Employers today are facing a barrage of wage and hour lawsuits on an unprecedented scale.  Indeed, it is not uncommon to see plaintiffs’ attorneys target a particular industry for “special” attention, especially when there appears to be a significant number of employers unclear about or unconcerned with the obligations imposed by the Fair Labor Standards Act (FLSA) and state wage and hour laws.  The hospitality industry has come under just such scrutiny, with single plaintiff and class action lawsuits filed against national chains as well as local “mom and pop” establishments.  With no employer immune, there are several areas where a proactive employer should pay particular attention.

Minimum Wage, Overtime and Off-The-Clock Claims

One issue that turns up time and again, particularly with less sophisticated employers, involves incorrect minimum wage payments.  Under federal and state law, employers are required to pay nonexempt employees the minimum wage.  In many cases, employers do not realize the federal or state minimum wage has changed and that, as a result, hourly employees are not being paid the appropriate minimum wage until a lawsuit has been filed.  Employers often mistakenly rely on HR consulting firms or payroll companies to notify them of any changes in the minimum wage.  However, the wage and hour laws place the onus of compliance on the employer. Unless the employer has an indemnification agreement with its payroll provider, the employer is on the hook for the unpaid wages plus any fees or other penalties that may be imposed.  Employers should periodically verify whether a minimum wage hike has occurred or is planned. 

Another easily correctible mistake involves the incorrect payment of overtime to hourly workers.  Instead of paying employees time-and-one-half (1.5x) the hourly rate for hours worked in excess of 40, some hospitality and service industry employers continue to pay employees the straight time rate for overtime hours.  For example, an employee is paid $10 per hour for all hours worked, including overtime hours, even though the federal and state laws require the employee to be paid $15 per hour for all hours over 40.  Some employers erroneously believe that an employee may agree, or even offer (in exchange for more hours) to accept a lesser overtime wage than is required by the law.  The law is very clear, however, that employees may not waive their right to be paid the minimum or overtime wage. 

Off-the-clock claims are another headache plaguing hospitality employers.  These lawsuits stem from the nonpayment of wages for time spent working by employees before clocking in and after clocking out (i.e., off-the-clock work), and they are often filed in conjunction with minimum wage and overtime claims.  To succeed on these claims, the employees must prove that the employer knew they were engaging in off-the-clock work activities without compensation.  The success of these claims often hinges on whether the employer has implemented timekeeping rules, notified employees of the rules and disciplined employees who violated them.  Credibility of the supervisors and witnesses is also a major factor. 

Employers would be well-served to require employees to clock in and out using a time clock and to have supervisors review the time cards on a weekly basis.  Under federal and state law, employers are required to keep accurate records.  Failure to do so can result in the courts giving more credence than they otherwise would to the employees’ estimate of the hours they worked.  Employers should also make clear to employees that they are not permitted to work overtime without prior authorization and that they will be disciplined up to and including termination if they work unauthorized overtime.  Employers also may want to consider implementing workplace rules requiring employees to start working as soon as they clock in and to leave the premises after they clock out, and depending on the industry and job, prohibiting employees from working at home. 

Lest employers think these lawsuits are not a cause of concern, under federal law, employees may be awarded liquidated damages in an amount that is equal to the amount of the unpaid minimum wage or overtime amounts plus their attorneys’ fees.  Thus, lawsuits, often stemming from innocent mistakes, may end up costing employers hundreds of thousands of dollars, not including attorneys’ fees.  Moreover, state or federal departments of labor may decide to audit all of the company’s wage and hour practices.

Be Careful with Tip Credit Arrangements

Treatment of “tipped” employees is another hospitality industry practice that is frequently challenged by plaintiff’s attorneys.  Under federal and most states’ laws, employers may pay tipped employees a reduced hourly rate if the employer follows certain rules.  For example, Illinois law permits employers to pay tipped employees an hourly rate of $4.95 per hour, rather than the statutory $8.25 per hour.  To qualify for this credit under federal law, the employer must satisfy the following requirements:

• Inform each tipped employee of the “tip credit” arrangement by, for example, posting the federal DOL notices regarding tipped employees and having employees sign a written acknowledgement of understanding. 
   
• Tipped employees must receive at least $30 in tips per month.  Compulsory service charges determined by the employers are not tips. 
   
• Tipped employees must be paid at least the minimum wage when the decreased hourly rate and tips are added together.
   
•  Employees must be permitted to keep ALL tips, provided that a valid tip-sharing arrangement (or “tip pool”) may be utilized.  Employees may not be required to contribute more to the tip pool than what is “customary and reasonable.”

If the employer fails to satisfy any of the above conditions, the tip credit arrangement is invalid and the employer may be liable for the amount saved by using the tip credit, any additional overtime amounts and liquidated damages. 

Most lawsuits challenging the tip credit take issue with the last element.  The general rule is that tip-sharing arrangements typically may not include dishwashers, cooks, managers, maintenance employees, janitorial staff and any other individuals not typically involved in serving customers.  Managers generally may not participate because their primary responsibility is to supervise, not service customers.  Starbucks has been fighting lawsuits all over the country, which claim that various supervisory employees should not be included in the tip pool.  The safest course is to limit the tip pool to employees whose primary responsibility is directly servicing customers. 

Another type of lawsuit that could have wide-ranging ramifications for the service and hospitality industries challenges the amount of time that tipped employees spend on non-tip producing activities.  In Fast v. Applebee’s International, the Eighth Circuit Court of Appeals affirmed a Missouri federal district court decision adopting the U.S. Department of Labor’s position that non-tip producing activities, when routine and in excess of 20 percent of the employee’s shift, should be compensated at the minimum wage with no tip credit allotted.  With this decision, employers are confronted with the onerous task of implementing monitoring and record keeping practices aimed at tracking whether minuscule activities, such as cutting lemons, need to be detailed during the employee’s shift.  This case may well prompt the plaintiffs’ bar to pay even more attention to how service and hospitality employers pay their employees. 

There is some good news for hospitality employers.  The United States Department of Labor recently reversed a long-standing enforcement rule specifying that, for purposes of how much an employee may contribute to a tip pool, the term “customary and reasonable” meant 15 percent.  In other words, the DOL previously took the position that requiring employees to contribute more than 15 percent of tips into a tip pool would jeopardize the employer’s tip credit arrangement.  The DOL pronounced in its new regulations that there is no maximum contribution percentage that applies to valid mandatory tip pools.  Employers should nevertheless be mindful to establish “tip pool” contribution rates that are consistent with industry standards.