Take 5 Views You Can Use: Wage and Hour Update

By:  Kara M. Maciel

The following is a selection from the Firm's October Take 5 Views You Can Use which discusses recent developments in wage hour law affecting the hospitality industry.

IRS Will Begin Taxing a Restaurant’s Automatic Gratuities as Service Charges

Many restaurants include automatic gratuities on the checks of guests with large parties to ensure that servers get fair tips. This method allows the restaurant to calculate an amount into the total bill, but it takes away a customer’s discretion in choosing whether and/or how much to tip the server. As a result of this removal of a customer’s voluntary act, the Internal Revenue Service (“IRS”) will begin classifying automatic gratuities as service charges, taxed like regular wages, beginning in January 2014.

This change is expected to be problematic for restaurants because the new treatment of automatic gratuities will complicate payroll accounting. Each restaurant will be required to factor automatic gratuities into the hourly wage of the employee, meaning the employee’s regular rate of pay could vary from day to day, thus adding a potential complication to overtime payments. Furthermore, because restaurants pay Social Security and Medicaid taxes on the amount that its employees claim in tips, restaurants are eligible for an income-tax credit for some or all of these payments. Classifying automatic gratuities as service charges, however, would lower that possible income-tax credit.

Considering that the IRS’s ruling could disadvantage servers as well, restaurants may now want to consider eliminating the use of automatic gratuities. Otherwise, employees could come under greater scrutiny in reporting their tips as a result of this ruling. Furthermore, these tips would be treated as wages, meaning upfront withholding of federal taxes and delayed access to tip earnings until payday.

Some restaurants, including several in New York City, have begun doing away with tips all together. These restaurants have replaced the practice of tipping with either a surcharge or increased food prices that include the cost of service. They can then afford to pay their servers a higher wage per hour in lieu of receiving tips. This is another way for restaurants to ensure that employees receive a sufficient wage, while simultaneously removing the regulatory burdens that a tip-system may impose.

The New DOL Secretary, Tom Perez, Spells Out the WHD’s Enforcement Agenda

On September 4, 2013, the new U.S. Secretary of Labor, Tom Perez, was sworn in. During his remarks, Secretary Perez outlined several priorities for the U.S. Department of Labor (“DOL”), including addressing pay equity for women, individuals with disabilities, and veterans; raising the minimum wage; and fixing the “broken” immigration system.

Most notably, and unsurprisingly, Secretary Perez emphasized the enforcement work of the Wage and Hour Division (“WHD”). Just last year, the WHD again obtained a record amount—$280 million—in back-pay for workers. Employers can expect to see continued aggressive enforcement efforts from the WHD in 2013 and 2014 on areas such as worker misclassification, overtime pay, and off-the-clock work. In fact, Secretary Perez stated in his swearing-in speech that “when we protect workers with sensible safety regulations, or when we address the fraud of worker misclassification, employers who play by the rules come out ahead.” By increasing its investigative workforce by over 40 percent since 2008, the WHD has had more time and resources to undertake targeted investigation initiatives in addition to investigations resulting from complaints, and that trend should continue.

Federal Court Strikes Down DOL Tip Pooling Rule

In 2011, the WHD enacted a strict final rule related to proper tip pooling and service charge practices. This final rule was met with swift legal challenges, and, this summer, the U.S. District Court for the District of Oregon (“District Court”) concluded that the DOL had exceeded its authority when implementing its final rule. See Oregon Rest. and Lodging Assn. v. Solis, No. 3:12-cv-01261 (D. Or. June 7, 2013).

Inconsistent interpretations of the FLSA among various appellate courts have created confusion for both employers and courts regarding the applicability of valid tip pools. One of the most controversial interpretations of the FLSA occurred in early 2010, when the U.S. Court of Appeals for the Ninth Circuit held that an employer could require servers to pool their tips with non-tipped kitchen and other “back of the house staff,” so long as a tip credit was not taken and the servers were paid minimum wage. See Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). According to the Ninth Circuit, nothing in the text of the FLSA restricted tip pooling arrangements when no tip credit was taken; therefore, because the employer did not take a tip credit, the tip pooling arrangement did not violate the FLSA.

In 2011, the DOL issued regulations that directly conflicted with the holding in Woody Woo. As a result, employers could no longer require mandatory tip pooling with back-of-the-house employees. In conjunction with this announcement, the DOL issued an advisory memo directing its field offices nationwide, including those within the Ninth Circuit, to enforce its final rule prohibiting mandatory tip pools that include such employees who do not customarily and regularly receive tips.

Shortly after the issuance of the DOL’s final rule, hospitality groups filed a lawsuit against the DOL challenging the agency’s regulations that exclude back-of-the-house restaurant workers from employer-mandated tip pools. The lawsuit sought to declare the DOL regulations unlawful and inapplicable to restaurants that pay employees who share the tips at least the federal or applicable state minimum wage with no tip credit. On June 10, 2013, the District Court granted the plaintiffs’ summary judgment motion, holding that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The District Court stated that the language of Section 203(m) of the FLSA is clear and unambiguous; it only imposes conditions on employers that take a tip credit.

The District Court’s decision may have a large impact on the tip pool discussion currently before courts across the country, especially if employers in the restaurant and hospitality industries begin to challenge the DOL’s regulations. Given the District Court’s implicit message encouraging legal challenges against the DOL, the status of the law regarding tip pooling is more uncertain than ever. Although the decision is a victory for employers in the restaurant and hospitality industry, given the aggressive nature of the DOL, employers in all circuits should still be extremely careful when instituting mandatory tip pool arrangements, regardless of whether a tip credit is being taken.

Take Preventative Steps When Facing WHD Audits

In response to a WHD audit or inspection, here are several preventative and proactive measures that an employer can take to prepare itself prior to, during, and after the audit:

  • Prior to any notice of a WHD inspection, employers should develop and implement a comprehensive wage and hour program designed to prevent and resolve wage hour issues at an early stage. For example, employers should closely examine job descriptions to ensure that they reflect the work performed, review time-keeping systems, develop a formal employee grievance program for reporting and resolving wage and hour concerns, and confirm that all written time-keeping policies and procedures are current, accurate, and obeyed. Employers should also conduct regular self-audits with in-house or outside legal counsel (to protect the audit findings under the attorney-client privilege) and ensure that they address all recommendations immediately.
  • During a DOL investigation, employers should feel comfortable to assert their rights, including requesting 72 hours to comply with any investigative demand, requesting that interviews and on-site inspection take place at reasonable times, participating in the opening and closing conferences, protecting trade secrets and confidential business information, and escorting the investigator while he or she is at the workplace.
  • If an investigator wants to conduct a tour of an employer’s facility, an employer representative should escort the investigator at all times while on-site. While an investigator may speak with hourly employees, the employer may object to any impromptu, on-site interview that lasts more than five minutes on the grounds that it disrupts normal business operations.
  • If the DOL issues a finding of back wages following an investigation, employers should consider several options. First, an employer can pay the amount without question and accept the DOL’s findings. Second, an employer can resolve disputed findings and negotiate reduced amounts at an informal settlement conference with the investigator or his or her supervisor. Third, an employer can contest the findings and negotiate a formal settlement with the DOL’s counsel. Finally, an employer may contest the findings, prepare a defense, and proceed to trial in court.

In addition, employers should review our WHD Investigation Checklist, which can help them ensure that they have thought through all essential wage and hour issues prior to becoming the target of a DOL investigation or private lawsuit.

Following these simple measures could significantly reduce an employer’s exposure under the FLSA and similar state wage and hour laws.

ADA Compliance: Implications for Owners and Managers When Acquiring or Developing New Lodging Facilities

On September 18, 2013, our hospitality practice attorneys, Kara Maciel and Mark Trapp, have the pleasure of speaking at the Lodging Conference in Scottsdale, Arizona on key financial and legal issues under the Americans with Disabilities Act impacting hotel owners and managers when acquiring, selling, developing or managing properties. 

Under the 2010 ADA Standards, which became effective in March of 2012, hotels must take steps to remove access barriers for individuals with disabilities. The new federal standards encompass some key changes for hotel owners, operators and developers.   Our Round Table discussion will focus on hot-button issues facing the hotel industry, including:

·         Why Owners and Managers Should Care about ADA Compliance when Purchasing / Selling / Developing / Managing a Property

·         Key Financial Issues In Acquiring / Selling Properties

·         Key Financial Issues in Developing New Construction / Renovating Older Properties

·         Key Financial and Operational Issues in Management Agreements 

·         Best Practices for Compliance under the ADA for Lodging Facilities

Attendees will leave the workshop better equipped to address the critical operational issues affecting their deals and profit margins, including:

·         How to conduct Due Diligence to minimize financial exposure and legal risks

·         How to negotiate and maximize your financial investment in a Purchase Sale Agreement

·         What issues are important in a Management Agreement

·         How to draft and implement employment and related policies to minimize the risk of ADA lawsuits

For more information about this important topic impacting the lodging industry, contact Kara or Mark. 

Ninth Circuit Rules That Employees Need Not "Request" A Seat Under California's Obscure "Suitable Seating" Law

By Michael Kun

We have written previously in this blog about California’s obscure “suitable seating” law, which requires that some employers provide “suitable seating” to some employees.

In short, the plaintiffs’ bar recently discovered a provision buried in California’s Wage Orders requiring employers to provide “suitable seating” to employees when the nature of their jobs would reasonably permit it. The provision was not designed to cover employees in the hospitality industry who often stand to show that they are ready to assist customers. Instead, it was written to cover employees who normally worked in a seated position with equipment, machinery or other tools. Nonetheless, employers in a variety of industries have been hit with class actions alleging that they have violated those provisions – and those cases are typically brought by a single plaintiff who was well aware that the employer expected him or her to be standing while performing the job at the time he or she applied. Just as typically, those employees have not even requested a seat before filing suit.

Now, reversing a district court decision that dismissed a “suitable seating” class action on the grounds that there had been no request for a seat, the Ninth Circuit has held that an employee need not request a seat to be entitled to one.

The Ninth Circuit explained that the district court had read into the Wage Orders something that was not there – a requirement that employees affirmatively request seats. Importantly, the Ninth Circuit expressly declined to comment on whether the nature of the work would reasonably permit seats in the case at issue. As before, it appears that will be the dispute in most “suitable seating” cases.
 

New Jersey to Propose Gender-Equality Notice Rules for Employers

by Maxine H. Neuhauser and Amy E. Hatcher

On January 7, 2013, the New Jersey Department of Labor and Workforce Development (the “Department”) published in the New Jersey Register proposed new rules and notification language to implement a recently enacted law intended to fight gender inequity and bias in the workplace. The notice of proposal is available for downloading here.

The law, which became effective on November 19, 2012, requires every employer in New Jersey with 50 or more employees to post a notice advising employees of their right to be free from gender inequity or bias in pay, compensation, benefits, or other terms or conditions of employment under particular state and federal laws.

New Jersey employers are also required to distribute a copy of the notice:

·                     In English and Spanish and any other language that the employer reasonably believes is the first language of a significant number of the employer’s workforce, provided a notice has been issued in that language by the Department;

·                     To all employees no later than 30 days after the notice is issued by the Department;

·                     At the time of an employee's hiring;

·                     To all employees annually, on or before December 31 of each year (and the employer must obtain a written acknowledgement of receipt); and

·                     At any time upon the first request of an employee.

The notice may be transmitted electronically to employees via e-mail, or via an internet or intranet site, so long as it is accessible and the employer provides notice to employees that the notice has been posted electronically.

Importantly, the notification requirements of the law are not triggered until the New Jersey Commissioner of Labor and Workforce Development issues the form of notification by regulation, which will likely take at least a few months. Employers will have 30 days from the date of the notice of adoption in the New Jersey Register, containing the final form of the notification, to comply with the notification and posting requirements.

A public hearing on the proposed amendments and new rules is scheduled to take place on February 13, 2013, and the due date for public comments is March 23, 2013. The Department’s forthcoming January 22 notice, which provides notice of these dates (and also corrects an error in the January 7 proposal), is available for downloading here.

For further information on other New Jersey employer posting requirements, see EBG’s Act Now Advisory entitled “Employer Posting Requirements Under New Jersey Law.”

California Court of Appeal Confirms That Time Rounding Is Permissible

By Michael Kun and Aaron Olsen

Agreeing with the recent federal district court opinion in our case Alonzo v. MAXIMUS, Inc., 832 F.Supp.2d 1122, 1126 (2011), the California Court of Appeals has confirmed in a case against See’s Candy that California employers may round employees’ time entries so long as the employer’s rounding policy does not consistently result in a failure to pay employees for time worked.

In Alonzo, a federal district court granted summary judgment in favor of our client MAXIMUS, Inc. on the plaintiffs’ time rounding claims. The Alonzo Court explained that the federal standards regarding time rounding apply to employees’ time rounding challenges brought under California law. In the case against See’s Candy, the plaintiff urged the California Court of Appeals to reject the federal court’s analysis in Alonzo. The California Court of Appeal, however, stated, “We agree with the Alonzo court. In the absence of controlling or conflicting California law, California courts generally look to federal regulations under the FLSA for guidance…. Assuming a rounding-over-time policy is neutral, both facially and as applied, the practice is proper under California law because its net effect is to permit employers to efficiently calculate hours worked without imposing any burden on employees.”

Given the number of employers throughout California that have time-rounding policies, the California Court of Appeal’s decision to adopt the reasoning from the federal court in Alonzo is another welcome development for employers. Indeed, plaintiffs’ counsel likely had a number of time rounding class actions lined up to file in the event the Court of Appeal held that time rounding policies were unlawful. Those class action complaints have likely found their way to the recycling bin.

New California Supreme Court Decision Will Affect Whether And When Parties Obtain Witness Statements In Litigation, Particularly In Class Actions

By Michael Kun

On Monday, June 25, 2011, the California Supreme Court issued its long-awaited decision in Coito v. Superior Court, addressing the issue of whether a party in litigation could rely upon the work product doctrine to withhold witness statements obtained by its attorneys or the identities of persons who had given such statements. 

In short, while parties in California have long relied upon dicta in the Court of Appeal decision known as  Nacht v. Lewis for the proposition that such information is protected from disclosure by the work product doctrine, case-by-case determinations will now be required to determine whether a party must provide such information to its opponent in discovery in California state court cases. 

In its decision, the Court rejected the dicta in Nacht that provided for an absolute privilege for such witness statements, holding instead that witness statements may be entitled to an absolute privilege under some circumstances. 

The Court explained, “In light of the legislatively declared policy and the legislative history of the work product privilege, we hold that the recorded witness statements are entitled as a matter of law to at least qualified work product protection. The witness statements may be entitled to absolute protection if defendant can show that disclosure would reveal its ‘attorney’s impressions, conclusions, opinions, or legal research or theories.’ (§ 2018.030, subd. (a).)  If not, then the items may be subject to discovery if plaintiff can show that ‘denial of discovery will unfairly prejudice [her] in preparing [her] claim . . . or will result in an injustice.’ (§ 2018.030, subd. (b).)” (Emphasis added.)

As for the identities of persons who provided witness statements to counsel, those will now be easier to obtain in California state court cases.  The Court explained, “As to the identity of witnesses from whom defendant’s counsel has obtained statements, we hold that such information is not automatically entitled as a matter of law to absolute or qualified work product protection. In order to invoke the privilege, defendant must persuade the trial court that disclosure would reveal the attorney’s tactics, impressions, or evaluation of the case (absolute privilege) or would result in opposing counsel taking undue advantage of the attorney’s industry or efforts (qualified privilege).” (Emphasis added.)

This decision will have a great impact on the manner in which cases are litigated in California, particularly as they relate to litigation strategy.  The decisions whether to require a party to turn over witness statements obtained by its attorneys, or disclose the identities of persons who provided statements, will generally be left to the discretion of the judge.  Of course, all judges differ.  Some judges may be more inclined to require the production of this information than others.  Accordingly, parties will have to give considerable thought to when they wish to obtain written statements, mindful that they may have to disclose them to the opposing party. 

This will be an especially important strategic decision in class actions and collective actions, where defendants often obtain a great many written statements from putative class members early in the case for use later.  A defendant must now be concerned that it may be required to turn over all of those statements early in the case, educating the plaintiff’s counsel about the defendant’s strategy in the process and, perhaps, encouraging them to contact those putative class members to try to get them to recant their statements or to try to stop other putative class members from speaking with defendant’s counsel.  It will also be an important strategic decision in those cases where attorneys seek to have witnesses sign statements early to “lock in” their testimony, with no intention of using those statements in the case unless the witness later changes his or her testimony. 

California Court Denies Certification of Misclassification, Meal Period and Rest Period Claims against Joe's Crab Shack Restaurants

By Kara Maciel and Aaron Olsen

After five years of litigation, a Los Angeles Superior Court has denied class certification of a class action against Joe’s Crab Shack Restaurants on claims that its managers were misclassified as exempt and denied meal and rest periods in violation of California law.  The court found that the plaintiffs had not established adequacy of class representatives, typicality, commonality or superiority, and emphasized a defendant’s due process right to provide individualized defenses to class members’ claims.

Because the case was handled by our colleagues in our Los Angeles office, we think it best not to comment on the decision other than to say that it highlights the need for creative strategies in defending against wage-hour class actions.   

Mandatory Employee Arbitration Agreements: The NLRB Throws a Wrench into Their Enforceability

By:  Forrest G. Read, IV

Arbitration agreements can be an effective way for employers in the hospitality industry to streamline and isolate an employee’s potential claims on an individual basis and protect themselves from a proliferation of lawsuits with many plaintiffs or claimants. But the National Labor Relations Board’s (“Board”) January 6, 2012 decision in D.R. Horton, Inc. and Michael Cuda, notably finalized by two Board Members on departing Member Craig Becker’s final day, has caused significant confusion as to how employers can enforce such arbitration agreements with their employees over employment claims, including wage and hour disputes. 

In D.R. Horton, the Board concluded that an employer commits an unfair labor practice under the National Labor Relations Act (“NLRA”) when it requires, as a condition of employment, its employees to sign an arbitration agreement that precludes them from filing, in any forum, any class or collective claims addressing their wages, hours or other working conditions against the employer. However, the Board’s decision in D.R. Horton appears to be inconsistent with, if not directly contradicts, a recent U.S. Supreme Court decision upholding the validity of class action waiver provisions in consumer arbitration agreements under the Federal Arbitration Act, which many employers and members of the labor and employment bar interpreted as extending to waiver provisions in employment-related agreements.

Notwithstanding the Supreme Court’s unmistakable and consistent pro-arbitration stance, the Board in D.R. Horton directly concluded that Supreme Court precedent regarding arbitration agreements did not apply to the employment context.  The Board’s decision is controversial because it was issued by two Members leaving employers left to question its validity and confused as to which precedent to follow.  In addition, it represents another example of the Board’s willingness to insert itself into matters outside the traditional unionized workplace and find NLRA violations outside the labor-management realm.

D.R. Horton is also controversial because it places courts at an intersection of whether to follow and apply Board or Supreme Court precedent.  Indeed, since the Board’s ruling in D.R. Horton, at least one court in New York weighed in on the issue and, in following Supreme Court precedent, tentatively ruled that D.R. Horton does not apply in the wage-hour context where the employee had voluntarily entered into an arbitration agreement not as a condition of employment. But the court noted that D.R. Horton may have applied and led to a different conclusion if the argument had been made that the arbitration agreement had been presented to the employee in a confusing fashion or had operated through compulsion by the employer (even if presented voluntarily).

In short, the question of whether employment-related arbitration agreements are enforceable will remain a murky one until D.R. Horton, currently a hindrance to hospitality employers that seek to compel individual arbitration of wage and hour claims with their employees, is appealed and decided upon by an appellate court. In the meantime, employers should be cautious about the application of such agreements. Any current arbitration agreements (particularly those that include class action waivers) should be reviewed for enforceability, and perhaps suspended depending on how the waiver provisions were worded and the circumstances under which they were agreed to. In addition, hospitality employers should carefully consider whether and how to present new arbitration agreements to employees and scrutinize the agreement’s waiver provisions before they are executed.

Employers in California Can Tone Down Their Celebrations about the U.S. Supreme Court Decisions In Wal-Mart and Concepcion

By Michael Kun

               Understandably, employers have celebrated the U.S. Supreme Court decisions in Wal-Mart Stores, Inc. v. Dukes and AT&T Mobility v. Concepcion.  At the very least, those cases would seem to suggest that the wage-hour class actions and collective actions that have besieged employers might be curtailed significantly, along with the costly settlements triggered by the in terrorem effect of such lawsuits.

               California employers can stop celebrating, or at least tone down those celebrations.

               Unlike other states, California law provides for a mechanism by which employees can file suit on behalf of other employees without bringing such claims as class actions – the Private Attorneys General Act (“PAGA”).  PAGA, often referred to as “The Bounty Hunter Law,” generally allows an employee to file suit against an employer on behalf of all “aggrieved employees” for alleged violations of the California Labor Code.  The potential recovery in a PAGA claim can be staggering – while the limitations period is only one year, each “aggrieved employee” can recover up to $100 for the first pay period in which a violation occurs, and up to $200 for each subsequent pay period in which a violation occurs.  PAGA also provides for the recovery of costs and attorney’s fees.

               Because claims brought under PAGA are considered representative actions, not class actions, the California Supreme Court has held in Arias v. Superior Court that a PAGA plaintiff need not have a class certified to proceed.  As such, it is not surprising that plaintiffs in California are already arguing that the tougher class certification standards set forth in Wal-Mart are inapplicable to PAGA claims.  Given Arias, it is expected that California courts will agree.

               As for Concepcion, which held that arbitration provisions with class action waivers may be enforceable, plaintiff’s counsel have already begun arguing that Concepcion is inapplicable to PAGA claims.  In Brown v. Ralphs Grocery Co., a California Court of Appeal has agreed with that argument.  While that decision may well be challenged before the California Supreme Court, it only underscores how California employees have an avenue to try to avoid the impact of United States Supreme Court decisions regarding class actions – PAGA claims.

U.S. Department of Labor to Refer Employees to Plaintiffs' Lawyers

by Michael Kun and Doug Weiner

It is no secret that employers have been beseiged by wage-hour litigation, including wage-hour class actions and collective actions.   These lawsuits have hit the hospitality industry as hard as any other industry, perhaps harder.

It is also no secret that the persons who benefit most from these actions are often plaintiffs' counsel, who frequently receive one-third or more of any recovery.  

Now, as a result of an unprecedented new program initiated by the the Department of Labor's Wage and Hour Division ("WHD"), the WHD will be practically delivering potential plaintiffs to the doors of plaintiffs' counsel -- and the WHD has invited plaintiffs' counsel to let it know if it wants a piece of the action. 

Despite the fact that the WHD has an increased enforcement budget and has hired 350 new investigators over the last two years, the WHD has said that it is unable to handle all of the claims it receives.  Rather than seek more funding or implement new procedures to handle the claims, the WHD has made a stunning announcement that can only lead to an increase in wage-hour litigation across the country.  It has announced that it will begin referring employees directly to attorneys to assist them with their claims under the Fair Labor Standards Act ("FLSA") and the Family and Medical Leave Act ("FMLA").   The WHD's new program, which is referred to as the "Bridge to Justice," is part of collaboration with the American Bar Association. 

The Department of Labor's guidance on the "Bridge to Justice" program may be found here.  Under the new initiative, employees will be given a toll-free number to obtain referrals to attorneys in their area.  And attorneys who wish to be included on the referral list are invited to submit their names. 

For employers  -- and hospitality employers in particular --  the "Bridge to Justice" is likely to be seen as little more than the latest effort by the WHD to encourage employees to sue their employers, rather than to raise any concerns with their employers and try to resolve them amicably.  

For plaintiffs' counsel, the "Bridge to Justice" is likely to be seen as an early holiday gift from the WHD, one that they will reap the benefits of for years to come