“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. 

Avoid These Employment Law “Kitchen Fires” to Protect Your Restaurant and Your Employees

 

With restaurants struggling to return to normal after more than two years of COVID-19 shutdowns and restrictions and employee shortages, the last thing any restaurant owner wants to deal with is a costly lawsuit brought by a either a current or former employee, or potentially worse, by the Equal employment Opportunity Commission (EEOC) or the U.S. Department of Labor.

In this series of articles, first published  as Phelps Dunbar Employment Law Insights, I outline potential employment law “kitchen fires” that restaurant owners should be aware of, and what steps they need to take to avoid lawsuits and the expense and business disruption they can bring.

According to the EEOC, the restaurant industry is the single largest source of sexual harassment claims in the U.S. And it accounts for more than one-third of all sexual harassment claims from women. Recent surveys show 90% of women and 70% of men working in restaurants have experienced some form of sexual harassment from either managers, co-workers or customers. On a regular basis, well-known restaurant companies and celebrity chefs are being hit with sexual harassment claims as well as high-dollar judgments. Part One of the series covers the laws against sexual harassment in the workplace, how to prevent it in a restaurant environment, and how proper policies and training can protect against liability.

Part Two looks at restaurant liability under the federal Fair Labor Standards Act (FLSA). This is the law that requires employers to pay at least minimum wage and time and a half for all hours worked over 40 in the workweek. The FLSA can be a complicated and confusing law, and it is common for employers to make mistakes. Lack of compliance in a restaurant setting with multiple employees can lead to collective actions, which could potentially bankrupt a business. Part Two also looks at recent changes to the “tip credit” method of paying employees, misclassifying employees as exempt “managers,” liability for employees “working off the clock,” child labor laws, and what to do when faced with a Department of Labor investigation.

Part Three examines the federal statutes against employment discrimination on the basis of race, national origin, sex and age, the risks of liability for “English only” policies, and the legal requirement for restaurants to make reasonable accommodations on the basis of religion and disability.

Part Four looks at other easily overlooked employment law kitchen fires, such as a restaurant’s failure to comply with the federal immigration law by correctly completing Form I-9’s for each employee, the potential liability in conducting background checks on potential employees, and how failing to openly display required employment law posters in your restaurant can be a costly and strategic mistake.

In addition to avoiding expensive legal problems, compliance with relevant employment laws might also help to address the restaurant headache of high employee turnover. This series addresses compliance with federal law, but many states have their own varying employment standards. Where appropriate, restaurants should engage counsel for assistance in complying with federal, state and local laws.

Please contact Mark Fijman or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice or guidance.

EEOC ISSUES UPDATED COVID-19 VACCINATION GUIDANCE TO EMPLOYERS

 

The Equal Employment Opportunity Commission (“EEOC”) has released updated and expanded technical assistance addressing frequently asked questions concerning COVID-19 vaccinations in the employment context, and what is permissible under federal equal employment opportunity (“EEO”) laws, such as the Americans with Disabilities Act (“ADA”) and the Genetic Information Nondiscrimination Act (“GINA”).

The key updates to the technical assistance are summarized below:

• Federal EEO laws do not prevent an employer from requiring all employees physically entering the workplace to be vaccinated for COVID-19, so long as employers comply with the reasonable accommodation provisions of the ADA and Title VII of the Civil Rights Act of 1964 and other EEO considerations. Other laws, not in EEOC’s jurisdiction, may place additional restrictions on employers.  From an EEO perspective, employers should keep in mind that because some individuals or demographic groups may face greater barriers to receiving a COVID-19 vaccination than others, some employees may be more likely to be negatively impacted by a vaccination requirement.
• Federal EEO laws do not prevent or limit employers from offering incentives to employees to voluntarily provide documentation or other confirmation of vaccination obtained from a third party (not the employer) in the community, such as a pharmacy, personal health care provider, or public clinic. If employers choose to obtain vaccination information from their employees, employers must keep vaccination information confidential pursuant to the ADA.
• Employers that are administering vaccines to their employees may offer incentives for employees to be vaccinated, as long as the incentives are not coercive. Because vaccinations require employees to answer pre-vaccination disability-related screening questions, a very large incentive could make employees feel pressured to disclose protected medical information.

The EEOC has also posted a new resource for job applicants and employees, explaining how federal employment discrimination laws protect workers during the pandemic.

DOL Announces Continuing Standard for when “Telemedicine” is Considered an “In-Person” Visit for Establishing a Serious Health Condition Under the FMLA

The U.S. Department of Labor (“DOL”) has released a new Field Assistance Bulletin (“FAB”) to address an issue arising under the Family Medical Leave Act (“FMLA”) in the midst of the continuing COVID-19 pandemic and the shift to telework. 

 The FMLA provides eligible employees of covered employers with unpaid, job-protected leave for specified family and medical reasons, including a “serious medical condition”, the definition of which can include treatment by a healthcare provider. The DOL regulations provide that “[t]reatment by a health care provider means an in-person visit to a health care provider.” In July 2020, in response to the COVID-19 pandemic, and the increased need for social distancing, the DOL announced that a telemedicine visit by video conference would be considered an in-person visit for purposes of the FMLA, through December 31, 2020. 

In the new FAB, the DOL announced this standard will continue into 2021. The Department noted that health care providers are now often using telemedicine to deliver examinations, evaluations, and other healthcare services that would previously have been provided only in an office setting. Given this experience, and continuing the policy adopted in response to the COVID-19 pandemic, WHD will consider a telemedicine visit with a health care provider as an in-person visit provided specified criteria are met. 

To be considered an “in-person” visit, the telemedicine visit must include: 

· an examination, evaluation, or treatment by a health care provider;

· be permitted and accepted by state licensing authorities; and,

· generally, should be performed by videoconference. 

 According to the DOL, communication methods that do not meet these criteria (e.g., a simple telephone call, letter, email, or text message) are insufficient, by themselves, to satisfy the regulatory requirement of an “in-person” visit.

POT ON THE BALLOT COULD PUT EMPLOYER POLICIES OUT OF JOINT AND INTO THE COURTROOM

As this contentious presidential campaign season draws to a close on November 3, 2020, voters in five states also will be casting their ballots on legalization of marijuana. Arizona, Montana, New Jersey and South Dakota will decide whether to approve recreational marijuana, and Mississippi voters will choose whether to approve medical marijuana.

 

 However a recent federal court case in Pennsylvania, demonstrates the pitfalls and legal liabilities that employers can face in a state where marijuana is legal. In Hudnell v. Jefferson University Hospitals, Inc. (E.D. Pa. Sept. 25, 2020), a U.S. District Court allowed an employee fired for testing positive for marijuana to bring a lawsuit against her employer under Pennsylvania’s Medical Marijuana Act (“MMA”). 

 The plaintiff in the case, Donna Hudnell, was hired by Thomas Jefferson University Hospitals (“the Hospital”) as a security analyst in 2016. By 2018, she began experiencing severe back pain that limited her ability to work, walk and sleep. Recreational marijuana is illegal in Pennsylvania, but medical marijuana is legal under the state’s MMA. Patients prescribed medical marijuana are required to be certified by a physician and receive a medical marijuana card. Hudnell’s physician, who also worked at the Hospital, prescribed her medical marijuana to alleviate her back pain. However, her condition worsened and she was approved to work from home in May of 2019.

In October 2019, she asked to return to work and was required under the Hospital’s policies to take a drug test, because she had been out for more than 90 days. She gave the testing nurse copies of all her prescriptions, including her medical marijuana card. The nurse informed Hudnell that the card had expired in August. Hudnell responded she had renewed her card in August but her appointment with her physician for recertification was scheduled for five days later. Her physician at the Hospital re-certified her at that time.

However, the hospital subsequently terminated her under their drug testing policy, because at the time she was tested, and was positive for marijuana use, she did not have a valid and certified medical marijuana card. 

She subsequently sued the Hospital under Title VII of the Civil Rights of 1964, Pennsylvania’s Human Relations Act, and also alleged a claim under Pennsylvania’s MMA. Written into the MMA is a provision that “[n]o employer may discharge, threaten, refuse to hire or otherwise discriminate or retaliate against an employee regarding an employee’s compensation, terms, conditions, location or privileges solely on the basis of such employee’s status as an individual who is certified to use medical marijuana.” 

In regard to Hudnell’s MMA claim, the Hospital asked the court to dismiss the claim on the basis that the MMA did not explicitly provide a private cause of action allowing an employee to file a lawsuit. The Hospital also argued the statute did not apply to her because she did not have a valid medical marijuana card when tested.

 

In ruling against the Hospital and finding Hudnell had a right to sue under the MMA, the federal court determined that there was an implied right of action because, without one, the anti-discrimination provision would have no practical effect, and allowed Hudnell’s litigation against the Hospital to proceed.

The lesson for employers in states that legalize marijuana, is that the language of these statutes can vary widely as to the protections afforded to employees, and employers may have to adjust their policies to comply, including reasonable accommodation under the Americans with Disabilities Act.  Employers may also need to reexamine their drug testing policies and also address safety and discipline issues in regard to employees being under the influence in the workplace.

SUPREME COURT PASSES ON FINDING A "MARIJUANA EXCEPTION" TO THE FLSA

A Colorado employer’s hope of avoiding an employee’s collective action under the Fair Labor Standards Act (“FLSA”) has gone up in smoke at the United States Supreme Court.

The Justices declined to hear the employer’s argument that it should not have to comply with the federal wage and hour law because it was engaged in Colorado’s legal marijuana industry, which remains illegal under federal law.

The case involves Helix TSC, Inc. (“Helix”), which provides armed security guards, inventory control, and compliance services to the state-sanctioned marijuana industry in Colorado. The named Plaintiff, Robert Kenney, worked as a security guard for Helix, and filed suit claiming that the company misclassified him and other employees as exempt, and failed to pay overtime when they worked more than 40 hours in a work week.

In the trial court, Helix filed a Motion to Dismiss on the basis that the federal District Court lacked jurisdiction. Helix argued that because Kenney was employed in the marijuana industry, which is an industry "entirely forbidden" by the Federal Controlled Substances Act, Kenney was not entitled to the protections of the FLSA, and thus, the Court does not have subject matter jurisdiction over Plaintiff's claim. According to Helix, "[t]he protections of federal law ... are simply unavailable to an individual or business choosing to participate in an industry that is criminalized under federal law."

In the District Court’s Opinion denying Helix’s Motion, the Court held that the law was clear that “that employers are not excused from complying with federal laws, such as the FLSA, just because their business practices may violate federal law” and gave the example of finding FLSA violations where an employer employed illegal immigrants, which also was in violation of federal law. Helix then appealed the ruling to the U.S. Court of Appeals for the 10th Circuit.

 The 10th Circuit’s Opinion affirmed the District Court’s decision, and rejected Helix’s “illegality defense”, noting that “just because an Employer is violating one federal law, does not give it license to violate another.”

In its petition to the United States Supreme Court for a writ of certiorari, Helix argued that "the Tenth Circuit's decision confers the same rights on a mule trafficking methamphetamine for a cartel in Oklahoma as it does on a driver ferrying marijuana through the streets of Denver."

However, the Supreme Court was not convinced, and its October 5, 2020 denial of Helix's petition returns the case back to the District Court where Helix will have to defend against Kenney’s claims that he and other similarly situated employees were wrongly treated as exempt under the FLSA and not properly paid overtime.

Tattoos in the U.S. Now Mainstream and Workplace Tattoo Stigma Continues to Fade

According to a recent survey, the United States now holds the bronze medal for the most number of people with tattoos, with 46% of the American population having at least one tattoo.  The U.S. was beaten by Italy, with 48%, followed by Sweden with 47%.  However, according to the survey, Americans top the charts for people with multiple tattoos, men and women get tattoos at the same rate, and that tattoos are more popular among those with higher levels of education. 

What this means for employers, is that there is now an almost 50-50 chance that a job applicant will have one or more tattoos.  Traditionally, tattoos were viewed negatively during the hiring process and were not viewed as an asset in workplace advancement.  As recently as 2016, a survey of Human Resource managers cited tattoos as the third most likely physical attribute that limits career potential, and polling of millennials show that 70% will hide their tattoos in the workplace so as not to negatively impact their employment prospects.  However, a study by researchers from the University of Miami and University of Australia shows that such concerns may have little to no basis

In the study, entitled “Are Tattoos Associated with Employment and Wage Discrimination? Analyzing the Relationships between Body art and Labor Market Outcomes”, the researchers surveyed more than 2000 people in all 50 states, and found the  salaries and wages of tattooed employees were “statistically indistinguishable” from those of their non-tattooed counterparts.  The study suggests that employers recognize that by treating tattoos as a negative factor in hiring and employment decisions, they run the risk of missing out on well-qualified job candidates.  This is borne out in corporate America, where some of the country’s biggest employers are now considered “tattoo friendly”. 

From an employment law standpoint, employers generally retain broad discretion in making employment decisions based on tattoos, and whether having an “inked” employee is suitable to their particular company.  Likewise, tattoos that reflect offensive or discriminatory messages can be the basis for not hiring an applicant.    

However, under certain scenarios, restrictions on tattoos in the workplace could run afoul of Title VII of the Civil Rights Act of 1964 (“Title VII”) and possibly constitute religious discrimination.  A good example of this is the lawsuit that was brought by the Equal Employment Opportunity Commission (“EEOC”)  against the Red Robin Gourmet Burgers chain of restaurants.  In EEOC v. Red Robin Gourmet Burgers, Inc., the EEOC alleged that the company religiously discriminated when they fired an employee for not covering up his tattoos and refusing to accommodate a religious practice.  Red Robin ultimately settled the lawsuit prior to trial for $150,000 and entered into a consent decree with the EEOC.

The case began when Edward Rangel was hired as a server at Red Robin’s Bellevue, Washington restaurant.  In the lawsuit, Rangel asserted he was an adherent of the Kemetic religion, an ancient Egyptian faith.  As part of his religious practice, Rangel went through a rite of passage where he received religious inscriptions in the form of tattoos. The inscriptions, less than a quarter-inch wide and encircling his wrists, are liturgical verses from an Egyptian scripture.  According to the lawsuit, the inscriptions symbolized Rangel’s religious dedication and his religious practices made it a sin to intentionally conceal the religious inscriptions.

Rangel had the tattoos on his wrists when he was hired, and at that time, Red Robin has a dress code that prohibited employees from having visible tattoos.  The EEOC said that although Rangel worked at Red Robin for approximately six months without a complaint from customers, co-workers or his immediate supervisors, a new manager saw the tattoos and fired Rangel for not concealing them.

Rangel claimed he had repeatedly talked with management, giving detailed explanations of his faith and the need for an accommodation. He sought an exemption from the dress code, but Red Robin refused to provide it or any alternatives.  Title VII requires employers to make reasonable accommodations to sincerely held religious beliefs unless it would cause undue hardship to the business.  Throughout the suit Red Robin maintained that allowing any exceptions to its dress code policy would undermine its “wholesome image.”  Before the parties settled, Red Robin’s argument was rejected by the District Court, which held that Red Robin was required to support its undue hardship claim with more than hypothetical hardships based on unproven assumptions.

The lesson to be learned from that case is that Title VII and the EEOC take a very broad view of religion and generally, courts do not want to be placed in the position of deciding what is or is not a bona fide religion or religious practice.  To that extent, tattoos that are part of a religious practice may need to be accommodated.  Accommodations are not required if the employer would suffer undue hardship – that is, “more than de minimis “ or a minimal cost. Whether an accommodation would be an undue hardship is determined on a case-by-case basis, and considers the potential burden on an employer’s business in addition to any monetary costs.   

Purely decorative secular tattoos do not impose a duty of accommodation, and employees are free to make employment decisions on that basis or require employees to cover them up at work.  However, as indicated by the recent study, it appears that tattoos in the workplace are rapidly approaching the point of becoming a non-issue.