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

While the FLSA governs the payment of minimum wage and overtime, it does not by its statutory language regulate the receipt of gratuities.  However, Section 3(m) of the FLSA (29 U.S.C. § 203(m)) requires that employees paid pursuant to the “tip credit” provision (i.e., paid less than the standard minimum wage of $7.25 due to receipt of gratuities), retain all of their tips or share them only with employees who are customarily and regularly tipped and who do not qualify as a “employer” under the FLSA (Some states impose this principle even if a tip credit is not taken, and the USDOL recently issued guidance indicating it is taking the same position, contrary to case law). Thus, participation in a “tip pool” (wherein members of the service staff pool all tips for a given day or shift and redistribute them according to a pre-determined formula) is limited to employees who hold a customarily and regularly tipped position, and who do not meet the test for an employer under the FLSA. In a new decision involving prominent Washington D.C. eatery Marcel’s, a Federal District Judge rejected plaintiffs’ claims that the maitre ‘d who participated in the Marcel’s tip pool did so in violation of the FLSA. Arencibia v. 2401 Rest. Corp., 2011 U.S. Dist. LEXIS 146979 (D.D.C. Dec. 21, 2011). 

Plaintiffs alleged that Adnane Keiblar, the Restaurant’s long-standing maitre ‘d, should have not received tips because, in addition to his regular functions as maitre d’ where he was “responsible for organizing reservations, supervising the floor, ensuring the staffs' uniforms are clean, and generally accommodating   the requests of guests, including seeing that ‘regulars’ are seated at the tables they request,” he also exercised managerial authority rendering him an “employer” under the FLSA. The Court rejected this assertion by analyzing the four principal factors identified by courts in making this analysis, namely whether the individual had the authority to: hire or fire employees; set employee schedules; set employee compensation; and maintain employment records. The court also rejected claims that the restaurant’s director of sales should not have participated in the Marcel’s pool (even though she in fact did not), because her “direct interaction with customers to arrange private events” rendered her a properly tipped employee. 

Hospitality industry employers have been besieged by lawsuits and extensive regulation, including numerous challenges in New York and many other states as to the tip pool participation of various service positions outside of the universally understood tipped positions of server, and bus boy. Arencibia joins several other recent decisions which have rejected the narrow reading plaintiffs urge, which would limit tip pool participation to a small handful of titles not reflective of the versatile diverse nature of the hospitality industry workforce, particularly within the fine dining community.   Employers must carefully analyze their tip pool participants under both federal and state law. At all times, the employer must ensure that state law permits tip pooling and also be able to support its position that each participant is both not a manager and regularly involved in customer service.

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The FLSA and state law often both regulate the distribution of tips. See here. Under the FLSA, an employer can require all “customarily tipped employees” to pool tips generally or require a specific “customarily tipped employee” to share tips with another “customarily tipped employee.”  Disputes often arise as to whether an employee is a “customarily tipped employee” – one who provides service to an establishment’s patrons – thereby permitting his or her inclusion in the tip pool. In a recent decision from federal court in Texas, Judge Xavier Rodriguez denied a plaintiff’s motion for summary judgment seeking a ruling that a service bartender—who prepared drinks which he then provided to defendant restaurant servers, not to patrons—should not have received a share of customer tips. Barrera v. MTC, Inc., 2011 U.S. Dist. LEXIS 83468 (W.D. Tex. July 29, 2011).

In Barrera, plaintiffs attacked Mi Tierra Restaurant’s requirement that servers “tip out” 2% of gross sales into a tip pool that was divided between bussers, hosts, counter servers and service bartenders. While the service bartenders were in sight of customers, customers could not order drinks directly and, correspondingly, the bartenders did not receive tips directly. While observing that “front of the house” employees often are the only employees who share in tip pools, the Court, based on an analysis of the legislative history of Section 203(m) of the FLSA (addressing the FLSA’s tip credit and the customarily tipped employee requirement) and an analysis of industry custom, held that it was a factual issue as to whether the service bartenders in could be considered “customarily and regularly” tipped. In denying summary judgment, the Court compared the service bartender position to that of busboy, a position authorized to receive tips by 29 C.F.R. § 531.54.

As the Barrera decision highlights, hospitality establishments with tipped employees may have a tipping practice which does not necessarily correspond to a universally acknowledged “industry custom.. In such situations, the establishment must be prepared to defend its practice. See Kilgore v. Outback Steakhouse of Florida, Inc., 160 F.3d 294 (6th Cir. 1998) (hostesses) and Myers v. Copper Cellar Corp., 102 F.3d 546 (6th Cir. 1999) (salad preparers). As wage and hour litigation continues in the hospitality industry, industry employers must continue to regularly review their practices for compliance with federal and applicable state law.

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The hospitality industry remains a favorite target for wage/hour lawsuits. On June 16, 2011, a group of industry associations led by the National Restaurant Association filed a lawsuit of its own in the District Court for the District of Columbia, challenging the new DOL regulations effective in May expanding the notice requirements associated with taking a tip credit against tipped employees’ wages, pursuant to 29 U.S.C. § 203(m). Representatives of the organizations observed that the rule creates draconian and confusing new burdens on small business owners such as restaurateurs, likely leading to exposure to regulatory and private enforcement action, and also that the changes were implemented without a notice and comment process to afford an opportunity for business leaders and others affected to provide input. 

“Hospitality industry employers have seen a disproportionate share of enforcement proceedings, in the form of both Department action and private litigation,” observes Jackson Lewis partner Paul DeCamp, former Administrator of the U.S. Department of Labor’s Wage and Hour Division. “This new lawsuit, like the similar action filed by the Mortgage Bankers Association earlier this year, sends a message to the Department about the need to follow the rules governing administrative procedure, as well as the importance to employers of being able to rely on agency rulings without worrying that they are going to be discarded each time the political winds change.”

We will apprise of further developments arising from this new litigation and other important developments in the heavily regulated hospitality industry.

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Following up on proposed regulations issued in 2008 for notice and comment, the U.S. Department of Labor issued final regulations last week, effective 30 days following publication in the Federal Register. These regulations address the issues below but other than in regard to use of the tip credit under Section 3(m), the changes to the text of the current regulations are minimal.

The final rule, consistent with the original proposed rulemaking, states that there is no maximum contribution percentage to valid mandatory tip pools, thus permitting employers to require tipped employees to pool their tips with other service personnel, without a hard cap restriction on the amount pooled.  The DOL previously has taken the position that a "customary and reasonable" maximum contribution meant 15 percent of an employee's tips. However, the rule also states that mandating an employee share his or her tips with a lawful tip pool is the only permissible use to which an employer can put an employee’s tips. This regulatory position contradicts the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). In Woody Woo, the Ninth Circuit ruled that an employee has no property right in his or her tips under the FLSA, unless the employer takes a tip credit pursuant to Section 3(m). The new rules also require advance notice of the employer’s use of the tip credit and how the employer calculates it.

In addition to these changes, the enacted regulations eliminated the “20 percent rule” applicable to employees engaged in fire protection activities. As the regulation creating such a rule – permitting fire protection employees to spend up to 20% of their time on non-exempt non-fire protection work – 29 C.F.R. § 553.212, had been superseded by an amended to Section 3 of the FLSA to define the term “employee in fire protection activities,” the DOL eliminated the rule as applied to such employees, consistent with case law interpreting the regulation in light of the new amendment. 

Disappointingly, the DOL declined to adopt regulations clarifying the rules relating to the fluctuating workweek method of overtime compensation and the payment of compensatory time off to public sector employee under Section 7(o) of the Act.

It is vital to note that the DOL’s preamble raises significant questions regarding the application of the fluctuating workweek method of overtime in certain situations. Employers who utilize this payment method should discuss these issues with counsel. 

Otherwise, the changes effected by the new rules are unlikely to be substantial. The hospitality industry should continue to monitor its tip practices closely under federal and state law.

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Last Thursday, Donna Edwards (D-MD) introduced a bill to the House of Representatives which would increase the tip credit minimum wage for the first time since 1991.  The Working For Adequate Gains For Employment In Services Act (WAGE Act) would increase the tip credit minimum wage to $3.75/hour under federal law, with subsequent increases culminating in an increase to $5.50/hour after two years.  While the full federal minimum wage for non-tipped workers has increased in recent years, the tip credit minimum wage has remained $2.13/hour since 1991. 

This proposed legislation would increase the wage compensation requirements under federal law.  Of course, these new federal requirements would need to be compared with state obligations, which may impose higher rates as numerous states, including New York, California and Massachusetts, currently do.   

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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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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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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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In the food service industry, an employer can take a tip credit against the minimum wage for customarily tipped employees, such as servers, bus persons and bartenders.  Under federal law, a restaurant can pay employees holding such positions $2.13 per hour, rather than $7.25 per hour, as long as the employees receive sufficient tips to make up the difference and the tips are only retained by customarily tipped employees.  For years, an issue that has bedeviled industry employers is how to handle prep time and clean-up time as in most establishments there is a period of time pre and post-shift and potentially even during busy hours, in which customarily tipped employees perform prep work and maintenance work.  Can a tip credit be taken for the entire shift?

The United States Department of Labor through its Field Operations Handbook has long taken the position that an employer may take a tip credit for time spent on prep and maintenance only if it consists of less than 20% of the employee’s shift.  The United States District Court for the Western District of Missouri recently addressed this issue, and upheld the USDOL’s position. However, the court stayed the pending FLSA action (involving over 5,000 plaintiffs) and allowed an immediate appeal to the United States Court of Appeals for the Eighth Circuit.   If the appeal is accepted, the Eighth Circuit will determine whether the USDOL’s position is consistent with the language and intent of the Fair Labor Standards Act.   

The Circuit court would have to balance the conflicting positions of industry employers with that of employees and employee advocacy groups.  Industry employers assert this prep and maintenance work is part and parcel of the job duties that result in tips and accordingly the key inquiries should be solely whether the non-tipped duties were part of the continuum of the tipped duties (i.e., the direct customer service duties) and whether the individual received sufficient tips to make up the tip credit.  Employee advocates argue that the 20% rule provides employers with necessary leeway to assign non-tipped duties during a shift, but provides an inappropriate windfall by only having to pay a subminimum wage for non-tipped work that should be compensated at the standard minimum wage or higher.  See Fast v. Applebee's Int'l, Inc., 2010 U.S. Dist. LEXIS 19571 (W.D. Mo. Mar. 4, 2010).

Of course, at all times, state law must be consulted.  Some states do not allow any tip credit; other states allow a lesser tip credit than federal law and many states impose tangents on its application.  For example, in some states the tip credit cannot be taken for any hour in which more than a de minimis amount of prep or maintenance work is performed.

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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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In today's Employment Law 360 (subscription required), Jackson Lewis partner and leader of the Firm's Wage and Hour Practice Group offered his thoughts on a variety of wage and hour-related topics, including what he sees as the next wave of wage and hour cases:

These days, the plaintiffs’ bar is very focused on uncompensated increments of time, particularly at the start and end of the workday. Tip credit cases are big following [Fast v. Applebee's].

Independent contractor misclassification will continue to be a point of emphasis for DOL as well as the private bar. Most employers are out of compliance, and the best plaintiffs’ lawyers are always on the look-out for violations affecting a sizeable number of workers that can make a class or collective action viable.

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