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

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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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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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 most employers know, the United States Department of Labor has extensive regulations regarding the nature and scope of records employers covered by the Act must maintain. See 29 CFR § 516.1, et seq. Many state laws contain analogous provisions. See, e.g. NY Labor Law § 195. While violations of these recordkeeping requirements can lead to civil penalties, (standing alone a reason for compliance), wage records can be even more important as evidence of hours worked in defending claims for alleged unpaid overtime. See our earlier discussion regarding the implications of failing to maintain such records for the defense of wage/hour claims here.

However, employers also need to understand that falsification of wage and benefits records can also give rise to criminal penalties. The recent New York State court decision in People v Saxton, 2010 NY Slip Op 6011, 1 (3d Dep't 2010) is exemplary. In Saxton a New York state appeals court reviewed the jury conviction of the former executive of a failing business on three counts, including “falsifying business records in the first degree.”

The Defendant, Richard Saxton, had been the officer of a fledgling Internet start-up, Wurld Media, Inc. He supervised the company’s payroll and its general ledger. When Wurld Media encountered serious financial difficulty, it suspended payroll (a likely wage-and-hour violation itself), and instituted an “advance” program, wherein employees who had not received their regular paychecks could “request an advance of money when needed.” Wurld Media, through Defendant, listed these payments as loans, not wage payments, and as such did not pay taxes on these amounts.

After Wurld Media employees complained to the criminal authorities regarding the company’s failure to pay wages, an investigation was conducted giving rise to a nine-count indictment which included charges of: 1) offering a false instrument for filing in the first degree (two counts); 2) falsifying business records in the first degree, 3) failure to withhold income taxes, 4) failure to pay benefits, 5) grand larceny in the second degree, 6) grand larceny in the third degree, 7) criminal contempt in the second degree, and 8) money laundering in the fourth degree. Saxton was convicted on several of these charges.

In upholding Saxton’s conviction for falsifying business records, the appeals court cited evidence in the record “[that] payroll taxes were not withheld from those advances, that Wurld Media recorded those advances as loans on the general ledger and that defendant signed two quarterly tax reports that did not reflect that those advances were, in fact, payroll to avoid payroll tax liabilities.” 

Saxton is not an isolated case. In 2008, a prominent New York restaurateur was arraigned on 242 counts of, among other offenses, failing to pay wages, falsifying business records and defrauding the state unemployment insurance system. See “The American Dream, Delivered Perhaps Too Much on the Cheap” (The New York Times December 18, 2008). Failure to maintain proper wage records can have serious ramifications for a business. Creating and maintaining false ones is, unsurprisingly, even more dangerous for employers and executives.

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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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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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Business owners, supervisors and managers performing services for corporate entities often believe that liability for wage and hour violations can be imposed solely on the incorporated entity.  To the contrary, as demonstrated by a recent New York Federal Court decision, various theories support individual liability under both federal and, in this case, New York State law.

In Flannigan v. Vulcan Power Group, L.L.C., 2010 U.S. Dist. LEXIS 41751 at * 10-13 (S.D.N.Y. Apr. 27, 2010), Judge Barbara Jones considered a motion to dismiss wage and hour claims brought against an officer/manager.In denying the motion, the court explained that corporate officers and principal shareholders, as well as supervisors and managers involved in wage and hour policymaking/decision-making, can be personally liable for unpaid wages under federal and state law.  Id. The Court cited Plaintiff’s allegations and documentary evidence to the effect that the individual defendant had met with her regarding the terms of her employment, and subsequently communicated with her about the status of her commission compensation, as sufficient to allege individual liability under the FLSA and New York law. Id. The court did however find that individual liability could not be imposed on the corporate shareholders under Section 630 of the New York Business Corporation Law because the defendant corporation was not incorporated in New York. Id.  Under BCL § 630, the ten largest shareholders of a closely held New York corporation are liable for unpaid wages and benefits.

Business owners (as well as supervisors and managers involved in wage and hour policymaking/decision-making) must recognize the various theories under which they can be subject to personal liability and of course take actions to minimize such potential liabilities. 

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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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While in New York all employees are at-will absent contractual language to the contrary, an employer may (intentionally or unintentionally) create a “contract” with an employee governing certain terms of employment (such as bonus compensation) without destroying the at-will nature of employment.  Properly drafted and agreed upon, such a contract can preclude employees from later claiming they were made oral promises regarding compensation and benefits at the time of hire (or later on) which are different than the terms reflected in the contract.  In Broyles v. J.P. Morgan Chase & Co., 2010 U.S. Dist. LEXIS 21861 (S.D.N.Y. Mar. 8, 2010), United States District Judge William Pauley rejected an employee’s attempt to do just that, finding that the letter of employment the Plaintiff had received and signed at the time of hiring: (1) was an enforceable contract, and (2) it contained “the entire understanding of the parties with respect to the terms and conditions of the offer of employment.”  Id. at * 7. 

When the Plaintiff was subsequently terminated, he brought suit claiming he had been orally promised a bonus for the year prior to the year in which he was terminated.  However, the letter of employment at issue provided that any bonuses were discretionary and would not be paid if the employee quit or was terminated.  The Court held that this clear language governing bonuses contained in the offer letter, coupled with an integration clause, precluded the employee’s claims that he was verbally promised a bonus.  The court found that the offer letter was an enforceable written agreement which precluded any oral agreements or quasi-contractual claims by the employee.  Finally, since the bonus was never “awarded” to the employee, he had no “vested” interest in it, and therefore could not pursue a claim for the unpaid bonus under the New York Labor Law.

It is difficult for employers to ensure that no statements regarding compensation are made by managers, co-workers or human resources during the hiring process.  Recruiters or other interviewers can unwittingly make oral promises or use poorly tailored language regarding the terms and conditions of employment.  To prevent such statements from causing issues down the road, employers should consider utilizing a well drafted employment letter, such as the one in Broyles, or a well drafted incentive compensation plan with an integration clause, in order to easily dispose of these claims if and when they do arise.

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