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 Matthew S. Groban and Robert S. Groban, Jr.

The OCAHO has recently issued two Form I-9 enforcement decisions involving hospitality and construction industry employers that should be of interest to all our clients.

In United States v. Symmetric Solutions, Inc. d/b/a Minerva Indian Cuisine, 10 OCAHO no. 1209 (OCAHO February 6, 2014), an OCAHO Administrative Law Judge ("ALJ") upheld a $77,000 fine imposed by Immigration Customs Enforcement ("ICE") against a restaurant in Alpharetta, Georgia ("Restaurant"), for Form I-9 violations. ICE claimed that the Restaurant failed to prepare/present Forms I-9 for more than 80 employees, failed to ensure that several employees completed their Forms I-9 correctly, and hired 17 workers knowing that they were not authorized to work. The Restaurant claimed that it was not liable for the violations because, among other things, it did not own the Restaurant at the time of the violations. The ALJ rejected this defense, and upheld the fine, because the evidence established that the original owners retained a 40 percent interest in the business following the sale and continued to play an active role managing the business after the transaction.

In United States v. M&D Masonry, Inc., 10 OCAHO no. 1211 (OCAHO March 11, 2014), the ALJ upheld a fine of $228,300 imposed by ICE upon M&D Masonry ("M&D"), a Georgia masonry company, for Form I-9 violations. The government was alerted to possible misconduct by M&D from a newspaper article entitled "Illegal hiring for airport construction," which appeared in The Atlanta Journal-Constitution. After an investigation, ICE charged M&D with failing to secure correctly completed Forms I-9 from more than 270 employees and with failing to obtain any Form I-9 from more than 85 employees. The OCAHO ALJ rejected M&D’s claims that, among other things, these were at most technical violations and failed to take the company’s limited financial resources into account. In this regard, the ALJ upheld the fine of $228,300 after pointedly noting that ICE was "unduly generous" in considering the company’s financial situation when establishing the fine, due to the serious and persistent number of violations at issue.

These cases serve as an important reminder to employers of the potentially serious nature of Form I-9 violations and the continuing need to address them as part of any organization’s overall risk management policies. These cases also underscore the importance of "due diligence" in this area as part of any merger, acquisition, or other transaction. Most purchase and sale agreements do not have specific set asides for these penalties or provisions to handle the business disruption that can result from ICE directives to terminate undocumented workers. Thus, it is critical to assess these issues prior to closing to avoid the litigation that invariably follows if they are not suitably addressed.

 

By Kara Maciel

Our national hospitality practice frequently advises restaurant owners and operators on whether it is legal for employers to pass credit card swipe fees onto employees or even to guests, and the short answer is, yes, in most states. But whether an employer wants to actually pass along this charge and risk alienating their staff or their customers is another question.

With respect to consumers, in the majority of states, passing credit card swipe fees along in a customer surcharge became lawful in 2013. Only ten states prohibit it: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, Texas and Utah. If a restaurant decides to add a surcharge to the bill to recoup the credit card swipe fee, it is important the that the fee not exceed the percentage charged by the credit card company, the fee is posted clearly on the guest check prior to paying the bill, and it cannot be used for debit card purchases.

With respect to employees, the credit card swipe fee may only be passed along to servers and applied to the tipped portion of the bill. For example, if a bill is $100 plus a $20 tip, the swipe fee on the $100 (e.g., 3 percent or $3) must be paid by the restaurant. However, when paying out the server, you can allocate $19.40 since you can charge the server 3 percent or 60 cents to recover the swipe fee on the gratuity. As with guests, an employer may not charge the server more than credit card swipe fee, and the reduced amount in tips cannot cause the employee to earn less than the minimum wage. And again, you must always check state and local law as some states prohibit deductions from credit card tips for processing fees, such as California, Colorado, Nevada, New Mexico, Oregon, and Washington, among others.

But even if legal, is it practical or good business sense to pass along processing fees to employees and customers? Is it industry practice in your market to pass along these fees, or do you risk angering an important stakeholder in your profit margin – your employees and customers? Surcharges could be perceived as owners taking more money out of the pockets of employees and customers and companies could risk losing the business to another restaurant down the street. Unless the practice becomes an industry standard, it is likely that adding a surcharge or deducting the swipe fee from tips could do more harm than good.

By:  Kara Maciel, Adam Solander and Lindsay Smith

As the Employer Mandate compliance deadline looms for employers under the Affordable Care Act (“ACA”) and employers are closely monitoring employee hours, it is critical that employers take appropriate and lawful steps to record all hours worked by an employee.  If employers try to play games and manipulate how time records are maintained, they could find themselves in hot water under both the ACA and the Fair Labor Standards Act (“FLSA”). 

In what appears to be one of the first lawsuits challenging how hours are recorded under the ACA, an employee filed a putative collective action against Sun Holdings, LLC, a fast food franchisee.  The employee, a busboy at a Golden Corral restaurant, alleged that his managers required him to work under his real name and an alter ego to avoid paying him for all hours worked.  This set-up allegedly was designed to avoid having to pay overtime compensation under the FLSA and to count him as a full-time employee eligible to receive health benefits under the ACA.   

Accurate calculation and recording of the total number of hours worked by an employee is essential to compliance with the provisions of both the FLSA and the ACA.  Under the FLSA, an employer must pay an employee at least the minimum wage for all hours worked.  An employer must also provide overtime compensation at one and a half times the employee’s regular rate of pay for any hours worked in excess of 40 hours per week, unless that employee is classified as exempt.  Therefore, if an employer attributes some amount of time worked by one employee to an alter ego through which the employee cannot claim his time, the employee may be deprived of the overtime compensation he has earned.

Additionally, the ACA only provides benefits to employees who reach a certain amount of hours and binds employers with a certain amount of employees meeting that hour threshold.  The ACA applies to employers with 50 or more employees working 30 or more hours per week.  Only those employees working 30 hours or more per week are entitled to the health care coverage required by the ACA.  Therefore, an employee may lose the benefits to which he would otherwise be entitled if a portion of his hours worked is attributed to someone else, causing him to fall below the 30-hour minimum.  Furthermore, an employer may avoid the obligations of the ACA if it records 30 hours or more of work time for less than 50 of its employees. Although the Employer Mandate, which puts the employer-provided coverage into effect, does not kick in for large employers until January 1, 2015, applicability of the ACA depends upon the size of the affected workforce during the prior calendar year.      

A claim of this kind could be very costly for an employer because, as is the case here, such claims are often brought as collective actions.  In this case, the employee filed his claim on behalf of himself and all others similarly situated.  Although the amount of unpaid wages and liquidated damages he seeks only amounts to approximately $15,000.00, the franchisee owns roughly 400 restaurants in Texas and Florida.  Thus, a court award, or even a settlement, could be quite significant.

These allegations demonstrate the importance of correctly tracking employee hours and ensuring that an employee receives compensation and benefits in accordance with the total amount of hours worked.  Often times, this may mean training your managers as to the correct protocol for recording and compensating hours worked and monitoring to ensure managers are following that protocol. 

Importantly, this case forecasts what could be an emerging and growing area of litigation under the ACA, so employers must be ever vigilant about putting into practice protocols that ensure they are complying with the ACA and not manipulating hours to avoid the Employer Mandate’s requirements.  Considering that an analysis under the Employer Mandate’s look-back methodologies should be done this year, any changes to employees’ hours should be closely reviewed with legal counsel.  Although overtime compensation and benefits coverage can create increased financial burdens on employers, the cost of not complying can be even greater. 

Continue Reading Playing with Employees’ Hours Could Get You in Hot Water under the ACA and FLSA

Epstein Becker Green is pleased to be participating in the 2014 National HR In Hospitality Conference & Expo at the Aria Hotel in Las Vegas on April 28-30, 2014.  EBG is sending two of its hospitality industry experts to represent the Firm, Kara M. Maciel and Jeffrey H. Ruzal.

Kara, a Member of the Firm in its Washington, DC office, is Chair of the Hospitality Employment and Labor Law Outreach Group.  Kara’s practice is concentrated on issues related to the hospitality industry where she has represented national hotel chains, hospitality management groups, restaurants and spas. Kara also counsels employers on compliance with the Affordable Care Act, including the Employer Mandate for unionized and non-unionized employers. In 2013, she was appointed Chair of The Affordable Care Act and Wellness Interest Group of the HRA-NCA’s Legislative Committee.

Jeff, a Senior Counsel in EBG’s New York office, is a member of the Hospitality Employment and Labor Law Outreach and Wage and Hour groups.  Jeff’s practice is focused on wage and hour compliance and litigation related to the hospitality industry.  Jeff has represented national restaurant chains, hotels and country clubs.  Prior to joining EBG, Jeff was a trial attorney with the U.S. Department of Labor, Office of the Solicitor where he was responsible for FLSA enforcement investigations and trials.  Jeff regularly handles frequently litigated wage and hour issues in the hospitality industry, such as misclassification, tip pool and credit issues, and recordkeeping and notice violations.

Kara and Jeff look forward to sharing their expertise in hospitality law and discussing best practices to avoid many of the recurring legal issues plaguing the hospitality industry.  You can reach Kara at (202) 861-5328 or at Kmaciel@ebglaw.com, and Jeff at (212) 351-3762 or at Jruzal@ebglaw.com.          

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).
 

Most unionized hospitality employers have collective bargaining agreements which require contributions to multiemployer pension funds. In recent years, many of these pension funds have slipped into “endangered” or even “critical” status, and employers who have exited these funds have been hit with substantial assessments of withdrawal liability. These assessments often amount to millions of dollars in withdrawal liability.

Many employers are unfamiliar with the complicated procedures for contesting an assessment of withdrawal liability from a multiemployer pension fund. As a result, pension funds win a substantial percentage of litigated cases on procedural technicalities.

EBG partner Mark M. Trapp recently wrote an article entitled “Going Through Withdrawal: A Step-By-Step Guide to Arbitration in Multiemployer Withdrawal Liability Disputes” which appears in the current issue of the ABA Journal of Labor & Employment Law (members only).

Mark’s thoroughly researched and straightforward article sheds some light on a process unfamiliar to most employers, and provides a step-by-step guide to challenging assessments. Going Through Withdrawal can be used as a reference guide to ensure that hospitality employers faced with an assessment of withdrawal liability avoid missteps that could cost millions. As Mark notes in his article:

Successfully challenging an assessment of withdrawal liability is difficult enough without making any unforced errors. By avoiding procedural mistakes, a knowledgeable employer can keep the focus of the proceedings on the merits of the fund’s assessment and maximize its chances of prevailing.

The full article can be accessed here.

In a recent Law360 article, "NLRB Social Media Push Looms Large for Hospitality Sector" (subscription required), our colleague Mark Trapp comments on the importance for unionized and non-unionized hospitality employers to review their social media policies.

Following is an excerpt:

With the National Labor Relations Board increasingly interjecting into non-union issues, hotels, restaurants and other labor-intensive hospitality companies need to brace for potential claims and tread carefully when crafting social media policies for employees, experts say.

Over the last few years, the NLRB has been extending its reach — traditionally centered on union or collective bargaining matters — to include the actions and speech rights of groups of employees, even when those groups are not unions, according to a report released Wednesday by the the Cornell Institute for Hospitality Labor and Employment Relations. In these actions, the NLRB often targets companies’ broad social media policies for limiting the rights of employees to band together over wrongful job conditions, wages or terms, experts say.

"Certainly you want to take a look at your policies for social media, take a look at your handbook … and take a look at disciplinary policies," said Mark Trapp of Epstein Becker & Green PC. "It used to be that you didn’t have to pay attention to that as a non-union employer, but now you do."

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.