislation at the county level.  On March 25, New York City Council Member Gale Brewer, along with more than 30 co-sponsors, reintroduced the Earned Paid Sick Leave Act for debate and consideration. In short, the Act would require private employers in the City to provide employees a minimum number of paid sick days each year.  Washington DC and San Francisco already have such laws in place.  Further detail and discussion is available here.

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The Ninth Circuit Court of Appeals recently ruled that the FLSA does not restrict employer-mandated tip-pooling arrangements when no tip credit is taken by the employer against the minimum wage obligation.  Cumbie v. Woody Woo, Inc., et al., No. 08-35718 (9th Cir. Feb. 23, 2010).  Further, the Court rejected the DOL’s regulation at 29 C.F.R. § 531.35, and held that the employees in Woody Woo had no legal right under the FLSA to retain all of their tips, except where the tip credit is taken by their employer. 

In Woody Woo, all tips received by the restaurant went into a “tip pool”, the proceeds from which were redistributed to all employees, including the kitchen staff, who (it is universally understood) are not “customarily tipped” for the purposes of the FLSA in the restaurant industry.  Importantly, all employees received an hourly wage that complied with both federal and Oregon minimum wage laws: again (it can’t be said enough), no tip credit was taken. 

Based on this decision, in states where state wage-and-hour laws track the FLSA (or states with no applicable state wage law), especially those within the Ninth Circuit, employers may want to consider tip pooling arrangement similar to the one addressed by Woody Woo. Where the FLSA is the only statute at issue, Woody Woo stands for the proposition that, provided all employees receive the federal minimum wage (currently $7.25/hour), tips can be collected and redistributed to the entire labor pool, or even potentially kept by management, without violating the FLSA. 

However, in many states, state wage and hour laws expressly  prohibit the construct Woody Woo authorizes. In New York, for example, tip pooling and tip distribution is limited to voluntary pooling among employees who “customarily” receive tips and an employer or its agent cannot retain any tips. N.Y. Labor Law § 196-d.

Finally, even in states with no state law restrictions, common law theories of contract, quantum meruit or unjust enrichment (which are part of most states’ common laws), or statutory theories under consumer protection or business practices statutes can be utilized by employees to attack tip distribution arrangements where any tips are siphoned away from employees engaged in direct service. This concern is underscored if the customer is not explicitly advised that non-service personnel may receive a portion of tips. 

Further discussion of this decision can be found on www.JacksonLewis.com by clicking here.

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The following report is sent to us from Richard I. Greenberg and Felice B. Ekelman

The New York Department of Labor’s 2009 Restaurant and Hotel Industry Wage Board has submitted its Report and Recommendations to consolidate the individual wage orders for the restaurant and hotel industries into a single Hospitality Industry Wage Order.  Commissioner of Labor M. Patricia Smith had convened the Wage Board to recommend changes in the wage and hour regulations that govern restaurant and hotel industry workers following recent modifications to wage rates, gratuities and allowances emanating from the latest increase to the New York minimum wage (see New York Employers Subject to Modified Wage Orders Effective Immediately.

If approved, the September 21, 2009 Wage Board Report and Recommendations would implement many significant changes to existing restaurant and hotel wage orders.  Some of these recommendations are summarized after the jump.

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