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5th Cir.: Restaurant Cannot Take Tip Credit Where Retained Portion of Tips to Offset Credit Card Processing Costs in Excess of Its Direct Costs of Collecting Credit Card Tips

Steele v. Leasing Enterprises, Limited

This case was before the Fifth Circuit on the parties’ cross-appeals.  As discussed here, the case concerned an employer’s ability to withhold a percentage of an employee’s tips received by credit card to offset the fees associated with collecting credit card tips under the Fair Labor Standards Act (“FLSA”).  Specifically, the issue was whether the 3.25% that the defendant-restaurant admittedly retained of all credit card tips exceeded its actual costs of processing same, such that the employer forfeited any entitlement to take the tip credit with regard to its tipped employees.  The district court held that the defendant was not entitled to take the tip credit because this deduction exceeded the direct costs of collecting credit card tips for Perry’s’ tipped employees.  The Fifth Circuit affirmed the finding and held that the retention of tips in excess of the actual cost of collecting those tips violated 29 U.S.C. § 203(m).  As such, the employer was not entitled to benefit from the tip credit and was instead required to pay all tipped employees the regular minimum wage for all hours worked.

Describing the relevant facts, the court explained:

Instead of paying servers their charged tips through their bi-weekly pay checks, Perry’s chose to pay its servers their charged tips in cash on a daily basis. Perry’s voluntarily started this practice in response to servers’ requests. In order to pay its servers their charged tips in cash on a daily basis, Perry’s arranged for armored vehicles to deliver cash to each of its restaurants three times per week. Perry’s’ Chief Operating Officer testified that such frequent deliveries were necessary due to security concerns associated with keeping a large amount of cash on its premises.

In August 2009, Plaintiffs initiated this collective action. In their third amended complaint, they alleged that Perry’s had violated the FLSA by charging its servers the 3.25% offset fee. On August 31, 2010, the district court entered a partial interlocutory judgment, holding that Perry’s may offset credit card issuer fees, but not other costs associated with computers, labor, or cash delivery…

Following a bench trial, the district court issued findings of fact and conclusions of law, holding that Perry’s’ 3.25% offset violated the FLSA because the offset exceeded Perry’s’ credit card issuer fees. The court also held that Perry’s’ cash-delivery expenses could not be included in the offset amount because “[t]he restaurant’s decision to pay it[s] servers in cash is a business decision, not a fee directly attributable to its cost of dealing in credit” and that Perry’s had failed to prove fees related to cancellation of transactions and manual entry of credit card numbers, and therefore could not rely on these amounts to justify the amount of its offset. Finally, the court held that Perry’s may not include other expenses, such as costs associated with bookkeeping and reconciliation of cash tips, in the offset amount because those costs are incurred as a result of ordinary operations only indirectly related to Perry’s’ tip policy. The court concluded that even if it included all of Perry’s’ indirect costs, the 3.25% offset fee exceeded Perry’s’ total costs.

After discussing the law regarding the tip credit generally, the Fifth Circuit framed the issue before it as follows:

In this case we must determine whether an employer may offset employees’ tips that a customer charges on a credit card to recover the costs associated with collecting credit card tips without violating § 203(m)’s requirement that the employee retains all the tips that the employee receives. Specifically, we must determine if the employer violates that requirement when it offsets credit tips to recover costs that exceed the direct fees charged by the credit card companies. Perry’s contends that it may offset both credit card issuer fees and its own cash-delivery expenses and still claim a tip credit under 29 U.S.C. § 203(m). Plaintiffs assert that Perry’s may offset only an amount no greater than the total amount of credit card issuer fees.

The court then discussed the only prior circuit court decision to discuss this issue at length, and relevant DOL regulations and guidance:

Both parties rely on the only circuit court decision to address this issue, Myers v. Copper Cellar Corp., 192 F.3d 546 (6th Cir. 1999). In Myers, the employer deducted a fixed 3% service charge from employee tips whenever a customer tipped by credit card to account for the discount rate charged by credit card issuers. Id. at 552. Because the employer always deducted a fixed percentage, the deduction sometimes rose above or fell below the fee charged on a particular transaction. Id. at 553. The employees challenged this deduction, arguing that any withholding of tips violates § 203(m). The Sixth Circuit disagreed, holding that “an employer may subtract a sum from an employee’s charged gratuity which reasonably compensates it for its outlays sustained in clearing that tip, without surrendering its section 203(m) [tip credit].” Id. The Sixth Circuit determined that an employee does not “receive” a charged tip under § 203(m) until the “debited obligation [is] converted into cash.” Id. The court noted that this conversion is predicated on the “payment of a handling fee to the credit card issuer.” Id. at 554.

To reach that conclusion, the Sixth Circuit relied on 29 C.F.R. §§ 531.52 and 531.53. Section 531.52 defines tip as “a sum presented by a customer as a gift or gratuity in recognition of some service performed for him.” Section 531.53 further clarifies that tips include “amounts transferred by the employer to the employee pursuant to directions from credit customers who designate amounts to be added to their bills as tips.” The Sixth Circuit held that these two regulations make it clear “that a charged gratuity becomes a ‘tip’ only after the employer has liquidated it and transferred the proceeds to the tipped employee; prior to that transfer, the employer has an obvious legal right to deduct the cost of converting the credited tip to cash.” Myers, 192 F.3d at 554. The court noted that “payment of a handling fee to the credit card issuer” is “required” for that liquidation. Id. at 553–54.

As recognized by the Sixth Circuit, the Department of Labor has long interpreted its regulations to permit employers to deduct credit card issuer fees. U.S. Dept. of Labor Field Operations Handbook § 30d05(a) (Dec. 9, 1988).  In Myers, the Sixth Circuit added that such a deduction is allowed under the statute even if, as a consequence, some deductions will exceed the expense actually incurred in collecting the subject gratuity, as long as the employer proves by a preponderance of the evidence that, in the aggregate, the amounts collected from its employees, over a definable time period, have reasonably reimbursed it for no more than its total expenditures associated with credit card tip collections.

Myers, 192 F.3d at 554. Following Myers, the Department of Labor amended its position to allow employers to deduct an average offset for credit card issuer fees as long as “the employer reduces the amount of credit card tips paid to the employee by an amount no greater than the amount charged to the employer by the credit card company.” See U.S. Dept. of Labor Wage and Hour Division Opinion Letter FLSA2006-1.5 The parties do not contest that an employer may deduct a fixed composite amount from credit card tips, so long as that composite does not exceed the total expenditures on credit card issuer fees, and still maintain a tip credit. We agree. Credit card fees are a compulsory cost of collecting credit card tips. As a result, an employer may offset credit card tips for credit card issuer fees and still satisfy the requirements of § 203(m).  However, our inquiry does not end with this holding.

Applying the law to the facts at bar, the court concluded that the employer’s 3.25% chargeback was an impermissible offset, because here the defendant-employer was seeking an offset for costs above and beyond their actual direct cost of collecting credit card tips.  In so doing, the Fifth Circuit like the court below rejected the employer’s argument that it should be entitled to build its indirect costs of processing the credit card tips (that it voluntarily incurred based on its business decision) in addition to the direct cost of processing the credit card tips.  The court reasoned:

Perry’s concedes that its 3.25% offset always exceeded the total credit card issuer fees, including swipe fees, charge backs, void fees, and manual-entry fees. Perry’s submitted demonstrative exhibits which showed that the total offset for each restaurant exceeded all credit card issuer fees by at least $7,500 a year, and by as much as $39,000 in 2012. As a result, Perry’s argues that an employer may also deduct an average of additional expenditures associated with credit card tips and still maintain a tip credit under § 203(m). Although Perry’s justified its 3.25% offset based on a number of other expenses before the district court, Perry’s now maintains that credit card issuer fees and its cash-delivery expenses alone justify the 3.25% offset. In support, Perry’s shows that on an aggregate basis (and across all restaurants), Perry’s’ expenses for collecting and distributing credit card tips to cash—including both credit card issuer fees and expenses for cash-delivery services—always exceeded the offset amount. We must determine whether deducting additional amounts for cash-delivery services violates § 203’s requirement that the employee must keep all of his or her tips.

A Perry’s corporate executive testified that it made a “business decision” to receive cash deliveries three times a week in order to cash out servers’ tips each day and to decrease security concerns associated with keeping too much cash in the register. Importantly, this executive testified that it was only necessary to cash out servers each night because of employee demand, and that if it instead transferred the tips to the servers in their bi-weekly pay checks, the extra cash deliveries would not be necessary. The district court found that Perry’s’ cash-delivery system was “a business decision, not a fee directly attributable to its cost of dealing in credit.” We agree.

In Myers, the Sixth Circuit allowed the employer to offset tips to cover reasonable reimbursement for costs “associated with credit card tip collections” and highlighted that credit card fees were “required” to transfer credit to cash.9 192 F.3d at 554–55 (emphasis added). That court emphasized that the employer’s deductions were acceptable because “[t]he liquidation of the restaurant patron’s paper debt to the table server required the predicate payment of a handling fee to the credit card issuer.” Id. at 553–54. The Department of Labor incorporated a reading of Myers in an opinion letter:

The employer’s deduction from tips for the cost imposed by the credit card company reflects a charge by an entity outside the relationship of employer and tipped employee. However, it is the Wage and Hour Division’s position that the other costs that [an employer] wishes the tipped employees to bear must be considered the normal administrative costs of [the employer’s] restaurant operations. For example, time spent by servers processing credit card sales represents an activity that generates revenue for the restaurant, not an activity primarily associated with collecting tips.

U.S. Dept. of Labor Wage and Hour Division Opinion Letter FLSA2006-1. While it is unnecessary to opine whether any costs, other than the fees charged directly by a credit card company, associated with collecting credit card tips can ever be deducted by an employer, we conclude that an employer only has a legal right to deduct those costs that are required to make such a collection.

Perry’s made two internal business decisions that were not required to collect credit card tips: (1) Perry’s responded to its employees’ demand to be tipped out in cash each night, instead of transferring their tips in their bi-weekly pay checks, and (2) Perry’s elected to have cash delivered three times a week to address security concerns.11 Unlike credit card issuer fees, which every employer accepting credit card tips must pay, the cost of cash delivery three times a week is an indirect and discretionary cost associated with accepting credit card tips. As the district court noted, this cash delivery was “a business decision, not a fee directly attributable to its cost of dealing in credit.” Moreover, Perry’s deducted an amount that exceeded these total costs—credit card issuer fees and cash-delivery expenses—in nine of the relevant restaurant-years.

Thus, the court concluded that:

Allowing Perry’s to offset employees’ tips to cover discretionary costs of cash delivery would conflict with § 203(m)’s requirement that “all tips received by such employee have been retained by the employee” for employers to maintain a statutory tip credit. Perry’s has not pointed to any additional expenses that are the direct and unavoidable consequence of accepting credit card tips. Because Perry’s offset always exceeded the direct costs required to convert credit card tips to cash, as contemplated in § 203(m) and interpreted by the Sixth Circuit, we hold that Perry’s’ 3.25% offset violated § 203(m) of the FLSA, and therefore Perry’s must be divested of its statutory tip credit for the relevant time period.

Click Steele v. Leasing Enterprises, Limited to read the entire Fifth Circuit decision.

D.Colo.: “Expeditor” Proper Participant in Restaurant’s Tip Pool

Giuffre v. Marys Lake Lodge, LLC

This case was before the court on the defendant’s motion for summary judgment. At issue was whether its tip pool- which included its “expeditors”- complied with the FLSA. Holding that the defendant-restaurant was entitled to include the expeditor in the tip pool, the court reasoned that: (1) the expeditor was properly deemed a “front-of-the-house” employee with requisite duties to be deemed a “tipped employee;” (2) the expeditor was not an “employer” under the FLSA; and (3) the defendant had properly put plaintiff on notice of its intention to take the tip credit. Thus, the court granted the defendant’s motion.

Briefly discussing the chief issue of interest, the court explained:

MLL utilized the expeditor position on busy nights to assist in its restaurant. Defendants contend that the expeditor is a “front of the house” position that falls within the definition of a “tipped employee” for purposes of the FLSA, thus barring plaintiff’s claim that the tip credit is invalidated by the sharing requirement. See Roussell v. Brinker Int’l, Inc., 441 F. App’x 222, 231 (5th Cir.2011) (“Customarily, front-of-the-house staff like servers and bartenders receive tips. Back-of-the-house staff like cooks and dishwashers do not, and thus cannot participate in a mandatory tip pool.”). In arguing about whether the expeditor could share in tips, the parties focus on the position’s level of interaction with customers. See id. (“Direct customer interaction is relevant because it is one of the factors distinguishing these two categories of workers.”); see Townsend v.. BG–Meridian, Inc., 2005 WL 2978899, at *6 (W.D.Okla. Nov. 7, 2005) (“The cases that have considered whether a given occupation falls within the definition of a tipped employee have focused on the level of customer interaction involved in that occupation.”).

Plaintiff admits that, during the time he worked at MLL, the expeditor position was usually filled by Mikilynn Wollett. See Docket No. 64 at 3, ¶ 8; Docket No. 92 at 3, ¶ 8. Ms. Wollett descibes the expeditor as a “front of the house” position with the following responsibilities: “checking the plates as they come out from the kitchen cooks to make sure they match the tickets; placing the food on the serving trays; taking the serving trays to the tables and delivering the food to customers; checking in with customers about their meals and exchanging food if the customer has [a] complaint; refilling beverages; chatting with customers; and assisting the wait staff in any other way necessary.” Docket No. 64 –1 at 2, ¶¶ 1–2. According to Ms. Wollett, the “position is very similar to that of a waiter, and the attire is nearly identical, but the expeditor/food runner does not take the customers’ orders.” Id. at 1, ¶ 2.

Curiously, the court appears to have resolved factual issues with regard to the alleged duties of the expeditor and simply rejected plaintiff’s proffered evidence in that regard. As such, the court seemed to imply that with a stronger factual record- supported by testimony other than that of the named-plaintiff alone- it may have reached a different result, at least at the summary judgment stage. Thus, it’s not clear how much precedential value this case will have, if any.

Click Giuffre v. Marys Lake Lodge, LLC to read the entire Order.

D.Colo.: Pizza Hut Delivery Drivers’ Minimum Wage Claims, Premised on Claim That Defendants Failed to Reasonably Estimate Vehicle-Related Expenses for Reimbursement Can Proceed; Defendants’ Motion to Dismiss Denied

Darrow v. WKRP Management, LLC

This matter was before the Court on the defendants’ motion to dismiss plaintiff’s second amended complaint.  Plaintiff, a Pizza Hut delivery driver, alleged that defendants, Pizza Hut franchisees, violated the Fair Labor Standards Act (“FLSA”) and the Colorado Minimum Wage of Workers Act (“CMWWA”) by failing to reasonably approximate his automotive expenses for reimbursement purposes, and thereby, failing to pay him minimum wage.

Significantly, defendants paid plaintiff and opt-in plaintiffs at or near the Colorado minimum wage from 2007 to 2009.  According to the court, on average, the plaintiff and opt-in plaintiffs delivered two to three orders per hour and drove five miles per delivery.  Plaintiff alleged that defendants required their delivery drivers to ‘maintain and pay for safe, legally-operable, and insured automobiles when delivering WKRP’s pizza and other food items.’  Defendants reimbursed Plaintiff between $0.75 and $1.00 per delivery for the vehicle expenses incurred by plaintiff to make deliveries. Plaintiff alleged that it was defendants’ policy and practice to unreasonably estimate employees’ automotive expenses for reimbursement purposes, which caused Plaintiff and other similarly situated individuals to be paid less than the federal minimum wage and the Colorado minimum wage from 2007 to 2009 in violation of the FLSA and the CMWWA.

Rejecting defendants’ argument that plaintiff failed to state a claim for unpaid minimum wages under these facts, the court looked to the section 7(e)(2), which states that an employee’s regular rate does not include travel or other expenses incurred in furtherance of the employer’s interest:

“The FLSA provides a definition for “wages,” but does not address an employer’s reimbursement of expenses. However, “[Department of Labor] regulations are entitled to judicial deference, and are the primary source of guidance for determining the scope and extent of exemptions to the FLSA,” including expense reimbursement. Spadling v. City of Tulsa, 95 F.3d 1492, 1495 (10th Cir.1996). Therefore, the Court will look to the Department of Labor regulations to determine whether, under the FLSA, an employee may claim that his wages are reduced below the minimum wage when he is under-reimbursed for vehicle-related expenses. Under 29 C.F.R. § 531.35, “the wage requirements of the [FLSA] will not be met where the employee ‘kicks-back’ directly or indirectly to the employer or to another person for the employer’s benefit the whole or part of the wage delivered to the employee.” A kickback occurs when the cost of tools that are specifically required for the performance of the employee’s particular work “cuts into the minimum or overtime wages required to be paid him under the Act.” Id. Section 531.35 specifically incorporates § 531.32(c), which in turn incorporates § 778.217, which states:

Where an employee incurs expenses on his employer’s behalf or where he is required to expend sums solely by reason of action taken for the convenience of his employer, section 7(e)(2) [which provides that employee’s regular rate does not include travel or other expenses incurred in furtherance of the employer’s interest] is applicable to reimbursement for such expenses. Payments made by the employer to cover such expenses are not included in the employee’s regular rate (if the amount of the reimbursement reasonably approximates the expenses incurred). Such payment is not compensation for services rendered by the employees during any hours worked in the workweek.  29 C.F.R. § 778.217(a). In Wass v. NPC International, Inc. (Wass I), 688 F.Supp.2d 1282, 1285–86 (D.Kan.2010), the court concluded that these regulations “permit an employer to approximate reasonably the amount of an employee’s vehicle expenses without affecting the amount of the employee’s wages for purposes of the federal minimum wage law.” However, if the employer makes an unreasonable approximation, the employee can claim that his wage rate was reduced because of expenses that were not sufficiently reimbursed. Id. at 1287.

Plaintiff alleges that his under-reimbursed vehicle expenses constituted a kickback to Defendants because Defendants failed to reasonably approximate Plaintiff’s vehicle-related expenses and Plaintiff was specifically required to use and maintain a vehicle to benefit Defendants’ business. Plaintiff further alleges that Defendants’ unreasonable approximation of Plaintiff’s vehicle-related expenses led to Plaintiff’s wage being reduced below the minimum wage.

Defendants argue that Plaintiff cannot use an estimated mileage rate as a substitute for actual vehicle-related expenses. Without pleading his actual expenses, Defendants contend that Plaintiff is unable to prove (1) that Defendants’ reimbursement rate was an unreasonable approximation, and (2) that Defendants paid him below the minimum wage as a result of the under-reimbursement. Plaintiff responds that he does not have to produce his actual automotive expenses in order to state a claim under the Iqbal and Twombly standard because he can raise the plausible inference that Defendants’ approximation of his vehicle-related expenses was unreasonable without knowing his actual expenses. For the following reasons, the Court finds that Plaintiff’s Amended Complaint meets the pleading standard under Iqbal and Twombly.”

After a recitation of the applicable law, the court held that plaintiff had sufficiently pled his estimated costs of running his vehicle, using a variety of facts, including the reimbursement rate paid by defendants versus the IRS’ mileage reimbursement rate.  Further, when taken together with plaintiff’s hourly wages, he had sufficiently pled that defendants failed to pay him at least the federal and/or Colorado minimum wage(s).  Therefore, the court denied defendants’ motion in its entirety.

Click Darrow v. WKRP Management, LLC to read the entire Order.

8th Cir.: DOL’s 20% Rule, As Applicable to Tipped Employees Entitled to “Chevron” Deference; Relaxed Evidentiary Burden on Employees, Where Employer Failed to Maintain Proper Records Distinguishing Between Tipped and Non-Tipped Duties

Fast v. Applebee’s International, Inc.

This case was before the Eighth Circuit on Applebee’s interlocutory appeal of the district court’s denial of its motion for summary judgment.  The primary issue in the case was how to properly apply the “tip credit” to employees whom both sides agree are “tipped employees” but who perform both tipped and non-tipped (dual) jobs for the employer.  Relying on 29 C.F.R. § 531.56(e), the district court applied the so-called 20% rule promulgated by the D.O.L., requiring an employer to pay a tipped employee regular minimum wage to employees who spend more than 20% of their work time in a given week performing non-tipped duties.  Applebee’s challenged the ruling and asserted that the “dual job” regulations were inconsistent with 29 U.S.C. § 203(m) or the FLSA.  Affirming the decision below, the Eighth Circuit held that the D.O.L.’s regulations were entitled to “Chevron” deference and explained:

“Applebee’s argues that neither the statute nor the regulation places a quantitative limit on the amount of time a tipped employee can spend performing duties related to her tipped occupation (but not themselves tip producing) as long as the total tips received plus the cash wages equal or exceed the minimum wage. The regulation, to which we owe Chevron deference, makes a distinction between an employee performing two distinct jobs, one tipped and one not, and an employee performing related duties within an occupation “part of [the] time” and “occasionally.” § 531.56(e). By using the terms “part of [the] time” and “occasionally,” the regulation clearly places a temporal limit on the amount of related duties an employee can perform and still be considered to be engaged in the tip-producing occupation.  “Occasionally” is defined as “now and then; here and there; sometimes.” Webster’s Third New Int’l Unabridged Dictionary 1560 (1986); see also United States v. Hackman, 630 F.3d 1078, 1083 (8th Cir. 2011) (using dictionary to determine ordinary meaning of a term used in the commentary to the United States Sentencing Guidelines). The term “occasional” is also used in other contexts within the FLSA, such as in § 207, which allows a government employee to work “on an occasional or sporadic basis” in a different capacity from his regular employment without the occasional work hours being added to the regular work hours for calculating overtime compensation. See 29 U.S.C. § 207(p)(2). The DOL’s regulation defines occasional or sporadic to mean “infrequent, irregular, or occurring in scattered instances.” 29 C.F.R. § 553.30(b)(1). Thus, the DOL’s regulations consistently place temporal limits on regulations dealing with the term “occasional.”

A temporal limitation is also consistent with the majority of cases that address duties related to a tipped occupation. The length of time an employee spends performing a particular “occupation” has been considered relevant in many cases. For example, even when the nontip-producing duties are related to a tipped occupation, if they are performed for an entire shift, the employee is not engaged in a tipped occupation and is not subject to the tip credit for that shift. See, e.g., Myers v. Copper Cellar Corp., 192 F.3d 546, 549-50 (6th Cir. 1999) (noting that 29 C.F.R. § 531.56(e) “illustrat[es] that an employee who discharges distinct duties on diverse work shifts may qualify as a tipped employee during one shift” but not the other and holding that servers who spent entire shifts working as “salad preparers” were employed in dual jobs, even though servers prepared the very same salads when no salad preparer was on duty, such that including salad preparers in a tip pool invalidated the pool); Roussell v. Brinker Int’l, Inc., No. 05-3733, 2008 WL 2714079, **12-13 (S.D. Tex. 2008) (employees who worked entire shift in Quality Assurance (QA) were not tipped employees eligible to be included in tip pool even though servers performed QA duties on shifts when no QA was working; court “agrees that such work likely can be considered incidental to a server’s job when performed intermittently,” but distinguished full shifts). The same is true of nontipped duties performed during distinct periods of time, such as before opening or after closing. See Dole v. Bishop, 740 F. Supp. 1221, 1228 (S.D. Miss. 1990) (“Because [the] cleaning and food preparation duties [performed for substantial periods of time before the restaurant opened] were not incidental to the waitresses’ tipped duties, the waitresses were entitled to the full statutory minimum wage during these periods of time.”).  Conversely, where the related duties are performed intermittently and as part of the primary occupation, the duties are subject to the tip credit. See, e.g., Pellon v. Bus. Representation Int’l, Inc., 528 F. Supp. 2d 1306, 1313 (S.D. Fla. 2007) (rejecting skycap employees’ challenge to use of the tip credit where “the tasks that allegedly violate the minimum wage are intertwined with direct tip-producing tasks throughout the day”), aff’d, 291 F. Appx. 310 (11th Cir. 2008).

Because the regulations do not define “occasionally” or “part of [the] time” for purposes of § 531.56(e), the regulation is ambiguous, and the ambiguity supports the DOL’s attempt to further interpret the regulation. See Auer, 519 U.S. at 461. We believe that the DOL’s interpretation contained in the Handbook—which concludes that employees who spend “substantial time” (defined as more than 20 percent) performing related but nontipped duties should be paid at the full minimum wage for that time without the tip credit—is a reasonable interpretation of the regulation. It certainly is not “clearly erroneous or inconsistent with the regulation.” Id. The regulation places a temporal limit on the amount of related nontipped work an employee can do and still be considered to be performing a tipped occupation. The DOL has used a 20 percent threshold to delineate the line between substantial and nonsubstantial work in various contexts within the FLSA. For example, an “employee employed as seaman on a vessel other than an American vessel” is not entitled to the protection of the minimum wage or overtime provisions of the FLSA. See 29 U.S.C. § 213(a)(12). The DOL recognized that seamen serving on such a vessel sometimes perform nonseaman work, to which the FLSA provisions do apply, and it adopted a regulation that provides that a seaman is employed as an exempt seaman even if he performs nonseaman work, as long as the work “is not substantial in amount.” 29 C.F.R. § 783.37. “[S]uch differing work is ‘substantial’ if it occupies more than 20 percent of the time worked by the employee during the workweek.” Id. Similarly, an employee employed in fire protection or law enforcement activities may perform nonexempt work without defeating the overtime exemption in 29 U.S.C. § 207(k) unless the nonexempt work “exceeds 20 percent of the total hours worked by that employee during the workweek.” 29 C.F.R. § 553.212(a). And an individual providing companionship services as defined in 29 U.S.C. § 213(a)(15) does not defeat the exemption from overtime pay for that category of employee by performing general household work as long as “such work is incidental, i.e., does not exceed 20 percent of the total weekly hours worked.” 29 C.F.R. § 552.6. The 20 percent threshold used by the DOL in its Handbook is not inconsistent with § 531.56(e) and is a reasonable interpretation of the terms “part of [the] time” and “occasionally” used in that regulation.”

Determining that the issue was not properly before it, the court declined to answer the question of what duties are incidental to the tipped employee duties and what duties are not, stating:

“We note that the parties dispute which specific duties are subject to the 20 percent limit for related duties in a tipped occupation and which duties are the tip producing part of the server’s or bartender’s tipped occupation itself. The regulation lists activities such as “cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses” as “related duties in . . . a tipped occupation.”  § 531.56(e). The Handbook repeats these examples and states that the 20 percent limit applies to “general preparation work or maintenance.” (Appellant’s Add. at 32,  DOL Handbook § 30d00(e).) Although the district court stated that “it was for the Court to decide what duties comprise the occupation of a server or bartender” (Dist. Ct. Order at 6 n.3), the order under review did not do so and concluded only that “[e]mployees may be paid the tipped wage rate for performing general preparation and maintenance duties, so long as those duties consume no more than twenty percent of the employees’ working time” (id. at 15). To the extent that questions remain concerning which duties the 20 percent rule applies to, those issues are beyond the scope of this interlocutory appeal, and we do not address them. We hold only that the district court properly concluded that the Handbook’s interpretation of § 531.56(e) governs this case.”

Lastly, citing the Supreme Court’s Mt. Clemens decision, the court held that the “recordkeeping rule” applies in situations where the employer fails to maintain sufficient records to distinguish between time spent performing tipped duties and non-tipped duties.

Click Fast v. Applebee’s International, Inc. to read the entire decision.

DOL Publishes New FLSA Rules, Rejecting Pro-Employer Changes to Fluctuating Workweek and Comp Time, Clarifying Tip Credit Rules

On April 5, the Department of Labor (DOL) published its updates to its interpretative regulations regarding the Fair Labor Standards Act (FLSA) in the Federal Register.  to go into effect 30 days later.  The Updating Regulations, revise out of date CFR regulations. Specifically, these revisions conform the regulations to FLSA amendments passed in 1974, 1977, 1996, 1997, 1998, 1999, 2000, and 2007, and Portal Act amendments passed in 1996.

As noted by several commentators, the final regulations are noteworthy for what was not included as much as for what was.  Below is a brief description of the most significant changes and those changes originally proposed, that were not adopted:

Fluctuating Workweek Under 29 C.F.R. §778.114

The proposed regulations issued by DOL in 2008 under the Bush administration (73 Fed. Reg. 43654) would have amended regulations on the “fluctuating workweek” method of calculating overtime pay for nonexempt employees who have agreed to received pay in the form of fixed weekly payments rather than in the form of an hourly wage.  The proposed regulations would have amended 29 C.F.R. §778.114 to permit payments of non-overtime bonuses and incentives (such as shift differentials) “without invalidating the guaranteed salary criterion required for the half-time overtime pay computation.”  The DOL left out this proposed change from the final rules however, saying it had “concluded that unless such payments are overtime premiums, they are incompatible with the fluctuating workweek method of computing overtime.”  Explaining the decision not to amend the FWW reg, the DOL noted that “several commenters … noted that the proposal would permit employers to reduce employees’ fixed weekly salaries and shift the bulk of the employees’ wages to bonus and premium pay” contra to the FLSA’s intent.  The DOL’s decision to decline the proposed amendment is consistent with virtually all case law on this issue, as discussed here and here.

Tipped Employees

The DOL has also decided to revise the proposed regulations’ interpretation of Congress’ 1974 amendment, section 3(m) of the FLSA, to require advance notice to tipped employees of information about the tip credit the employer is permitted to take based on its employees’ tips.  The final rule combines existing regulatory provisions to assure such employees are notified of the employer’s use of the tip credit, and how the employer calculates it.  This regulation too is consistent with case law on the subject, requiring advanced notice of the tip credit.

Compensatory Time

The final rules also do not include a proposed change that would have allowed public-sector employers to grant employees compensatory time requested “within a reasonable period” of the request, instead of on the specific dates requested. Instead, the final rule will leave the regulations unchanged, “consistent with [DOL’s] longstanding position that employees are entitled to use compensatory time on the date requested absent undue disruption to the agency.”

The new CFR regulations go into effect on May 5, 2011.

S.D.Fla.: Employer Need Not Pay Employee MW For All Hours Worked to Take Advantage of Tip Credit

Goldin v. Boce Group, L.C.

This case was before the court on defendant’s motion to dismiss, for failure to state a claim.  The plaintiff’s theory of relief for minimum wage violations arose from the fact that while he worked 51 hours per week, each week, Defendants paid Plaintiff the required reduced minimum wage for only forty hours, and failed to pay him at all for the additional eleven hours of overtime. Plaintiff claimed that because Defendants “did not pay Plaintiff the required amount for every hour he worked,” they were not permitted to take advantage of the tip credit at all and must disgorge the entire tip credit.  Inasmuch as the FLSA requires that employers who seek to take the tip credit must pay tipped minimum wage in order to do so, this theory would seem to make perfect sense, however the court disagreed and dismissed the case.

The court reasoned:

“There is no basis in the FLSA for the relief Plaintiff seeks. The FLSA clearly lays out the prerequisites an employer must meet in order to claim the tip credit. There are only two: (1) the employer must inform the employee that the employee will be paid the reduced minimum wage; and (2) all tips received by the employee must be retained by the employee. 29 U.S.C. § 203(m).  There is no “condition precedent” that the reduced cash wage be paid for every hour worked before an employer is entitled to claim the statutorily-mandated tip credit. See id. Congress could, and did, write into the FLSA express conditions precedent to the application of the tip credit. The Court declines to read a condition precedent into the statute where Congress did not create one. In re Tennyson, 611 F.3d 873, 877 (11th Cir.2010) (stating that where statute is “clear, unambiguous, and does not result in any absurd consequences,” the Court “will not … read into the text of the statute an unstated purpose.”).

In addition, the FLSA very clearly lays out the remedies available to employees who are subject to FLSA violations by employers. Successful FLSA plaintiffs are entitled to recover “the amount of their unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and [ ] an additional equal amount as liquidated damages.” 29 U.S.C. § 216(b). Congress wrote specific remedies into the statute. Congress did not choose to include as a remedy disgorgement of the tip credit where the plaintiff is a tipped employee. The Court will not write this additional remedy into the statute where Congress did not see fit to do so. See In re Tennyson, 611 F.3d at 877.

In addition, two other divisions of court in this District have rejected Plaintiff’s theory on almost identical facts. See Muldowney v. Mac Acquisition, LLC, Case No. 09–22489–CIV, 2010 WL 520912 (S.D.Fla. Feb. 9, 2010) (Huck, J.); Perez v. Palermo Seafood, Inc., Case No. 07–21408–CIV, 2008 WL 7505704 (S.D.Fla. May 8, 2008) (O’Sullivan, M.J.). In both cases, a tipped employee who was paid the reduced minimum wage for some hours claimed their employers were not entitled to claim the tip credit because they were not paid for “off-the-clock work.”

In Palermo Seafood, Magistrate Judge O’Sullivan found no textual support in the statute for the plaintiff’s position, observing: “The cases that have disallowed the tip credit have done so because the employer failed to comply with one, or both, of the following requirements: (1) the employee receive proper notice of the tip credit and (2) that the employee is not required to share his or her tips with non-tipped employees.” 2008 WL 7505704 at *2. Accordingly, Judge O’Sullivan found tip credit should apply to the plaintiff’s regular shift hours, for which she was compensated at the reduced minimum wage. Id. at *1.

In Muldowney, Judge Huck came to the same conclusion:

Section 203(m) merely prescribes the method for calculating a tipped employee’s wages and sets forth two explicit requirements that must be met for an employer to claim the tip credit, both of which are satisfied in this case. The statute says nothing about unpaid wages due to off-the-clock hours. Further, by rejecting Plaintiff’s interpretation, she is not left without a remedy: she can seek unpaid wages for her alleged off-the-clock hours under state law or other sections of the FLSA. Therefore, the Court finds that Defendants are entitled to the tip credit for hours where Plaintiff was paid the specified reduced cash wage.2010 WL 520912 at *1.

The Court agrees with these two well-reasoned decisions. However, this does not mean, as Plaintiff argues, that employers are therefore not required to pay employees the minimum wage for every hour worked. Of course employers must compensate employees at the required rate for every hour worked, and of course the failure to do so is a violation of the FLSA. 29 U.S.C. § 206(a)(1) (providing minimum wage amounts); 29 U.S.C. § 215(a)(2) (creating cause of action for violation of minimum wage and overtime provisions).”

It should be noted that this decision and the 2 decisions on which it relies were all rendered in the Southern District of Florida.  As tipped employee cases continue to become more and more prevalent though, as a result of tremendous amount of abuses of tipped workers in various industries, it will be interesting to see if courts outside of the Southern District of Florida have a different take, based on the text of 203(m).

Click Goldin v. Boce Group, L.C. to read the entire order.

D.Md.: Employer-Owner Could Not Share in Employee Tip Pool Under FLSA, Regardless of Extent of His Bartending Activities

Gionfriddo v. Jason Zink, LLC

In this case tipped employees challenged the validity of the employer’s tip pool, due to the participation of “non-tipped employees” in the tip pool.  The case was before the court on a variety of motions.  Of significance here, the parties moved by cross motions for summary judgment on the issue of whether the defendant’s tip pool arrangement was valid or not.  The court held that the owner-operators participation in the tip pool necessarily rendered it invalid, notwithstanding the fact that he regularly bartended side by side with his tipped employer bartenders.  In doing so, the court rejected the defendant’s argument that an owner-operator, who earns primarily tips, can transform himself into a tipped employee, such that he may permissibly participate in a tip pool with other tipped employees.

The court reasoned:

“As previously mentioned, the Fair Labor Standards Act was enacted to eliminate “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” Pub.L. No. 75-718, 52 Stat. 1060 (1938) (codified as amended at 29 U.S.C. §§ 201 et seq.). To effectuate this aim, the FLSA requires that employees be paid a minimum wage of $7.25 per hour. 29 U.S.C. § 206(a)(1)(c). An exception exists for “tipped employees.” “Tipped employees” are those employees that are “engaged in an occupation in which [they] customarily and regularly receive[ ] more than $30 a month in tips.” 29 U.S.C. § 203(t). Those employees are required to receive at least the minimum wage, but their employers are permitted to pay a direct wage of $2.13 per hour and then take a “tip credit” to meet the $7.25 per hour minimum wage requirement. 29 U.S.C. § 203(m). In other words, an employer satisfies the FLSA if he pays his tipped employees at least $2.13 per hour, and that wage, in conjunction with the tips they receive, make up at least the $7.25 per hour minimum wage. Employees are permitted to share tips through a tip pooling or tip splitting arrangement so long as each employee customarily receive more than $30 per month in tips. 29 C.F.R. § 531.54. However, “[i]f tipped employees are required to participate in a tip pool with other employees who do not customarily receive tips, then the tip pool is invalid and the employer is not permitted to take a ‘tip credit.’ “ Wajcman v. Inv. Corp. of Palm Beach, 620 F.Supp.2d 1353, 1356 n. 3 (S.D.Fla.2009) (citing 29 U.S.C. § 203(m)). In the present case, the bartenders at the Taverns participated in a collective tip pool that was divided up according to a formula that accounts for the hours worked by each bartender.

Mr. Zink worked as a bartender at the Taverns and concedes that he participated in the tip pool. Mr. Zink also concedes that he satisfies the definition of “employer” under Section 203(d) of the FLSA. See Defs.’ Cross Mot. Summ. J. at 24, ECF No. 51-1. Both parties agree that bartending is typically a tipped occupation. Where the parties disagree, however, is on the question of whether an “employer” may also be a “tipped employee” and receive a share of the tip pool. Defendants argue that despite his status as an employer, Mr. Zink is nevertheless permitted to share in the tip pool because he can simultaneously be an “employer” and a tipped “employee” under the FLSA. In other words, because Mr. Zink works as a bartender, a position that ordinarily receives tips, his status as an employer is immaterial to the FLSA analysis. Plaintiffs respond by arguing that allowing Mr. Zink to simultaneously benefit from the “tip credit” exception to the minimum wage requirements and at the same time personally receive tips would be completely contradictory to the purpose behind the FLSA. Plaintiffs maintain that Mr. Zink, as the sole owner of the Taverns, and the Plaintiffs’ employer, simply may not participate in a tip pool, and that to the extent he did participate in a tip pool, that tip pool is invalid under the FLSA. In short, the question before this Court is to what extent, if any, an owner-employer who also tends bar is permitted to receive tips from an employee tip pool.

This precise question is an issue of first impression in this District and in the Fourth Circuit, but not elsewhere. Every court that has considered the issue has unequivocally held that the FLSA expressly prohibits employers from participating in employee tip pools. “Congress, in crafting the tip credit provision of section 3(m) of the FLSA did not create a middle ground allowing an employer both to take the tip credit and share employees’ tips.” Chung v. New Silver Palace Restaurant, Inc., 246 F.Supp.2d 220, 230 (S.D.N.Y.2002); see also, e.g., Morgan v. SpeakEasy, LLC, 625 F.Supp.2d 632, 652 (N.D.Ill.2007) (quoting Chung, 246 F.Supp.2d at 230); Ayres v. 127 Restaurant Corp., 12 F.Supp.2d 305, 308-09 (S.D.N.Y.1998) (finding tip pool invalid as a result of general manager’s participation); Davis v. B & S, Inc., 38 F.Supp.2d 707, 714 (N.D.Ind.1998) (“an employer is not eligible to take the tip credit, and will be liable for reimbursing an employee the full minimum wage that employee would have earned, if the employer exercises control over a portion of the employee’s tips”).

Despite the clear weight of authority holding that employers may not participate in employee tip pools, Defendants seek to carve out a novel legal question where there is none. Essentially, Defendants argue that the analysis undergirding the cases holding that employers may not participate in employee tip pools is fundamentally flawed because those courts considered the issue under the faulty premise that a particular individual may only be an employer or a tipped employee, and not both. See Defs.’ Cross Mot. Summ. J. at 26-34, ECF No. 51-1; Defs.’ Reply at 16, ECF No. 58. Defendants rely on a textual interpretation of the FLSA, and argue that as a result of the Act’s broad definition of “employer,” it is also possible for an employer to be a tipped employee if that person participates in an activity that customarily receives tips, such as bartending. Id. In this regard, Defendants are mistaken-the cases holding that employers may not participate in employee tip pools do not take the position that under no circumstances will an “employer” be prohibited from participating in a tip pool-indeed, in close cases courts have gone to great lengths to determine whether a person who possesses some managerial control may be considered a “tipped employee” under the FLSA. For example, in Rudy v. Consol. Restaurant Cos., No. 3:08-CV-0904-L, 2010 WL 3565418 (N.D.Tex. Aug. 18, 2010), the district court considered whether maître d’s, who possessed some managerial authority over regular restaurant waiters, were properly considered “tipped employees” as a result of their significant interaction with customers. Id. at *4-9. Similarly, in Davis v. B & S, Incorporated, 38 F.Supp.2d 707, 714 (N.D.Ind.1998), the court found that a material fact existed with regard to whether a general manager could participate in a tip pool and declined to grant summary judgment to the employee. Id. at 717 (“because issues of fact remain as to whether [the general manager] was a ‘tipped employee’ with regard to his work with the disc jockeys, the validity of his participation in the tip pool … cannot be resolved as a matter of law”).”

Click Gionfriddo v. Jason Zink, LLC to read the entire order.

S.D.Ohio: Inclusion Of Maître D’ In Tip Pool Not Necessarily Illegal; Evidence Demonstrated Maître D’ Lacked Management Duties To Make Him An FLSA Employer, If He Did Not Hire Or Fire

Strange v. Wade

This case was before the court on plaintiff’s motion for summary judgment regarding a variety of issues.  Although the court granted the motion in some respects, as discussed here, it denied the motion with respect to plaintiff’s claim that defendant’s inclusion of the maître d’ in its tip pool was illegal and invalidated the tip pool.  The court held that on the record before it, it was not possible to conclude that the maître d’ was a management employee rather than a properly tipped service employee.

Discussing this issue the court reasoned:

“The FLSA expressly prohibits employers from participating in employee tip pools. “Congress, in crafting the tip credit provision of section 3(m) of the FLSA did not create a middle ground allowing an employer both to take the tip credit and share employees’ tips.” Chung v. New Silver Place Rest., Inc., 246 F.Supp.2d 220, 230 (S.D.N.Y.2002); Wajcman v. Investment Corp. of Palm Beach, No. 07-80912-CIV, 2008 WL 783741, *3 (S.D.Fla. March 20, 2008) (“The theory here is that employees who exercise substantial managerial authority over the day to day operations of the business are functionally the ‘employers’ themselves”). Where employers participate in a tip pool, the pool is invalid. See Ayres v. 127 Restaurant Corp., 12 F.Supp.2d 305 (S.D.N.Y.1998) (tip pool violated FLSA where general manager, who had authority to suspend, hire and fire employees and analyze payroll costs, was allowed to participate in the pool).

Plaintiff argues that Pigall’s tip pool was invalid because Brown was a manager and shared in the pool. (Doc. 22-1.) In support of its argument, Plaintiff points to Brown’s guaranteed compensation, his participation in the opening of the restaurant, his authority to train, schedule and supervise the wait staff, and his authority to hire and fire employees. (Id.) Plaintiff cites to the depositions of Brown and de Cavel, wherein both men testified that Brown was considered part of the restaurant’s management team. (de Cavel Dep. 50:13-14; Brown Dep. 59:17-22.) These facts, Plaintiff argues, unequivocally establish that Brown was an employer for purposes of the FLSA. See Ayres, 12 F.Supp.2d at 307-08 (general manager of restaurant, who had full authority to suspend or terminate employees, supervised wait staff, made hiring decisions, assumed responsibility for budget and received weekly salary of $2000 was not an employee who “customarily and regularly received tips” under the FLSA).

Defendants agree that Brown participated in the tip pool but argue that he was not a manager and, thus, the tip pool was not invalid by virtue of the fact that Brown participated in it. Defendants point to Dole v. Continental Cuisine, Inc., 751 F.Supp. 799 (E.D.Ark.1990), to support their contention that Brown cannot be considered an employer under the Act. In Continental Cuisine, the individual in question was the maître d’ of the restaurant alleged to have violated the FLSA. 751 F.Supp. at 802-03. The maître d’ was responsible for setting up the dining room, seating and greeting customers, serving the first drink to customers, scheduling shifts for the wait staff, interviewing applicants for positions as waiters and waitresses, and recommending that persons be hired or fired. Id. at 800. Because the maître d’ did not have final authority to hire and fire employees, set wages, control restaurant operations, or control payroll, he was not considered an employer for purposes of the FLSA. Id. at 803. Defendants argue that, similar to the maître d’ in Continental Cuisine, Brown did not have the requisite managerial authority to be considered an employer under the Act.

The Court agrees with Defendants that there is a genuine issue of material fact as to whether Brown is an employer under the FLSA. Although the parties appear to agree on many of the duties that Brown performs, there is conflicting testimony regarding whether Brown had full authority to hire and fire workers and how much control Brown exercised at the restaurant. For example, although Brown testified that he made final hiring decisions, he acknowledged that he was “not at liberty to hire someone” without de Cavel first meeting with that person. (Brown dep. 53:3-54:15.) Meanwhile, de Cavel testified that Brown was part of his management team and “fire[d] a few people without [his] agreement” (de Cavel dep. 50:13-14; 20:9-10). Conversely, Brown testified that he had no responsibility “for any decision that involved spending money.” (Brown dep. 51:19-20.) Based on the current record, and construing all facts in favor of Defendants, the Court believes that genuine issues of material fact preclude summary judgment on this issue. Plaintiff’s motion for summary judgment regarding the validity of the restaurant’s tip pool is DENIED.”

To read the entire decision, click here.

EDITOR’S NOTE:  In a recent decision going one step further, a court in the Northern District of Texas held on similar evidence, that as a matter of law, the inclusion of a maître d’ did not render a tip pool illegal.  Rudy v. Consolidated Restaurant Companies, Inc., 2010 WL 3565418 (N.D.Tex. Aug. 18, 2010).

It is clear from both of these decisions that while there is room for the argument that inclusion of a maître d’ may render an otherwise valid tip pool invalid, it is a very fact intensive issue and plaintiff attorneys would be wise to fully develop their factual record on issues of hiring/firing powers if they prosecute these claims.

Click here, to read more about the rules, regulations and laws applicable to Tipped Employees.

D.Nev.: FLSA Precluded Nevada State Law Class Action

Daprizio v. Harrah’s Las Vegas, Inc.

This case was before the Court on Defendant’s Motion to Dismiss Plaintiffs’ state law claims on several grounds.  As discussed here, the Court ruled that the FLSA precludes Nevada State Law Class Action claims. 

“The Court finds that the FLSA precludes the state law class action. The conflict between the two mass action schemes involves the mechanisms by which parties become members of a suit. Defendant argues that “allowing the parallel claims to be pursued concurrently would allow the application of the collective action opt-out mechanism of Rule 23, invoked by the state law claims, to govern what Congress intended to be a more limited situation of opt-in collective action [under the FLSA].” (Mot. Dismiss 13, ECF No. 2). The Court agrees. The FLSA states that, “No employee shall be a party plaintiff to any such action unless he gives consent in writing to become such a party and such consent is filed in the court in which such action is brought.” 29 U.S.C. § 216(b). This is the “opt-in” provision used for FLSA collective actions, under which a putative class member is not bound unless he or she affirmatively opts in to the suit. Gardenvariety class actions, however, are governed by Rule 23, which states that “the court will exclude from the class any member who requests exclusion.” Fed.R.Civ.P. 23(c)(2)(B)(v). This is the “opt-out” provision, under which members of a certified class must affirmatively opt out of the class or be bound by the class action litigation. This divergence between the respective opt-in and opt-out procedures of a FLSA collective action and a garden-variety class action results in a class action under state labor laws being preempted by the FLSA’s collective action scheme.

The Ninth Circuit has based its preemption analysis on the Supreme Court’s three categories: (1) express preemption-“where Congress explicitly defines the extent to which its enactments preempt state law”; (2) field preemption-“where state law attempts to regulate conduct in a field that Congress intended the federal law exclusively to occupy”; and (3) conflict preemption-“where it is impossible to comply with both state and federal requirements, or where state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.”  Williamson v. Gen. Dynamics Corp., 208 F.3d 1144, 1149 (9th Cir.2000) (citing Indus. Truck Ass’n, Inc. v. Henry, 125 F.3d 1305, 1309 (9th Cir.1997) (citing English v. Gen. Elec. Co., 496 U.S. 72, 78-80 (1990))). “Consideration of the issues arising under the Supremacy Clause ‘start[s] with the assumption that the historical police powers of the states [are] not to be superseded by … Federal Act unless that [is] the clear and manifest purpose of Congress.’ “ Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516 (1992) (quoting Rice v. Santa Fe Elevator Corp., 331 U.S. 218 (1947)). “Preemption issues must be decided on a case-by-case basis.”   Williamson, 208 F.3d at 1155.

A court of this District has ruled that the FLSA precludes state-law labor class actions. In Williams v. Trendwest Resorts, Inc., the court found that “the class action mechanisms of the FLSA and Rule 23 are incompatible. It would be inappropriate to permit Plaintiff’s attempt to circumvent the restrictive opt-in requirement of the FLSA….” No. 2:05-CV-0605-RCJ-LRL, 2007 WL 2429149 at *4 (D.Nev. Aug. 20, 2007) (Jones, J.). In Trendwest Resorts, the defendant’s employees were attempting to recover overtime wages under the FLSA as well as under California state labor law. The court pointed out that notice was sent to 1578 employees of Trendwest Resorts in California and Nevada, but only 194 individuals had opted into the putative class. Id. Had Rule 23 been implemented, the other 1100 California employees who failed to affirmatively opt in would have been brought into the case. Id . In the present case, there is only one complaining party and an unknown number of potential class members. “[T]he policy behind requiring FLSA plaintiffs to opt in to the class would largely be thwarted if a plaintiff were permitted to back door the shoehorning in of unnamed parties through the vehicle of calling upon similar state statutes that lack such an opt-in requirement.” Leuthold v.. Destination Am., Inc., 224 F.R.D. 462, 470 (N.D.Cal.2004) (citation and internal quotation marks omitted).

Plaintiff argues that no preemption issue exists since none of the three types of preemption apply. Express and field preemption are not in dispute since neither side alleges that the federal law expressly preempts state law or that labor disputes are strictly a federal issue. Conflict preemption, Plaintiff argues, also does not apply because the “Nevada overtime and minimum wage claims do not ‘stand as an obstacle’ to Congress’ purpose in enacting the FLSA.” (Resp. Mot. Dismiss 9:11-12, ECF No. 14). In support of this argument, Plaintiff points to the “savings clause” of the FLSA which allows states to enact wage and hour laws more favorable to workers than the minimum requirements of the FLSA and quotes Williamson, which states that, “the FLSA’s ‘savings clause’ is evidence that Congress did not intend to preempt the entire field.” 208 F.3d at 1151 (citing 29 U.S.C. § 218(a)). This argument is unpersuasive for two reasons. First, the savings clause of the FLSA that Plaintiff mentions deals expressly with minimum wages and child labor laws. The language leaves little room for broader inference and probably no room for broader application. Second, the quote from Williamson Plaintiff mentions explicitly refers to field preemption, a type of preemption Plaintiff explicitly disclaims. The savings clause simply means that plaintiffs may bring FLSA collective actions based on violations of state wage and hour laws that are stricter than federal requirements. But the fact that Congress permits suit based on a state’s wage and hour requirements that are stricter than those in the FLSA does nothing to ameliorate the conflict between the FLSA opt-in provision and the Rule 23 opt-out provision.

Because of the tension between the opt-in procedure of an FLSA collective action and the opt-out procedure of a garden-variety Rule 23 class action, a conflict exists. See, e.g., Rose v. Wildflower Bread Co., No. CV09-1348-PHX-JAT, 2010 WL 1781011, at *3 (D.Ariz. May 4, 2010). The Ninth Circuit has stated even more broadly in dicta that “[c]laims that are directly covered by the FLSA (such as overtime and retaliation disputes) must be brought under the FLSA.” Williamson, 208 F.3d at 1154. This could be read as preempting even Plaintiff’s individual claim, but that question is not before the Court.”

There continues to be a rift between various circuits (and even within circuits) as to whether so-called hybrid FLSA Collective Actions may co-exist with State Law Class claims.  Stay tuned to see whether the Supreme Court will ultimately weigh in.

To read the entire decision, click here.

D.D.C.: High-Profile D.C. Chef Is An “Employer” And Personally Liable For Wage And Hour Violations At His Restaurant

Ventura v. Bebo Foods, Inc.

This case, concerning alleged Wage and Hour violations under the FLSA and the DCWPCL was before the Court on two issues: (1) whether defendant Roberto Donna (“Donna”) was personally liable for minimum wage and overtime violations of the Fair Labor Standards Act (“FLSA”) and the D.C. Wage Payment and Collection Law (“DCWPCL”); and (2) damages, if any, as to the corporate defendants.  The Court held that Donna was personally liable for such violations, but deferred on the remaining issues.

Discussing the personal liability of Donna, the Court reasoned:

“The Court concludes that Donna is personally liable under the FLSA and DCWPCL for minimum wage, overtime, and equal pay violations because he is an employer under both the FLSA and DCWPCL. To be liable for violations of the FLSA, the defendant must be an “employer.” 29 U.S.C. §§ 206207 (2010). The FLSA defines “employer” to include “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U.S .C. § 203(d). This definition is broadly construed to serve the remedial purposes of the act. Morrison v. Int’l Programs Consortium, Inc., 253 F.3d 5, 10 (D.C.Cir.2001). Thus, courts look to the “economic reality” rather than technical common law concepts of agency to determine whether a defendant is an employer. Id. at 11; see also Donovan v. Agnew, 712 F.2d 1509, 1510 (1st Cir.1983).

In applying the economic reality test, the Court considers “the totality of the circumstances of the relationship between the plaintiff/employee and defendant/employer to determine whether the putative employer has the power to hire and fire, supervise and control work schedules or conditions of employment, determine rate and method of pay, and maintain employment records.” Del Villar v. Flynn Architectural Finishes, 664 F.Supp.2d 94, 96 (D.D.C.2009) (citing Morrison, 253 F.3d at 11). This test may show that more than one “employer” is liable for violations of the FLSA. Dep’t of Labor v. Cole Enterprises, Inc., 62 F.3d 775, 778 (6th Cir.1995). As a result, a corporate officer may qualify as an employer along with the corporation under the FLSA if the officer has operational control of a corporation’s covered enterprise. Agnew, 712 F.2d at 1511. To determine whether a corporate officer has operational control, the Court looks at the factors above plus the ownership interest of the corporate officer. See Cole Enterprises, 62 F.3d at 778 (explaining that an individual has operation control if he or she is a high level executive, has a significant ownership interest, controls significant functions of the business, and determines salaries and makes hiring decisions).

Here, plaintiffs have demonstrated that Donna is an “employer” under the FLSA because he has operational control over the corporate defendants. First, Donna is an executive with significant ownership interest in the corporate defendants. He is the president and sole owner of Bebo Foods and was the president and sole owner of RD Trattoria. (Donna Dep. at 18:3-20:11, 29:16-17.) He also owned eighty percent of Galileo. (Id. at 33:7-8.) Second, Donna had the power to hire and fire, control work schedules and supervise employees, determine pay rates, and maintain employment records. For example, Donna transferred employees from Galileo to Bebo Trattoria when Galileo closed in 2006, and he took part in the hiring of other employees. (Pls.’ Opp’n [12] to Defs.’ Mot. to Dismiss Ex. 2; Donna Dep. 54:5-7.) Moreover, at the evidentiary hearing, several plaintiffs testified that Donna supervised plaintiffs on the floor of his restaurants. He also approved wage payments to plaintiffs, including the issuance of post-dated or unsigned checks, the payment of partial wages, and the withholding of any payment. (See, e.g., Ventura Aff. ¶¶ 7-9; Vuckovic Aff ¶ 4.) Furthermore, when plaintiffs complained about defendants’ payment practices, he informed them that he withheld wage payments-either in full or in part-from plaintiffs in order to pay Bebo Trattoria’s past debts for which he was behind in payment. (See, e.g., Ventura Aff. ¶ 7; Romic Aff. ¶ 10.) Indeed, plaintiffs’ evidence demonstrates that Donna exerted operational control over the corporate defendants.

Accordingly, Donna is an “employer” under the FLSA and is personally liable for the corporate defendants’ wage, overtime, and equal pay violations. Similarly, because the DCWPCL is construed consistently with the FLSA, Donna is an “employer” under the DCWPCL and is liable for the corporate defendants’ violations of its wage and overtime provisions.”

Due to the high volume of claims against restaurants and their chef-owners recently, this case will no-doubt will have wide-reaching reverberations.

To read the entire opinion, click here.

To learn more about laws and regulations applicable to tipped employees, click here.