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

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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