Ms. Obod

Hospitality Law

Minimum Wage Violations in the Restaurant Industry

By Marjorie Obod, Partner, Dilworth Paxson LLP

The hospitality industry is particularly susceptible to minimum wage violation because of the unique compensation methods used industry wide. Minimum wage violations can result in potential civil litigation which can be both costly and time consuming for an employer. As a result this article attempts to highlight various issues surrounding minimum wage compliance.

Generally, the Fair Labor Standards Act (FLSA) establishes minimum wage regulations affecting both full-time and part-time employees. Workers covered under the act (which includes bartenders, servers, valet personal etc.) are entitled to a minimum wage rate of $5.15 an hour.

Typical compliance issues include: (1) failure to maintain records, (2) illegal deductions from pay for items like cash register shortages, uniforms, errors, bad checks etc. (3) insufficient tips to make up the difference between the employer's direct wage obligation and the minimum wage (4) employees receiving tips only and (5) sharing a portion of tipped employees' tips with employees who are not eligible because they do not normally receive tips.

Consequence of a Violation

Where an employee has been underpaid in violation of federal law, the Department of Labor has the authority to recover back wages administratively or through court action. Violations may result in either civil or criminal action. In 2005, the Employment Standards Administration's Wage and Hour Division (WHD) recovered more than $166 million in back wages for over 241,000 employees- a 26% increase over 2001. WHD specifically monitors low-wage industries (restaurants, hotels and motels, janitorial services etc.) because of a history of chronic violations. Specifically, last year, 4,829 cases were handled regarding restaurants resulting in $13,800,956 in back wages awarded. Hotel employees were awarded $2,847,607 and custodial engineers were awarded $3,408,819. These awards can have devastating effects on some employers particularly mid to small sized restaurants.

For more information regarding compliance, contact the nearest WHD office of the United States Government Labor Department.

State Minimum Wage Law

Although FLSA is federal law, various states have their own regulations regarding minimum wage. Federal law establishes minimum regulations; however, states have the authority to grant broader protections for employees. For example, in Texas, absent an agreement between and employer and employee, tips should be kept by employee as compensation and should not be considered in computing minimum wage. In Ohio, an employee who was compelled to contribute to a restaurant wide tip pooling scheme was entitled to full minimum wage rate for those hours.

Below is list of state minimum wage laws as of April 3, 2006.

For more state specific information see http://www.dol.gov/esa/minwage/america.htm#1

Tipped Employees:

A tipped employee is any person who receives more than $30 or more a month from tips. An employer is required to pay a tipped employee a cash wage of at least $2.13 per hour if they claim a tip credit against their minimum wage obligation. If an employee's tip and cash wage fall short of the minimum hourly wage, the employer must pay the difference. An employer may elect to take a food credit as well. The employer may take credit for food which is provided to the employee at cost resulting in an hourly deduction from pay. However a violation will be found where an employer claims a credit for merely providing a discount on menu prices to an employee.

In New York, waitresses who spent substantial portion of their time cleaning bathrooms and participating in food preparation were entitled to the full minimum wage during those times since those activities were not incidental to waitress' tipped duties. Also, the state denied an employer any credit for tips because the employer did not inform employees they would be receiving a tip credit against their minimum wage per hour. Recently in New York, Astoria Restaurant settled a back wages dispute for $460,000 after the state Attorney General instituted an investigation based on complaints from wait staff that their only payment for work was tips- a violation of both state and federal law.

Beyond payment compliance, a restaurant owner must ensure that employees satisfy their reporting obligations. This requires maintaining daily records of all cash and charged tips, plus the sharing of any tips received under a tip-pooling or tip-splitting arrangement and ensuring that employees include tips on their tax returns.

Employment of Workers with Disabilities at Special Minimum Wages

Section 14(c) of the FLSA authorities employers who have received a certificate from the Wage Hour Division office to pay special minimum wages to workers who have disabilities for the work performed. This special minimum wage is less than the federal minimum wage. These special wages must be commensurate wages based on the workers personal productivity compared to the productivity of a non-disabled worker. An employer may consider the type, quality, quantity of the work and the general labor pool of the geographical area. All special minimum wage rates must be reviewed and adjusted periodically if there is has been a substantial change in the workers productivity or the prevailing wage.

Possible Changes: Santorum Amendment

In 2005, Republican Senator Rick Santorum of Pennsylvania proposed an amendment to the FLSA. This amendment would have sweeping affects for both employers and employees alike. First, the amendment would limit the scope of FLSA. Currently the Act covers employees of businesses with revenues of more than $500,000 and all workers who engage in interstate commerce. The Santorum Amendment eliminates FLSA coverage (along with federal minimum wage requirements) for all workers at organizations with revenues up to $1 million. As of 1997, 6.8 million employees worked at businesses with revenues of between $500,000 and $1 million. Second, this amendment would also force states and local governments to adopt a 100% tip credit. This would enable employers to pay tipped employees nothing so long as their aggregate tips equal the minimum wage affecting approximately 2 million servers nationally.

Please feel free to contact Marjorie if you have any questions or comments regarding this article.

Marjorie L. Obod is a Partner in Dilworth Paxson LLP's Labor & Employment Practice. She prvides counsel to corporate clients and non-profit organizations in labor, employment and regulatory matters. She serves as lead counsel in jury trials in employment, including Title VII cases, the enforcement of restrictive covenants in employment agreements, and other employer/employee disputes in federal and state courts. She represents clients before the Equal Employment Opportunity Commission, the Pennsylvania Human Relations Commission and the New Jersey Division on Civil Rights OSHA. Ms. Obod can be contacted at 215-575-7000 or mobod@dilworthlaw.com Extended Bio...

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