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The End of Tip-Credit Pay?

We are not quite there yet, but with the recent announcement by the Department of Labor of a 6.8 million dollar consent judgment with Chickie’s & Pete’s in Philadelphia should raise concerns. (DOL’s Press Release) This along with more recent press releases on this subject. Restaurateurs and entrepreneurs have discovered over the last few years the danger of costly Federal Fair Labor Standard’s Act (FLSA) litigation. These quite frequently turn into class and/or collective actions where a single or handful of employees seek to bring a class action against the employer with allegations where many employers never knew there was a potential problem. The problem with these cases for the employers is that they can be devastatingly expensive, costing thousands, even hundreds of thousands of dollars even before the merits of the case can be resolved. These types of cases have been brewing for years where employees working under tip credit provisions seek to obtain all back wages by disallowing the tip credit. In other words, the employees’ actions seek to obtain the difference between the standard minimum wage rate and the tip credit rate for every hour worked even while keeping any tips they have received.

Tip Pool Violations

Many of these cases originally arose under alleged tip pool violations and undocumented off-the-clock violations. The tip pool violations arose from allegations of improper tip pool sharing with non-customer service employees or management. Such situations can result in the entire tip credit being disallowed with a substantial amount of back wages and liquidated damages (double back wages) up to three years. The overtime and off-the-clock violations frequently included broad allegations of other violations. The attorneys bringing these actions seek to include as many people as possible in their class.

Off the Clock and Overtime

Several of these cases actually began from employees working off the clock or having paid hours cut off so as to avoid overtime. Once these cases are brought, many times other issues are raised which include tip notice and tip pool arguments. The goal of the plaintiffs in the case is not only to seek damages for more than just unpaid hours, but to invalidate the tip credit wage requiring full minimum wage for every hour worked regardless of tips receive. This includes potential liquidated damages for twice the recovery and substantial attorney’s fees. These off the clock and overtime claims result in a broad complaint addressing as many issues that the plaintiff can bring.

Side Work or No Work

A rash of cases were brought which are now making their way to the southeastern states involving what is referred to as a dual jobs claim. These cases allege that much of the side work being performed by servers, hosts and bartenders are in fact not proper job duties that can be paid under tip credit provisions. The largest problem for employers in these cases is the fact that what is not allowed under the job duties is not being clearly defined and can be extremely varied from district to district and even judge to judge.

The issue that employers must be aware of is that these types of cases are quite frequently brought in a representative capacity by one or a small number of employees and can easily balloon into a large class. Some states actually allow for a true class action by the employees, but where states do not provide for class actions, these are done under what has been referred to as a representative of similarly situated individuals. There generally is a two stage process in the bringing of the litigation which involves a pre-certification stage and a certification stage. In the similarly situated individuals cases, there is a pre-certification stage that does not take a substantial amount of evidence. The problem is that these cases can be certified relatively easily which results in a a large class of employees being provided notice, allowing them to opt in to the action. Quite frequently, because of the expensive nature of the litigation, cases become pre-certified and pend for quite some time and get resolved leaving no appeal process for the circuit courts to address. The appellate process is virtually non-existent during the pre-certification stage and the trial judge is given broad discretion of what to pre-certify and not. Quite frequently an employer ends up having no choice except to expend large amounts of money to defend these actions and ultimately resolve them because of the additional costs of going forward and potential exposure.

Employers will remain walking in the dark until some of these cases actually reach the appellate level, especially in the 11th Circuit which includes Georgia, Florida and Alabama. Until the actual merits are ruled upon and provide clear guidance, employers remain in dangerous uncharted waters. This is not just peculiar to restaurateurs as employee representation frequently seeks to search out violations in other industries. This hidden danger lurks for restaurant operators and entrepreneurs. It is prudent in this climate to do an informal audit with a seasoned professional that is familiar with this area of law in order to avoid potentially costly litigation. Arbitration agreements are frequently enforced by the courts and proper guidance with FLSA clients could potentially stop the clock from running on potential litigation. Restaurateurs and entrepreneurs beware as each should check their policies, practices and procedures and their operations in order to avoid potentially becoming a target for one of these costly lawsuits.

Stephen Fuller is the managing partner of Fuller Sloan, LLC and has practice in business litigation and consulting for 37 years and has over 25 years representation of the founder of one of the largest sit-down casual restaurants in America. For more information, email info@fullersloan.com.

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