Fifth Circuit Pays Special Deference to NLRB’s Determination that Hotel Management Company Acted With Anti-Union Animus In Outsourcing Housekeeping DepartmentA recent decision of the U.S. Court of Appeals for the Fifth Circuit illustrates the potential pitfalls of outsourcing in the face of a union campaign, as well as the steep hurdle employers face in overturning a decision of the National Labor Relations Board (“NLRB”). In Remington Lodging & Hospitality, LLC v. NLRB, the Fifth Circuit enforced an NLRB order holding that a hotel management company’s decision to outsource the hotel’s housekeeping department was motivated at least in part by anti-union animus and therefore violated Section 8(a)(3) of the National Labor Relations Act (“the Act”).

In late 2011, Remington Lodging & Hospitality, LLC (“the Management Company”) was hired to manage the Hyatt Regency Long Island hotel (“the Hotel”). At the time the Management Company took over management, the Hotel’s housekeeping functions had been outsourced to a staffing company. Consistent with its general preference to directly employ its workers, the Management Company brought the housekeeping function back in-house, and terminated the Hotel’s contract with the staffing company.

Unfortunately, the Hotel’s guest-room component score – its primary indicator of housekeeping effectiveness – continued to decline, and by June of 2012 had hit its lowest level. That month, the Management Company contacted the staffing company about re-outsourcing the Hotel’s housekeeping department, and in August entered into a new agreement with the staffing company to do so.

The NLRB held that this second outsourcing was at least partially motivated by a desire to discourage membership in a union that had begun making efforts to unionize the housekeepers around the time the Management Company elected to re-outsource the department.

On appeal, the Fifth Circuit rejected the Management Company’s argument that to prove a violation of Section 8(a)(3) of the Act, the NLRB must produce evidence that the discrimination “in fact caused or resulted in a discouragement of union membership.” As the NLRB had failed to introduce such evidence, the Management Company argued the NLRB’s order was not supported by substantial evidence.

In rejecting this argument, the Fifth Circuit noted that requiring actual evidence of discouragement was “completely inconsistent” with Fifth Circuit precedent. The court stated flatly the NLRB “need not prove discouragement as a matter of fact.”

While the Management Company asserted that the decline in guest-room component scores explained its decision, the court upheld the NLRB’s resolution of this contested issue of fact. The court noted that the NLRB had relied on evidence of two union-related conversations between housekeepers and Hotel supervisors prior to the outsourcing decision, as well as the statement of another supervisor that the outsourcing decision was “because of the union.” Together these constituted substantial evidence of an unlawful motive. Stating that it must pay “special deference” to the NLRB’s resolution of conflicting evidence, the court upheld the NLRB’s order.

The lesson for employers is a familiar one – be mindful of the potential repercussions of outsourcing decisions, and careful when considering and articulating the underlying motivation. Conflicting evidence is enough to find illegal motivation.

With the financial crisis and recession behind us, mergers and acquisitions have picked up dramatically over the past several years. In 2015, more than 25,000 M&A deals were announced in the United States, valued at trillions of dollars, primarily involving companies in the hospitality, health care, pharmaceuticals, energy, and technology industries. This year and next, most financial experts foresee an increasing number of these transactions taking place.

In an M&A transaction, the buyer must determine whether it will acquire only the assets of the target company or acquire both the assets and liabilities of that company. Based on that determination, the transaction can be structured as an asset acquisition or a stock acquisition. In a stock transaction (including the typical merger), there is no technical change other than pure ownership. The new owner merely steps into the shoes of the selling shareholders and inherits all assets and liabilities of the business.

In an asset deal, however, a new owner may accept or reject specific assets and liabilities. While this structure typically leaves the buyer free to terminate many of the seller’s employees and bring in its own management team, there are circumstances under which an asset purchaser may nevertheless be liable if care is not taken.

Buyers and sellers alike should carefully consider the labor and employment implications of a proposed transaction and not merely focus on business and financial issues. Otherwise, the parties may walk into multimillion dollar class and collective action lawsuits, incur serious benefit plan obligations, and create unnecessary employee morale issues.

Some of the more serious issues facing hospitality entities might include employee misclassification (as independent contractors or as exempt white-collar employees not entitled to overtime pay), non-compete and trade secret agreements, union collective bargaining agreements, immigration matters, discrimination in employee layoff and retention, individual employment agreement issues, executive compensation plans, and federal and state facility closing and mass layoff laws.

When an M&A transaction is contemplated, in-house counsel and outside corporate counsel must consider all employment and labor implications of the transaction early in the planning process. As part of their due diligence, counsel for the buyer should solicit and acquire copies of, among other things, all of the target company’s individual employment contracts, executive compensation plans, employee handbooks and personnel manuals, union collective bargaining agreements, benefit plan documents, and information with respect to all of the target’s pending federal, state and local governmental employment lawsuits, administrative proceedings, and other matters.

From a hotel buyer’s perspective, all of the employment and labor implications should be considered quite early in the transaction process, while the buyer still has the opportunity to withdraw from the transaction. A buyer must decide whether it is willing to assume the target business’s labor and employment-related liabilities and union obligations (if any), and how these considerations might impact the purchase price. To accomplish its objectives, the buyer will have to carefully negotiate with the seller and then draft the necessary purchase agreement language to identify the significant assets.

Whether to buy a unionized hotel or restaurant will depend upon the strength and weaknesses of the unions involved, language in the collective bargaining agreements, and collateral obligations that might arise under any currently outstanding orders or from pending proceedings before the National Labor Relations Board (“NLRB” or “Board”). Further, in some locations, with respect to certain industries (e.g., the building service and maintenance industry in New York), local governments have enacted laws, rules, and regulations requiring an acquiring company to continue to employ the seller’s employees for 60 or 90 days. Pursuant to those laws, prospective buyers might not legally be able to bring in their own workforce to take over the acquired operations for many months, if at all.

The Employee Retirement Income Security Act (“ERISA”) creates significant potential liability upon an acquiring company with respect to multi-employer pension plans that have been created and maintained pursuant to the Taft-Hartley Act. For example, upon a hotel or restaurant shutdown or mass layoff, ERISA imposes upon buyers in some circumstances the obligation to absorb a withdrawal liability that normally would attach to a seller. Buyer’s counsel in these cases must carefully consider whether the buyer wishes to assume such liability and whether to insist upon a reduction in the purchase price to cover the potential cost of that liability. And, counsel for the seller, of course, will want to insure that any such liability is shifted to the buyer. In a stock transaction on the other hand, aside from the change in ownership, there is no legally cognizable change in the business. Thus, a withdrawal liability will not be triggered (although the new stock owner will inherit ongoing pension fund obligations). Once the decision has been made with respect to whether the transaction will be a stock or an asset transaction, labor and employment law counsel for both seller and buyer must pay careful attention to the drafting of the purchase agreement, its representations and warranties, indemnities, disclosures, and related matters.

Additionally, employers intending to downsize a workforce after an acquisition must pay particular attention to obtaining a census of employees to avoid allegations of selective discrimination in the process. Once the dust settles after an acquisition has been implemented, housekeeping and front-desk employees, managers, and others may find themselves facing a brave new world. The consequences of a restructuring often are unintended as to employee morale and employment policies. Employees treated with dignity are less likely to become class action plaintiffs than those quickly shown the door. In any subsequent litigation, jurors tend to be less sympathetic to employers that fail to consider the impact of the transaction upon employees and their families. Many of these issues should be dealt with upfront early during the sale and acquisition process.

As the U.S. economy rebounds and corporations pick up the pace of restructuring, acquisitions and mergers, it is essential that complex and subtle labor and employment implications of these transactions be considered and dealt with at an early stage, so as to avoid or limit potential liabilities.

What Hospitality Employers Should Do Now

As part of the due diligence process in any acquisition or merger, hospitality employers should do the following:

  • Have your employment counsel request from the company to be acquired or merged with:
  • all individual employment and union collective bargaining agreements, confidentiality and non-compete agreements, employee handbooks and personnel manuals, executive compensation plans, and benefit fund documents, including summary plan descriptions;
  • all files pertaining to any currently open or pending federal, state, and local governmental employment lawsuits and administrative proceedings, as well as to recently closed matters;
  • a complete census of current employees, their job titles, compensation levels, and, to the extent available in company records or by visual observation, their ethnicities, ages, disabilities, and other legally protected characteristics; and
  • information regarding the economic valuation of different properties, facilities, and related assets in order to target asking prices if a decision were to be made to dispose of any.
  • Assemble a team of legal and human resource professionals to focus on the details of the acquisition or merger.
  • Consult with outside labor and employment law counsel with respect to any or all of the above matters.

A version of this article originally appeared in the Take 5 newsletter “Five Key Issues Facing Employers in the Hospitality Industry.”

By Michael Kun

Several years ago, employees in California began filing class action lawsuits against their employers alleging violations of the “suitable seating” provision buried in the state’s Wage Orders.  The unique provision requires some employers to provide “suitable seating” to some employees when the “nature of their work” would “reasonably permit it.” 

The use of multiple sets of quotation marks in the previous sentence should give readers a good idea just how little guidance employers have about the obscure law.  

The California Supreme Court is now poised to explain what that obscure law means for those employers who do business in California.  And the Court’s ruling could mean that restaurants in California will have to provide seats to hosts, hostesses and line cooks, or that hotels and other institutions will have to provide seats to their front desk staffs.

A little history: The “suitable seating” provision was written to cover employees who normally worked in a seated position with equipment, machinery or other tools.  For decades, it had been the subject of little litigation and even less discussion.  But after a court of appeal decision brought the obscure law to the attention of plaintiffs’ lawyers in California, employers in a wide variety of industries have been hit with class actions alleging that they have not provided seats to their employees.  Like many class actions, those cases have typically been 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 for a job.  Just as typically, those employees have not even requested a seat before filing suit and seek recovery of millions of dollars.

To date, the parties and courts dealing with these lawsuits have done so largely in the dark.  Simply put, there is little case law or legislative history explaining what the provision’s various terms mean or how they are to be applied or analyze.  Which employees are covered by the law?  What is a “suitable seat”?  What does the “nature of their work” mean?  What does “reasonably permit” mean?  What should be considered?  What should not be considered?

Earlier this year, the Ninth Circuit Court of Appeals threw up its hands and asked the California Supreme Court to clarify the law.  It asked the California Supreme Court whether the term “nature of the work” refers to individual tasks that an employee performs during the day, or whether it should be read “holistically” to cover a full range of duties.  It also asked the California Supreme Court to clarify whether an employer’s business judgment should be considered in determining whether the nature of the work “reasonably permits” the use of a seat, as well as the physical layout of the workplace and the employee’s physical characteristics.  Finally, it asked the California Supreme Court to clarify whether the employee must prove what would constitute a “suitable seat” to prevail.

After some speculation that the California Supreme Court might decline to answer these questions, it agreed to do so.  While the process will take time, employers in California should finally have much-needed guidance on this obscure law, allowing them to alter their practices as necessary and avoid these class actions.

Depending on what the California Supreme Court says, its opinion could have a great impact upon the hospitality industry. 

A few examples:

Hosts and hostesses at restaurants and clubs often stand behind a desk or podium when greeting customers.  Such employees (or their lawyers) might argue that they could perform their jobs just as effectively from a high stool or a half-seat. 

What about line cooks?  The thought of line cooks working while seated is an unusual one.  But, again, such employees (or their lawyers) might argue that they could do their jobs while seated.  Can an employer consider the layout of the kitchen?  Can it consider whether seats would block the often-tight passageways in the kitchen?  Can it consider the safety and health implications?  How about whether placing seats in the kitchen would violate local fire ordinances?

Like hosts and hostesses in restaurants, the staffs at the reception desks at hotels, spas and other institutions typically are standing while greeting and assisting customers.  Could they do their jobs while seated on a high stool or a half-seat?  Can a hotel take the position that the physical layout of the reception area would not allow chairs at the reception desk?

While the California Supreme Court’s decision is unlikely to address any of these hospitality-based questions specifically – the cases before it do not involve the hospitality industry – hospitality employers will need to review the decision carefully to determine whether the Court’s opinion suggests that some of its employees must be provided with seats.

By Kara M. Maciel

When hoteliers are considering purchasing, selling or remodeling hotels, one of the most overlooked issues during the due diligence and planning phases relates to the Worker Adjustment and Retraining Notification Act.

This statute requires covered employers to provide 60 days’ notice to employees, union representatives, state agencies and localities before carrying out plant closings or mass layoffs.[1] Congress intentionally devised WARN to provide affected employees adequate time to prepare for employment loss, seek and obtain alternative employment, and/or arrange for skill training or retraining to compete successfully in the job market.

Accordingly, hotel buyers, sellers, owners and management companies should be mindful of WARN’s obligations and be aware of potential liability for failure to provide written notice.

WARN’s Threshold Requirements

To fall under WARN, a hotel must employ at least 100 full-time employees, or employ 100 or more full-time and part-time employees who work at least 4,000 hours per week (exclusive of overtime). In determining whether a hotel has the requisite number of employees, hotels must count temporary employees and individuals who are temporarily laid off or on a leave of absence but who have a reasonable expectation of recall toward the threshold number of “full-time” employees.

In contrast, part-time employees are excluded from determining if a hotel satisfies the threshold levels. Part-time employees are individuals who work on average fewer than 20 hours per week, or who have been employed fewer than six of the 12 months preceding the date on which notice is required (e.g., recent hires working full-time schedules and seasonal workers).

Covered Employees and Content of Notices

Hotels covered by WARN must provide 60 days’ notice of a qualifying termination event to each hourly and salaried employee, manager and supervisor who may reasonably expect to experience employment losses. This notice requirement applies to both full-time and part-time employees.

Although temporary employees are counted for purposes of determining coverage under WARN, they are not entitled to advance notice so long as they were hired with the clear understanding that their employment was limited in duration.

The required content of written WARN notifications vary depending on whether the hotel is notifying employees, union representatives or government entities. Nevertheless, common to all notifications are (1) a description of the termination event and a statement as to whether the event is expected to be permanent or temporary; (2) the expected date(s) when the layoffs will commence; and (3) the name and telephone number of a hotel official to contact for further information.

Triggering WARN Notice Requirements

Fundamentally, three types of termination events trigger WARN notification requirements where 50 or more full-time employees experience employment losses. Those events are:

  • A plant closing that is a permanent or temporary shutdown of a “single site of employment” or one or more facilities or distinct operating units within a single site of employment that results in an employment loss during any 30-day period for 50 or more full-time employees.
  • A mass layoff (exclusive of a plant closing) of at least 50 full-time employees where the employment loss consists of at least 33 percent of the full-time employees at the single site.
  • A mass layoff of 500 or more full-time employees at a single site of employment, regardless of its proportion of the total employment at the site or if the employment loss is part of a plant closing.

Additionally, WARN defines “employment loss” as involuntary separations of workers exceeding six months; or a reduction in hours worked of at least 50 percent during each month for a six-month period. Any employment losses during a 30-day period are considered a single event for the purposes of the WARN Act.

Notably, even if a hotel’s initial terminations during a 30-day period do not constitute a covered termination event, WARN may be retroactively applied under certain circumstances. If two or more groups of employees suffer employment losses at a single site of employment during a 90 day period, and each group alone does not meet the threshold employee levels, the groups can be aggregated and treated as a single event.

Thus, when smaller layoffs that occur within 90 days collectively satisfy the WARN threshold level, each affected employee must receive 60 days’ notice prior to his or her date of termination. To avoid treating group terminations as a single event, hotels must establish that (1) the employment losses are unrelated and distinct; and (2) they have not structured or phased the terminations to avoid the WARN requirements.

Additionally, if a hotel announces a non-WARN covered layoff of six-month or less but subsequently extends the layoff past six months, the hotel may have WARN notification responsibilities. Unless the hotel can establish that the layoff extension was due to unforeseeable circumstances at the time of the original layoff, the matter is treated as if notice was required for the original layoff.

Finally, plant closing or mass layoff stemming from a relocation or consolidation of all or part of a hotel’s business is not considered an “employment loss,” if before the event (1) the hotel offers to transfer an employee to another site within a reasonable commuting distance and not more than a six-month break in employment occurs (regardless of whether the employee accepts or rejects the offer); or (2) the employee accepts a transfer to another site (regardless of distance) with no more than a six-month break in employment, within 30 days of the hotel’s offer or the closing or layoff, whichever is later.

Notification Exceptions

The WARN Act specifies exceptions in which hotels may provide less than 60 days’ notice to employees, state agencies and localities affected by an employment loss. The primary exceptions are:

  • Faltering Company Exception. Hotels can provide reduced notice for plant closings — but not mass layoffs — where they are actively seeking new capital or business to prevent the closing, have a realistic chance of obtaining sufficient funds or new business, and believe in good faith that giving notice would prevent it from obtaining the necessary capital or business to remain open.
  • Unforeseeable Business Circumstances Exception. Hotels can provide reduced notice where plant closings and mass layoffs are caused by business circumstances that were not reasonably foreseeable at the time notice would otherwise have been required (e.g., swift onset of a deep economic downturn, a nonnatural disaster).
  • Natural Disaster Exception. Hotels can provide reduced notice if a natural disaster, such as hurricane, flood or earthquake, directly causes a plant closing or mass layoff. Although this exception does not apply when the natural disaster indirectly causes the closing or layoff, the unforeseen business circumstances exception above might.

If the hotel provides less than 60 days’ notice under one of the aforementioned exceptions, it must explain in the notice the reason for the reduced notice period.

Who Must Give Notice in Shutdown: Owner or Operator?

Although hotel owners more often decide to shut down operations permanently rather than the managing entities that operate the hotels, the managing entity bears the primary responsibility for giving WARN notices.[2]

Accordingly, in negotiating management agreements, prudent hotel managers should secure protection from the owner against WARN liability for a permanent shutdown. That protection may be requiring the employer to notify the manager of a shutdown with sufficient time for the manager to comply with the WARN Act and securing indemnification against WARN liability if the owner gives insufficient notice to allow for WARN compliance.

Sale of Hotels

The general rule under WARN is that the responsibility to notify affected employees of a mass layoff or plant closing shifts at the time of sale. In this regard, when part or all of a business is sold and WARN’s threshold requirements are satisfied, the seller is responsible for providing notices to affected employees for any closing or layoff, up to and including the effective date of the sale. After the effective date of the sale, however, the buyer is responsible for providing notice for any such event.

Under WARN, however, employees who are merely transferred from the seller to buyer as part of the sale are not deemed to have suffered an employment loss.[3] In other words, the obligation to notify affected employees of a mass layoff is not triggered by the actual sale but by the employment loss.

The U.S. Department of Labor’s corresponding regulations further provide that employees who remain the sellers’ employees until the effective date of the sale and then are terminated, even if on account of the sale, will be treated as if they are employed by the buyer thereafter.

Thus, as the seller’s employees are treated as employed by the buyer after the sale, the seller will have no WARN responsibilities in connection with the post-sale termination of employees incident to the sale. The buyer will be responsible for WARN compliance if it elects not to retain those employees.[4]

If the seller has knowledge that a significant number of employees might be terminated within the first 60 days after the sale is consummated and the seller can identify those affected employees, the seller, although not required to do so, may send WARN notices to the affected employees as the agent of the buyer.[5] The regulations also encourage the parties to discuss and arrange who will bear the WARN obligations and include the specifics in the purchase agreement with appropriate indemnity language.

For the seller to avoid WARN obligations and liabilities, the seller should, to the extent possible, postpone any terminations incident to the sale until after the effective date of the transaction. In addition, a seller should notify employees who are laid off prior to completion of the transaction if their layoffs are temporary, (i.e., expected to be for less than six months), and that the buyer expects to hire some or all of them.

Under these circumstances, short-term layoffs incident to the sale do not constitute an employment loss under WARN and do not trigger WARN notice requirements. The notice obligations would only arise if the buyer fails to rehire a sufficient number of the seller’s employees. In this case, however, the buyer is solely responsible for giving any WARN notices.

It would therefore be prudent for the seller to obtain a provision in the purchase agreement that indemnifies the seller and obligates the buyer to comply with WARN under such circumstances. If, of course, the seller assumes WARN obligations, then it must also comply with WARN’s specific notice requirements.

Enforcement and Penalties

Federal courts enforce WARN through private right of actions, as the U.S. Department of Labor lacks investigative and enforcement authority for the act. Since district court lack injunctive authority to stop a plant closing or mass layoff, a plaintiff’s remedies are limited to statutory damages, attorneys’ fees and costs, and/or civil penalties.

In sum, in light of WARN’s potential for significant financial exposure, hoteliers should carefully plan in advance any notice requirements prior to the purchase, sale or remodel of a hotel.

[1] See 29 U.S.C. §§ 2101-2109 (1988). Many states have mini-WARN laws which may provide more generous notice to employees; therefore, it is critical that hoteliers check state law in addition to the federal notice provisions under WARN.

[2] See Local 217, Hotel and Restaurant Employees Union v. MHM Inc., 976 F.2d 805 (2d Cir. 1992) (finding the hotel’s management company to be liable under WARN for firing its staff in the wake of the hotel’s closing, even though the hotel owner ordered the shutdown).

[3] See Wiltz v. MG Transport Servs., 128 F.3d 957 (6th Cir. 1997) (holding that the actual sale was not a WARN event and that employees who the buyer retained did not fall under WARN).

[4] See Local 54, Hotel Employees International Union v. Elsinore Shore Associates, 724 F. Supp. 333 (D.N.J. 1989) (holding that whoever is the employer at the time of the plant closing or mass layoff is responsible for notifying the employees 60 days in advance).

[5] 29 C.F.R. § 639.4(1).
 

Our colleague Kara M. Maciel of Epstein Becker Green wrote a wage and hour update in this month’s Take 5 labor and employment newsletter.

Here’s a preview of the five items:

1. IRS Will Begin Taxing a Restaurant’s Automatic Gratuities as Service Charges
2. The New DOL Secretary, Tom Perez, Spells Out the WHD’s Enforcement Agenda
3. DOL Investigates Health Care Provider and Obtains $4 Million Settlement for Overtime Payments
4. Federal Court Strikes Down DOL Tip Pooling Rule
5. Take Preventative Steps When Facing WHD Audits

Read the full article here.

 

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.

By: Kara M. Maciel

Many restaurants include automatic gratuities on guests’ checks with large parties to ensure servers get fair tips. This method allows the restaurant to calculate an automatic gratuity or tip into the total bill, but it takes away the 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 IRS has decided that it will separately tax automatic gratuities.

In 2012, the IRS issued a ruling to clarify earlier tax guidance on tips, particularly automatic gratuities, but because restaurants persuaded the IRS to hold off for a year, the IRS did not immediately enforce that ruling. As of January 2014, however, the IRS will begin classifying automatic gratuities as service charges, taxed like regular wages. 

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 any 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 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. Finally, it will produce more paperwork and add to the already rising costs restaurants will incur due to the Affordable Care Act. 

Restaurants considering eliminating the use of automatic gratuities are unlikely to face much backlash from employees, as the IRS’s ruling could disadvantage them as well. For example, 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. For those waiters and waitresses used to coming home with money in their pockets each workday, such a delay could prove a serious financial hardship.

Some restaurants have begun moving toward the use of suggested tips on a customer’s bill instead of charging an automatic gratuity in light of this change. For example, Darden Restaurants Inc., has begun implementing a new system in some of its restaurants in which three suggested tip amounts, 15%, 18% and 20%, appear on all customer bills. This system allows the customer to exercise discretion in choosing whether and how much to tip. In its ruling, the IRS suggested that such a practice would not be subject to federal withholdings because the decision to leave a tip is still voluntary. Therefore, this practice presents a viable alternative to automatic gratuities as it provides some protection for employees without incurring increased tax penalties.

Other 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 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 employees receive a sufficient wage, while simultaneously removing the regulatory burdens that a tip-system may impose.   

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. 

By:  Kara Maciel

Last week, I had the honor of attending the Resort Hotel Association’s (“RHA”) Annual Conference at The Edgewater Hotel in Seattle.  RHA is comprised of 130 independently-owned resorts, hotels, city clubs and spas in the United States and specializes in insurance programs that address the risks unique to the lodging industry.  For the second year in a row, RHA invited me and my colleague, Jordan Schwartz, to speak on the Americans with Disabilities Act (“ADA”) and public accommodations issues that hotel and lodging operators face. The room was packed and due to constant questions from the audience we were unable to review all our material in the 75 minute speech. Needless to say, ADA compliance remains a hot topic within the hospitality industry! 

Here are the main points from our speech:

1. ADA Lawsuits continue to the flood the federal courts since the 2010 ADA Standards took effect in March 2012. Civil penalties increased to $55,000 per violation, and many lawsuits are now being filed after a potential guest merely calls the property to ask about accessibility standards. Hoteliers continue to struggle with responding to complaints from national advocacy groups and professional plaintiffs across the country.

2. Pool Lifts – Fixed lifts should be in place at each pool, spa, Jacuzzi on property since January 1, 2013 unless you can demonstrate it is not readily achievable. Lifts must remain in operation at all times the pool is open which means batteries must be charged, covers must be removed, and lifts can’t be locked away in storage pending a guest request. Hoteliers remain concerned about the significant liability and exposure from children or other unauthorized persons playing on the lifts that could lead to injury. Many operators at the conference reported that while they have installed the lifts, they have yet to be used in practice.

3. Room Reservations – Under the 2010 ADA Standards, hotels must now modify their policies, practices, or procedures to ensure that individuals with disabilities can make reservations for accessible guest rooms during the same hours and in the same manner as other individuals; be able to identify and describe accessible features in the hotel and guest rooms offered through their reservations service; ensure that accessible guest rooms are held for use by individuals with disabilities until all other guest rooms of that type have been rented and the accessible room requested is the only remaining room of that type; and prevent accessible guest rooms from being double booked.   As a practical matter, this will require many hotel operators to revise their electronic reservations systems and to train employees who take reservations so that they understand the features of accessible rooms.

4. Food Allergies – The Department of Justice has now identified all severe food allergies as disabilities, which could trigger reasonable accommodation requirements under the ADA.  This pronouncement could have wide-ranging implications for all hoteliers that serve food, either as a primary or secondary practice. Thus, hospitality opera­tors should evaluate their practices for offering and providing accommodations for food allergies to minimize any potential exposure to disability discrimination charges under the ADA. While there may not be a “one size fits all” solution to this issue, hospitality companies can take prudent steps to ensure that guests with allergies have the ability to fully and equally enjoy the dining services and the social benefits that accompany such services

5. Website Accessibility – Online marketing is a key tool for hotels and resorts, and most individuals will review a hotel’s website before booking their stay. Thus, it is critical that hotels position themselves as an ADA-friendly property, with notices about their accessible rooms and amenities. In addition, to the extent hotels allow guest to check room availability or book a stay online, the website must be accessible for individuals with visual and other impairments. The Department of Justice has begun to focus on website accessibility for online retailers, and more individuals are filing civil suits over inaccessible on line services.

Overall, the hospitality industry should continue to be vigilant and proactive in ADA compliance ensuring their property meets accessibility requirements before a civil complaint is filed. Necessary steps include an internal audit and inspection of the entire property to ferret out areas needing improvement, staff training on ADA policies and procedures and how to respond to guest inquiries on the phone or in person, and finally, removing architectural and structural barriers where readily achievable to ensure barriers to access are eliminated.

Our next speech will be at The Lodging Conference in Scottsdale on September 16 where we will discuss “ADA Compliance: Implications for Owners and Managers When Acquiring or Developing New Lodging Facilities.”

By Adam C. Abrahms and Steven M. Swirsky

In another major defeat for President Obama’s appointees to the National Labor Relations Board (NLRB or Board), the US Court of Appeals for the DC Circuit found that the Board lacked the authority to issue a 2011 rule which would have required all employers covered by the National Labor Relations Act (the “Act”), including those whose employees are not unionized, to post a workplace notice to employees. The putative Notice, called a “Notification of Employee Rights Under the National Labor Relations Act,” is intended to ostensibly inform employees of their rights to join and be represented by unions and to engage in other activity protected by the Act. The rule would also have made it an unfair labor practice for an employer to fail to post the required notice and such failure also could be considered proof of anti-union animus in other Board proceedings.

Although proposed in 2011 and scheduled to become effective on April 30, 2012, the requirement has yet been put into effect. As we discussed previously, last year, the US District Court for the District of Columbia had held that the Board lacked the authority to make it an unfair labor practice for an employer to fail to post the notice, holding that this exceeded the Board’s authority under the Act. Just prior to the rule going into effect, the DC Court of Appeals issued an emergency injunction in support of the District Court’s opinion and the NLRB opted to not enforce the rule pending the appeal.

Perhaps what is most noteworthy about the Court’s recent opinion, authored by Senior Circuit Judge Randolph, is the Court’s reliance on employers’ free speech rights which are protected by Section 8(c) of the Act. That section of the Act ensures employers the right to communicate their views concerning unions to their employees. The Court noted that while Section 8(c) “precludes the Board from finding non coercive employer speech to be an unfair labor practice, or evidence of an unfair labor practice, the Board’s rule does both.” That is because under the rule an employer’s failure to post the required notice would constitute an unfair labor practice and the Board’s rule would have allowed the Board to “consider an employer’s ‘knowing and willful’ noncompliance to be ‘evidence of anti union animus in cases in which unlawful motive [is] an element of an unfair labor practice.”

The Court focused on the question of the right of employers to “free speech,” under both Section 8(c) of the Act and under the First Amendment to the Constitution, noting that the rule would have required employers to disseminate information and that “the right to disseminate another’s speech necessarily includes the right to decide not to disseminate it,” relying on analysis from prior Supreme Court and appellate court decisions which it referred to as “compelled speech” cases.

Interestingly, the Court’s conclusion that the Board’s rule violates Section 8(c) because it makes an employer’s failure to post the Board’s notice an unfair labor practice, and because it treats such a failure as evidence of anti-union animus, suggests the Board might be able to find an alternate route to a notice posting requirement if it did not seek to create such a remedy for an employer’s failure to post the notice. However, the Court refused to leave the portion of the Board’s rule requiring the Notice posting in effect even without the enforcement and remedial provisions, because they were an inherent part of the Board’s purpose in adopting the rule. For now the beleaguered Board will need to decide whether it wishes to appeal this decision to the Supreme Court, attempt to craft a new rule with the currently constituted Board that this same Court of Appeals has ruled was unconstitutionally appointed in its Noel Canning decision or postpone any action until a new Board is confirmed by the Senate.