FIFTH CIRCUIT SERVES RESTAURANT EMPLOYERS A SECOND CHANCE FOR INJUNCTION AGAINST DOL’S NEW “TIP CREDIT” RULE

 

In a win for restaurant employers using “tip credit” to pay employees, the U.S. Court of Appeals for the Fifth Circuit ruled that a Texas District Court erroneously denied a preliminary injunction against enforcement of a rule that causes “irreparable harm” to employers. In the 2-1 opinion, the Fifth Circuit panel reversed the decision against the Restaurant Law Center and Texas Restaurant Association in the groups’ action against the U.S. Department of Labor (DOL), and sent the matter back to the lower court for further proceedings consistent with its ruling.

Generally, employers are required to pay nonexempt workers at least the minimum wage of $7.25 per hour. However, the Fair Labor Standards Act (FLSA) allows an employer to satisfy a portion of its minimum wage obligation to a “tipped employee” by allocating a partial credit, known as a “tip credit,” toward the minimum wage based on the amount of tips an employee receives. This allows the employer to pay a direct cash wage as low as $2.13 per hour, provided they make up the difference with tips earned by and paid to the employee. Tip credit is used extensively in the restaurant and hospitality industries to manage high up-front labor costs. However, proper compliance with tip credit can be complex and mistakes are common.  

In 2021, the Biden Administration’s DOL introduced a new rule that further complicated the use of the tip credit method for employers. Under the “80/20” and “continuous 30-minute” provisions, if an employee spends more than 20% of their time or 30 continuous minutes doing non-tip-producing work, the employer cannot utilize tip credit and is required to pay at least the full minimum wage. DOL makes clear its hostility to the tip credit method of payment and its intent to discourage its use and vigorously investigate any allegations of noncompliance.

In February 2022, the U.S. District Court for the Western District of Texas denied a motion for a preliminary injunction filed by the Restaurant Law Center and Texas Restaurant Association. In its ruling, the District Court did not reach the merits of their claims against the rule, but instead held that Plaintiffs “had failed to show they were irreparably harmed by the costs of complying with the new rule” and found the additional costs of time monitoring and recordkeeping were “purely speculative.” “overstated,” and “unspecific.”

The Fifth Circuit panel majority held that the District Court ignored well-established precedent that “non-recoverable compliance costs for ongoing managements costs to ensure compliance with the 80/20 and continuous 30-minute provisions are usually irreparable harm.” The opinion noted that Plaintiffs’ witnesses testified that managers must incur an additional 8-10 hours of time a week to comply with the rule, and the DOL conceded that compliance costs nationwide would be $177 million annually. 

The majority strongly described the DOL’s arguments that the new rule did not impose new recordkeeping requirements on employers as “meritless.” The court stated:

To claim the tip credit, employers must “ensure that tipped employees are not spending more than 20 percent of their time on directly supporting work, or more than 30 minutes continuously performing such duties.” We cannot fathom how an employer could honor these specific constraints without recording employee time. What if an employer is investigated by the Department or sued by an employee for wrongly claiming the tip credit? Without time records, how could an employer defend itself?

***

In the same vein, the Department also claims that “employers need not engage in ‘minute to minute’ tracking of an employee’s time in order to ensure that they qualify for the tip credit.” No explanation is given (nor can we imagine one) why an employer would not have to track employee minutes to comply with a rule premised on the exact number of consecutive minutes an employee works. The Department also assures us that a “30-minute uninterrupted block of time . . . can be readily distinguished from the work that surrounds it. Maybe so, but that does not remove an employer’s need to account for blocks of employee time, especially if an employer is accused of violating the rule.

Finding that the restaurant Plaintiffs met their burden of showing irreparable harm, the case will return to the the District Court to determine if the Plaintiffs can meet the remaining tests for a preliminary injunction and succeed on the merits of the case.

In October 2022 while the appeal was pending, the case was reassigned from Judge Robert Pitman to Judge David Ezra. Prior to the Fifth Circuit ruling, both the DOL and the restaurant Plaintiffs filed motions for summary judgment which have yet to be ruled upon.

Please contact Mark Fijman or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice or guidance on labor and employment issues in the restaurant or hospitality industry.

“TIP CREDIT” IS A DOUBLE-EDGED KNIFE FOR RESTAURANT EMPLOYERS

In the restaurant business, using the “tip credit” method of paying employees under the Fair Labor Standards Act (“FLSA”) is analogous to a kitchen worker chopping vegetables with an extremely sharp chef’s knife.  If handled properly, it’s an extremely useful tool for restaurants to manage high up-front labor costs.  If handled carelessly, it can result in expensive litigation and high-dollar liability. 

A national steakhouse chain recently agreed to pay $995,000 as part of a settlement to resolve claims it failed to properly pay servers and other employees who received tips. For smaller businesses with less resources, mistakes with tip credit can result in catastrophic liability.  Likewise, the continued use of tip credit by the restaurant industry and other hospitality businesses is under attack by the current U.S. Department of Labor.

The Basics

In most instances, employers are required to pay nonexempt workers at least the minimum wage of $7.25 per hour. However, the FLSA allows an employer to satisfy a portion of its minimum wage obligation to a “tipped employee” by taking a partial credit, known as a “tip credit,” toward the minimum wage based on the amount of tips an employee receives. 29 U.S.C. 203(m)(2)(A). This allows paying a subminimum wage, as low as $2.13 per hour, provided that the employer makes up the difference with tips earned by and paid to the employee. Under the FLSA a “tipped employee” is defined as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”

Compliance with tip credit can be complex and mistakes are common. Failure to abide by the extremely strict rules can invalidate the employer’s entitlement to the tip credit and make the restaurant liable for unpaid wage claims, liquidated damages and attorneys’ fees.  The basic requirements for restaurants to use the tip credit include:

•    The employer must notify workers in advance that: (a) the employer intends to utilize the tip credit and treat tips as satisfying part of the employer’s minimum wage obligations and (b) if the amount of tips plus hourly wages does not match or exceed the applicable minimum wage, the employer must make up the difference. The FLSA does not require this notice to be in writing, but it is a best practice to do so and have the employee agree by signing a form.

• Tipped employees must retain all tips earned by that employee. The restaurant or managers cannot receive any portion of the tips.

• Only employees who customarily receive tips, such as servers, may be paid utilizing the tip credit. Typically, back-of-house workers, such as cooks and dishwashers, cannot be paid using the tip credit.

• The exception to restaurant employees retaining all tips is if there is a valid tip pooling arrangement where all tips are combined and shared among all tipped employees according to a pre-determined formula. A tip pool will be considered invalid if non-eligible workers or managers are allowed to participate.

Hostility to Tip Credit from the U.S. Department of Labor

Compliance with the tip credit has recently become even more problematic. The Biden Administration’s DOL has reinstated the so-called “80/20” rule. Under the reinstated policy, when tipped employees spend at least 20% of their workweek performing duties that support their occupation but do not directly produce tips, their employers are required to pay them a direct cash wage of at least $7.25/hour for that work, instead of a direct cash wage of $2.13/hour, with the remainder made up by tips. Examples of work that is not tip producing might include a server preparing food for a salad bar or cleaning the kitchen or bathroom or a bartender cleaning the dining room. 

The current DOL has made clear its hostility to the tip credit method of payment and its intent to discourage its use, as well as its intent to vigorously investigate any allegations of noncompliance. For this reason, restaurants should make sure they are meeting all of the requirements and potentially consult with counsel on alternative payment methods.

Mandatory Service Charge v. Tip Credit?

A recent decision by the U.S. Court of Appeals for the Eleventh Circuit illustrates how some restaurants may be moving away from using the tip credit method versus a mandatory customer service charge that would go toward paying employee wages and potentially avoid the headaches of tip credit.  

In Compere v. Nusret Miami, an upscale Miami steakhouse added a mandatory 18% "service charge" to customers' bills. It directly collected these payments and redistributed them to certain employees on a pro rata basis to cover the restaurant’s minimum and overtime wage obligations. Unlike tips, the service charge payments never went directly to the wait staff. Employees sued the restaurant, claiming the service charge was in fact, actually a tip.  

The Eleventh Circuit ruled in the restaurant’s favor, finding that because it was a mandatory charge, unaffected by the customer’s discretion.  However, using this method also carries its own complicated requirements and wage issues, and while common in other countries, American restaurant customers do not generally favor mandatory service charges.

Please contact Mark Fijman  if you have questions or need compliance advice or guidance as to labor and employment issues in the restaurant or hospitality industry. 

DOL Reduces the Risk of Employers Offering Unpaid Internships

Employers interviewing for their upcoming summer internship programs now have more flexibility and less risk of wage and hour litigation due to a significant policy turnaround by the U.S. Department of Labor (DOL).

 

Traditionally, unpaid internships offered college students the opportunity to gain real-life business experience in their chosen career, while for-profit employers received the benefit of additional assistance in the workplace, as well as an opportunity to assess potential new employees.

 

However, in 2010, this symbiotic relationship was complicated by the DOL’s institution of a strict six-factor test to determine if the individual was properly classified as an unpaid intern or an employee entitled to wages and overtime under the Fair Labor Standards Act (FLSA).

 

Under the former DOL test, all of the following criteria must have been met to be considered an intern by the FLSA: (1) the internship is similar to training that would be given in an educational environment, (2) the internship experience is for the benefit of the intern, (3) the intern does not displace regular employees and works under close supervision of existing staff, (4) the employer does not gain an immediate advantage from the intern's activities (and the employer’s operations may actually be impeded or hindered by the intern’s activities), (5) the intern is not guaranteed a job at the end of the program, and (6) the employer and the intern each understand that the internship is unpaid.

The 2010 test resulted in current and former interns bringing class action lawsuits against companies such as Viacom, 21st Century Fox, and fashion giant Gucci, resulting in large dollar settlements. While some companies reacted by creating internships that paid at least the minimum wage, many other companies simply eliminated internship programs out of fear of litigation.

 

In January 2018, the DOL released Fact Sheet #71: Internship Programs Under The Fair Labor Standards Act, which scrapped the old test, in favor of the court-favored “primary beneficiary test” to determine if an individual is an intern or an employee under the FLSA. The new seven-factor test is as follows:

 

1.         The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, expressed or implied, suggests that the intern is an employee—and vice versa.

2.         The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.

3.         The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.

4.         The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.

5.         The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.

6.         The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.

7.         The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

Courts have described the “primary beneficiary test” as a flexible test, and no single factor is determinative. Accordingly, whether an intern or student is an employee under the FLSA depends on the circumstances of each case.

If analysis of these circumstances reveals that an intern or student is actually an employee, he or she is entitled to both minimum wage and overtime pay under the FLSA. On the other hand, if the analysis confirms that the intern or student is not an employee, then he or she is not entitled to either minimum wage or overtime pay under the FLSA.

 

Employers should carefully assess their internship programs under the new criteria, and if needed, seek advice of counsel in regard to any use of unpaid interns.



 

 



SURPRISE RULING ON FLSA OVERTIME RULE

It continues to be a season of surprises in American politics . . . and in employment law.  Who would ever have thought that a federal judge, appointed by President Obama, would throw a money wrench in a key initiative of the Obama Department of Labor?  Not me.  As I incorrectly predicted in my November 18, 2016 article, I fully expected U.S. District Judge Amos L. Mazzant III to shoot down an injunction aimed at blocking the December 1, 2016 implementation of the DOL’s Final Rule, bumping the minimum salary level for white collar exemptions under the Fair Labor Standards Act ("FLSA") from $23,660 annually ($455 per week) to $47,476 annually ($913 per week).

What instead happened was that Judge Mazzant entered a nationwide preliminary injunction on November 22, 2016, blocking for now the U.S. Department of Labor (“DOL”) from implementing significant changes to the overtime rules applicable to white collar employees.  The ruling out of the U.S. District Court for the Eastern District of Texas held that the DOL most likely exceeded its authority by doubling the salary requirement, which would have rendered essentially meaningless the duties test, which is actually written into the FLSA.

The issuance of an injunction means that implementation and enforcement of the Final Rule by the DOL is just on hold until further notice by the Court.  The DOL has not yet announced whether it intends to appeal the ruling, and it remains to be seen if the Trump administration would have any interest in trying to implement a Rule so unpopular within the business community.  Another potential option might be a revised Rule that would include a smaller increase in the minimum salary requirement.

What I think I did get correct was my observation that “[i]f the unlikely actually happens, I expect an enormous sigh of relief from many employers, tinged with annoyance and aggravation over six months spent preparing for a rule that never went into effect.”  Annoyance aside, what should employers do at this point? 

In expectation of the December 1, 2016 deadline, many employers had bumped employee salaries to meet the new requirement, and many more had simply adjusted hour wages and work schedules in an effort to reduce overtime or keep actual wages approximately the same.  As reported in the Wall Street Journal, businesses are now faced with the difficult decision of either walking back pay increases they had already put in place, resulting in angry employees, or eating the expense of changes made in anticipation of a now uncertain requirement.

There is no right or wrong answer, and employers will have to look at a number of factors in making their decision for their particular business.  These factors include, but are not limited to: (1) whether the employer has already begun implementation of salary/exemption changes, (2) whether the employer has already communicated planned salary increases or changes even if it hasn’t actually put them in place, (3) whether the changes impact or potentially impact the company’s benefit plans, (4) the overall economic impact of the change to the client, (5) the workforce morale issues that may be implicated, (6) the temporary nature of the injunction and the fact that it could be appealed and, if so, potentially reversed on appeal.  This is an odd situation where those employers who planned ahead are faced with more issues than those companies that procrastinated and did nothing.

In response to reader requests, if you would like to receive the latest articles from "The Employee With The Dragon Tattoo" by e-mail, please send your name, your company, and your e-mail to me at fijmanm@phelps.com.  

RULING EXPECTED NEXT WEEK IN LEGAL CHALLENGE TO INCREASED SALARY REQUIREMENT FOR FLSA “WHITE COLLAR” EXEMPTIONS

Back in May 2016, the U.S. Department of Labor ("DOL") issued its final rule, bumping the minimum salary level for white collar exemptions under the Fair Labor Standards Act ("FLSA") from $23,660 annually ($455 per week) to $47,476 annually ($913 per week). With the new standard slated to go into effect on December 1, 2016, employers have spent the last six months scrambling on how to comply with the new rule, which makes millions of formerly exempt employees now eligible for overtime under the FLSA.

 

Options available to employers include bumping employee salaries to meet the new minimum (not feasible in many cases), paying employees’ current salaries with overtime after 40 hours (increased expense), reorganizing schedules and workloads to avoid overtime, or adjusting hourly rates of pay to essentially maintain the same pay level by estimating potential overtime hours. For a more detailed explanation of the final rule, click on this link to read an article by my colleague Jessica Coco Huffman in Phelps Dunbar’s Baton Rouge, Louisiana Office. For a discussion and explanation of the FLSA white collar exemptions, click on this link.
 

However, 21 states filed a lawsuit against the DOL, seeking to block the implementation of the new salary requirement prior to it going into effect, because of the heavy burden it would place on state budgets An injunction hearing was held November 16, 2016 in the United States District Court for the Eastern District of Texas. At the hearing, issues addressed included the DOL’s authority to make the change, the appropriateness of a nationwide injunction, and the impact on the incoming Administration. Following the hearing, the federal Judge in the case stated he was taking the matter under advisement, and expects to have a ruling on the requested injunction on Tuesday, November 22, 2016.
 

Reading the tea leaves, I think it is unlikely the Court will issue the injunction this late in the game. The federal Judge hearing the case, Amos L. Mazzant III, is an appointee of President Obama, who initially pushed for the change. However, after our tumultuous roller-coaster ride of a political season, the only sure bet is to see what happens next Tuesday.
 

If the unlikely actually happens, I expect an enormous sigh of relief from many employers, tinged with annoyance and aggravation over six months spent preparing for a rule that never went into effect.

 

 

In response to reader requests, if you would like to receive the latest articles from "The Employee With The Dragon Tattoo" by e-mail, please send your name, your company, and your e-mail to me at fijmanm@phelps.com.  





EEOC PAYS SETTLEMENT FOR VIOLATING OVERTIME RULES AND THE NLRB PAYS THE PRICE FOR “ADMINISTRATIVE HUBRIS”

Welcome back to another episode of “Federal Employment Agencies Behaving Badly” and in this week’s episode, we’ll start off with the Equal Employment Opportunity Commission (“EEOC”), the federal agency tasked with enforcing the nation’s anti-discrimination laws.  While the EEOC does not enforce the Fair Labor Standards Act (“FLSA”) and the laws regarding overtime pay, it is required to comply with the FLSA as it relates to the agency’s own employees. As a reminder of this fact, the EEOC has now agreed to pay a $1.53 Million settlement for failing to properly pay overtime to its employees.

The case began back in 2006, and in 2009, an arbitration ruling found the EEOC had violated the FLSA by requiring investigators, mediators and paralegals to work during lunch hours, on weekends, or after hours, and then forcing them to accept compensatory time instead of the overtime pay they were entitled to for their overtime errors.  EEOC employees described what they were subjected to as “forced volunteering.”  The ruling held:

There is an entitlement to overtime, whereas compensatory time operates as an alternative, should the employees request it . . .  Put another way, it is incorrect to view the FLSA as providing non-exempt employees with the option of selecting either overtime or compensatory time. The right is to overtime; compensatory time is the option.”

The arbitration ruling seven years ago urged the EEOC and the union representing the federal employees to reach a settlement, however, an agreement was not reached until September 22, 2016. 

Despite the settlement, the union was critical of the EEOC’s role in the long delay toward resolving the dispute.  According to National Council of EEOC Locals, No. 216 President Gabrielle Martin “It has been very frustrating to employees that this case has gone on for a decade during which employees retired or unfortunately passed away . . . It is a sad irony that the agency charged with preventing discrimination against workers violated the rights of its employees.”

Our next segment deals with the National Labor Relations Board (“NLRB”), which is the federal agency charged with enforcing U.S. labor law and investigating and remedying unfair labor practices.  A federal appeals court judge has now ordered the agency to pay a company nearly $18,000.00 in legal fees for engaging in “bad faith litigation” and engaging in “administrative hubris”

In Heartland Plymouth Court MI, LLC v. NLRB, a company sought legal fees after it had successfully appealed an NLRB ruling that incorrectly found the company had violated a collective bargaining agreement by reducing employee hours.  In the opinion, Judge Janice Rogers Brown of the United States Court of Appeals for the D.C. Circuit found that the NLRB had taken positions unsupported by the law, which placed the employer in the untenable position of having to incur the costs of an unjustified settlement demand, or the legal costs of appealing the NLRB’s improper ruling:

  Facts may be stubborn things, but the Board’s longstanding “nonacquiescence” towards the law of any circuit diverging from the Board’s preferred national labor policy takes obduracy to a new level. As this case shows, what the Board proffers as a sophisticated tool towards national uniformity can just as easily be an instrument of oppression, allowing the government to tell its citizens: “We don’t care what the law says, if you want to beat us, you will have to fight us.”  It is clear enough that the Board’s conduct was intended to send a chilling message to Heartland, as well as others caught in the Board’s crosshairs.

 

Let the word go forth: for however much the judiciary has emboldened the administrative state, we “say what the law is.” In other words, administrative hubris does not get the last word under our Constitution. And citizens can count on it.

 

A MESSAGE TO READERS OF "THE EMPLOYEE WITH THE DRAGON TATTOO"  

 A reader of this blog recently asked if she could be included on an e-mail list for new posts.  I currently do not have an e-mail service but it seems like an excellent idea and I will be setting it up in the very near future.  If you would like to be included, please send your name, your company, and your e-mail to me at fijmanm@phelps.com.  Thanks! 



Dept. of Labor Delays FLSA Enforcement and Penalties Against Home Healthcare Companies

             Employers in the home healthcare industry will be getting a brief delay in the enforcement of new regulations extending minimum wage and overtime requirements to home healthcare workers under the Fair Labor Standards Act (“FLSA”). 

The U.S. Department of Labor’s (“DOL”) final rule is scheduled to take effect January 1, 2015, but on October 7, 2014, the DOL announced it would delay enforcement and the imposition of penalties for a period of six months, or until June 30, 2015.  For the following six months, or until December 31, 2015, the DOL will exercise its discretion in determining whether to bring enforcement actions, based on the extent to which employers have made “good faith efforts to bring their home care programs into FLSA compliance.”

 It is important for employers to remember that despite the DOL's enforcement delay, they are still required to begin complying with the new rule as of January 1, 2015.

            Up until the new rule, the FLSA contained an exemption that employees providing “companionship services” to elderly persons or individuals with illnesses, injuries, or disabilities were not required to be paid the minimum wage or overtime pay if they met certain regulatory requirements.

            This change will result in nearly two million direct care workers, such as home health aides, personal care aides and certified nursing assistants falling under the requirements of the FLSA.  Business groups and Congressional Republicans had strongly pushed for a complete suspension of the new rule, expressing fears that it would make home healthcare unaffordable and result in disruption to patient care.  In explaining its reason for the additional delay in active implementation, the DOL noted:

When we announced the final rule, we provided a 15-month implementation period before its effective date. We did so out of recognition that home care services financing is complex, and that making adjustments to operations, programs and budgets in order to comply with the rule would take time. Some states, tell us that they’re ready to implement the rule. Others, because of budget and legislative processes, have requested an extension.  After careful consideration, the department decided to adopt a time-limited non-enforcement policy. This approach will best serve the goals of rewarding hard work with a fair wage while not disrupting innovative direct care services.

            For employers seeking more detailed information on the changes to the FLSA under the final rule, the DOL is providing an on-line fact sheet.

Mark Fijman is a labor and employment attorney with Phelps Dunbar, LLP, which has offices in Louisiana, Mississippi, Florida, Texas, Alabama, North Carolina and London. To view his firm bio, click here. He can be reached at (601) 360-9716 and by e-mail at fijmanm@phelps.com



DEPARTMENT OF LABOR EXTENDS FLSA REQUIREMENTS TO IN-HOME HEALTH CARE WORKERS

 

On September 17, 2013, the Wage and Hour Division of the U.S. Department of Labor issued a Final Rule which limits the "companionship exemption" of the Fair Labor Standards Act ("FLSA") and extends additional minimum wage and overtime protections to an estimated two million direct care workers, including personal caregivers, home health aides and certified nursing assistants.

Hardest hit by the Final Rule will be home health care staffing agencies and similar health care business. This is because the Final Rule, which becomes effective on January 1, 2015, does not allow third-party employers to claim the FLSA’s companionship services or live-in domestic service employee exemptions.

Generally, the FLSA requires that all hourly non-exempt employees be paid at least the minimum wage and overtime for hours worked beyond the forty hour work week. However, the law provided an exemption for domestic service workers hired for "companionship services" and such workers were not required to be paid the minimum wage or overtime. Likewise, the exemption did not require live-in domestic service workers to be paid overtime.

The Final Rule clarifies that direct care workers who perform medically-related services for which training is typically a prerequisite are not companionship workers and therefore are entitled to the minimum wage and overtime. And, in accordance with Congress' initial intent, individual workers who are employed only by the person receiving services or that person's family or household and engaged primarily in fellowship and protection (providing company, visiting or engaging in hobbies) and care incidental to such activities, will still be considered exempt from the FLSA's minimum wage and overtime protections.

Because home healthcare agencies will no longer be able to claim the exemption, such business will have to review and revise their payroll and time-keeping practices and procedures to be in compliance with the FLSA.

For Further information, the Department of Labor has proved answers to frequently asked questions on the Final Rule.

Mark Fijman is a labor and employment attorney with Phelps Dunbar, LLP, which has offices in Louisiana, Mississippi, Florida, Texas, Alabama, North Carolina and London. To view his firm bio, click here. He can be reached at (601) 360-9716 and by e-mail at fijmanm@phelps.com.