I have written before on these tip pool cases involving Starbucks and other restaurants where the tip credit (which allows an employer to pay a sub-minimum wage) is destroyed.  This happens because “improper” people (i.e. managers) share tips along with rank-and-file employees.  Suffice to say that the liability in these cases can be astronomical, because the employer must pay the difference between the tip credit wage, usually $2.13 per hour and the minimum wage ($7.25 under federal law).  The First Circuit has recently demonstrated how devastating this principle of law can be, ordering Starbucks to pay class action members $14.1 million in damages over tips that were improperly taken from them.  The case is entitled Matamoros et al v. Starbucks Corporation.

The class action was launched in 2008; the latest incarnation of this long-running battle goes back to March 2011, when the First Circuit ruled that the shift supervisors were actually managers, as that term is defined under the state law entitled the Tips Act; the same principles obtains under FLSA regulations.  Thus, they were precluded from sharing in the tip pools.  Indeed, the Court was rather harsh in its description of the Company’s defense.  The Court wrote that Starbucks’ "protest is disingenuous.”  The Court further observed that “Starbucks is the architect of these tip pools, which flout the law and lump together eligible and ineligible employees. If there is an inequity, the fault lies with Starbucks — not with the Tips Act.”

The Company contended that because the shift supervisors spent a great deal of time doing the same work as their subordinates, i.e. making coffee, working the cash register, that their “primary duty” which is the FLSA test for the executive exemption, was not management.  The Court rejected this argument, as did the federal district court below.

The lower court decision, however, left both sides dissatisfied.  The Company appealed, claiming that summary judgment had been inappropriately awarded to the plaintiffs.  The plaintiffs cross-appealed, contending that the lower court erred by not giving them treble damages (as was allowable under the Tips Act).

A “manager” will still be deemed a manager, under the law, even if they perform a fair/large amount of non-exempt work, if they retain management/supervision as their primary duty, even when they are performing non-exempt duties.  This is a gray line, or perhaps a slippery slope, but employers have to be keenly aware of this legal doctrine, if they seek to defend a tip pooling case by contending that their managers have lost their supervisory status.


I happily note that a positive trend, in my view, is continuing.  That is to say, the defeating of FLSA collective actions by defendants asserting that there is not enough similarity in the putative plaintiffs to warrant their conditional certification into a class.  A federal judge has just rejected a motion for conditional certification, in which 65,000 employees, nationwide, tried to sue Steak N Shake, for overtime.  The case is entitled Beecher v. Steak N Shake Operations Incorporated and was filed in federal court in the Northern District of Georgia.

This was another of these off-the-clock cases, where hourly employees charge that they were not paid for all time worked.  The suit also charged that managers altered time records in order to “save” the overtime that would have otherwise been due.  Parenthetically, I should note that in these chain-store cases, so-called Burger King cases, the individual stores run on tight labor budgets and managers are judged by whether they adhere to these budgets, so there is intense pressure to stay within budget, sometimes resulting in off-the-clock work being done, or allegedly being done.

With that said, the Court concluded that that the plaintiffs had not shown that they were similarly situated to each other or that there was not a commonality, a system wide policy or company practice that could be the “glue” to hold the action together.  This was particularly applicable to the contention that a nationwide practice to falsify and alter records existed.

The court concluded that “even assuming, arguendo, that there exists a nationwide practice of reviewing and sometimes revising hours clocked in and out, and tips received, that is not enough glue to hold this proposed class together; neither is the fact that defendant generally discourages managers from allowing overtime work.”

Thus, the court found that the plaintiffs’ allegations required individual scrutiny because to adjudge the claims would mean to be to call numerous supervisors to testify to their particular practices on these matters.  Merely showing that the putative class members all utilized the same reporting system (and that all of the stores used the same internal reporting system) would not answer the key question of whether the employees were similarly situated or treated.  Thus, given the size of the class and the individualized nature of the allegations, there would have to be several thousand mini-trials, which would make the case unmanageable.  Thus, dismissal was warranted.

What I take away from this is that when faced with a nationwide class action, with thousands (or hundreds of thousands) of possible plaintiffs, the opportunity to argue no commonality/need for individual scrutiny may be actually enhanced.  Instead of being the terrifying specter that such a suit initially raises, it could actually be the salvation of the defendant-employer.

Last week, the U.S. Department of Labor (“DOL”) announced that United States Beef Corp., doing business as Arby’s, has agreed to pay back wages in the amount of $55,838 based on their failure to properly calculate overtime.  This agreement came following an investigation by the DOL, which found that 255 Arby’s restaurants had failed to include bonuses paid to managers when computing the “regular rate” of pay for overtime compensation. The settlement affects 759 current and former hourly paid managers in Arkansas, Illinois, Kansas, Missouri, and Oklahoma.

Pursuant to the Fair Labor Standards Act (“FLSA”), overtime for hourly workers “must be compensated at a rate not less than one and one half times the regular rate at which the employee is actually employed.”  The “regular rate” is computed by dividing the total compensation paid to an employee (including all commissions, bonuses and incentive pay) by the hours worked in a given week.  Contrary to an hourly rate, the “regular rate” of pay will vary from week to week depending on the number of hours worked and the monetary amount of any bonus or commission paid to the employee.

The DOL found that Arby’s had computed overtime for the hourly managers using their hourly rate of pay rather than their “regular rate.”  The DOL stated in a press release that “Fast food restaurants are frequently found by the Wage and Hour Division to be in violation of the FLSA’s minimum wage and overtime wage provisions.  Because historical data indicate that the majority of violations are committed by franchisees rather than by corporate-owned establishments, the division is focusing its enforcement efforts accordingly.”

All employers, not just fast food franchisees, need to make sure that they are calculating overtime correctly.  This is especially true for businesses that pay employees lump sum amounts, such as bonuses, pursuant to company policy or practice.  As seen above, even a relatively small deviation from the required computation can lead to significant liability.

On May 9, 2011, a group of Yankee Stadium food service workers filed a complaint in the Southern District of New York alleging that the stadium’s concession providers withheld tips in violation of the New York Labor Law (“NY Labor Law”). The workers allege that the concession providers at the new and old Yankee stadiums kept the 20% service charge added to the cost of food and drinks served to certain field level fans. The workers claim that the menu for the field level seats states, “A 20% service charge will be added to the listed prices. Additional gratuity is at your discretion.” The case is entitled Ryan et al. v. Legends Hospitality, LLC, and the proposed class allegedly consists of one hundred members.

The case is notable in that it highlights an increasingly rare phenomena – – a divergence between state and federal wage and hour law. Under the federal law, the Fair Labor Standards Act, a compulsory service charge does not constitute a tip, but rather is counted toward the employer’s gross receipts. In contrast, the NY Labor Law, provides that an employer cannot “retain any part of a gratuity or any charge purported to be a gratuity for an employee.”

The New York Court of Appeals has previously interpreted this language to require that an employer is prohibited from withholding a mandatory service charge or fee if a “reasonable patron” would have believed the service charge to be gratuity. Accordingly, the employers in Ryan et al. v. Legends Hospitality, LLC appear to have a difficult road ahead of them since the menu states, as alleged by plaintiffs, that “additional gratuity is at your discretion.”

The lesson here is that employers need to be mindful of state, as well as federal, wage and hour law. While state and federal law is typically consistent, a difference such as discussed in Ryan et al. v. Legends Hospitality, LLC, can lead to significant problems.

In a recent posting in the Wage Hour Blog, Amy Traub has commented on a proposal in New York that would merge the Restaurant and Hotel Wage Order.  If the New York State DOL adopts the merger, this will affect requirements related to the minimum wage, tip credits and tip pooling, customer service charges, overtime calculations and other common issues affecting these related industries.

Significantly, the proposal would prohibit employers from paying non-exempt employees on a salary basis and would mandate hourly payment for all such employees.  This, by itself, is a major shift in the law as the law (state and federal) stands right now, non-exempt employees may be paid on any basis (hourly, salary, piece-rate, etc) provided they are paid overtime properly.  Currently, for salaried employees, this means paying overtime at the half-time rate allowed by the fluctuating work week formula.

This proposal to merge/change the Wage Order highlights the importance of Wage Orders and the absolute necessity for employers to first scrutinize Wage Orders for their particular industry.  Wage Orders cover specific industries and are the “bible” for that industry for wage hour issues.  After the Wage Order, the more generalized state wage hour laws apply, as well as the federal law.   These Wage Orders often have very arcane, unique and industry-specific provisions that can pose trouble for the unwary employer.

Therefore, start by knowing if Wage Orders apply to your industry.  If they do, study them carefully and apply every aspect of them.  Failure to do so will expose the employer to possibly significant liability and the defense that “I didn’t know” will not be met with a sympathetic ear by a Department of Labor or a court.

In another of the slew of tip pool cases that have ripped through the restaurant industry in New York City and elsewhere, a federal judge has granted class certification to workers who receive tips in the Smith &-Wollensky Restaurant Group Inc.  These employees allege that the chain has improperly required them to pool their tips in a manner proscribed by the law.  The case is entitled Schmidt v. Smith & Wollensky and was filed in the U.S. District for the Northern District of Illinois.

The lawsuit charges that Smith & Wollensky did not comply with the Fair Labor Standards Act (FLSA) rules regarding the tip-credit provisions of the Fair Labor Standards Act and Illinois wage law  The “tip credit” allows an employer to pay less than the federal minimum wage, on the assumption that the employee will make up the difference in tips.

However, certain rigid requirements must be met. If employees who do not receive tips as a customary function of their job duties, they cannot share in the pooled monies.  The complaint charges that such employees did share in the pool and, as such, the validity of the tip pool is destroyed and the employer then loses the ability to claim the tip credit.  What follows then is that for every hour worked, the employer has not properly paid the minimum age and tremendous liability (potentially) arises, depending on the number of employees involved and how far back the statute of limitations goes (e.g. two or three years under FLSA and longer under state law).  In this case, the complaint charges that the employer required servers to share tips with “expediters, dishwashers, silver polishers and coffee makers” and also included a manager in the tip pool.

In granting class certification under Rule 23, the state law claim, the judge rejected the employer’s argument that the class was unduly broad as it sought to include all of the employees receiving tips, not just servers.  This was based on holdings by the Court of Appeals for the Seventh Circuit which has determined that a class is too broadly defined if it seeks to include employees who could not have a recovery or suffered an injury at the misconduct of the employer.  The District Court judge, however, ruled that the manner in which the class was defined was not overly broad because it “appropriately includes those employees who ‘could’ have been injured by defendant’s alleged conduct.”

In the restaurant industry, tip pooling arrangements are under constant focus and are the targets of a rash of class action lawsuits.  One way to resolve this dilemma is not to tip pool and just allow each waiter to receive/keep his own tips.  The downside is that there will be fights over good “stations” and other possible employee discord/unrest.  This may a smaller price to pay than thousands (or hundreds of thousands) of dollars in damages.

A group of employees has filed a lawsuit against a high-end Greek restaurant situate in the vacation haven of the Hamptons.  The plaintiffs, servers, are alleging that the employer improperly implemented a tip-pooling policy that violated the Fair Labor Standards Act (“FLSA”).  Four employees filed the case, but the allegation is there are 75 others similarly situated.  There has lately been a rash of tip pool class and collective actions filed, with large settlements and verdicts inuring to the plaintiffs.

This is because unless a tip pool is correctly implemented, the employer loses a significant advantage that it enjoyed, namely, the taking of the tip credit and then major minimum wage violations occur.   The case is entitled Sierra v. Orama Inc and was filed in the Southern District of New York.

Under the federal law (and most states), employers may take a tip credit, as concerns their tipped employees, i.e. waiters, busboys, bartenders, etc.  This means that the restaurant need not pay the full minimum wage (i.e. $7.25 per hour) but it pays only a small fraction of that (approximately 50%) with the assumption that the employee will derive the balance of at least the minimum wage from customers leaving tips.

If, however, employees who do not “customarily and regularly” receive tips are included in the pool, or a management employee shares in the pool, the validity of the pool is destroyed and with that destruction, the tip credits that had been taken by the employer are also ruled invalid.  That means for each hour worked by the tip employee, there is a shortfall for payment of the minimum wage. That means large-dollar violations.

The plaintiffs’ theory herein is that managers shared in the tip pool.  This has been the allegation in a number of cases emanating out of New York City restaurants, some of them very famous.  The lesson for restaurant employers is to ensure that managers have no share in the tip pool.  If uncertain as to whether someone is a true “manager,” it is safer to consider them as such and not to include them in the tip pool.

The downside is a very, very upset stomach for the employer.