Article

An Employment and Labor Compliance Primer for Independent Operators

The restaurant industry has a history of operators being heavily penalized for wage and hour and employment discrimination law violations.

In the early 2000s, Treetop Enterprises Inc., the second-largest franchisee of Waffle House, a popular restaurant in the Southeast, was ordered by a federal judge to pay about $2.9 million in overtime pay owed to its managers.

Restaurant industry employment is more than 11 million workers, making it a prime target for Department of Labor (DOL) regulation monitoring and enforcement. A recent DOL report indicated that among the approximately 9,000 investigations of full-service restaurants for wage and hour violations in the past five years, all were found to be in violation of the FLSA, says human resources consultant Danielle Verderosa, guest on a recent RestaurantOwner.com webinar. She adds, 'The DOL calls restaurants low-wage, high-violation industries.'

Editor's note: Recently, RestaurantOwner.com invited human resources consultant Danielle Verderosa, founding president of HR Allies, to underscore how even well-intentioned independent restaurants find themselves in violation of employment and labor laws. Verderosa has more than 25 years' HR management and consulting experience, beginning her career at Johnson & Wales University in Providence, Rhode Island. She has advised numerous hospitality businesses, including Chipotle Mexican Grill, and held an executive HR position with Guest Services, Inc. Her company, HR Allies, is a human resources advisory firm focused on HR compliance and employee relations. It supports independent restaurants nationwide by protecting them from liability into which owners can stumble, unless they are educated on the subject and vigilant of their practices. This article underscores her key points.

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The court rejected Treetop's claims that the managers were "executives" who were exempt from Fair Labor Standards Act (FLSA) overtime requirements because the Waffle House managers performed non-managerial tasks as their primary jobs, with management roles being secondary. It did not help that the company's training manual defined their managerial duties as subordinate to cooking.

The penalties for violation of FLSA overtime requirements can include back overtime pay for every hour worked beyond a 40-hour week for as long as each misclassified employee has been working for you. In the case of Treetop Enterprises, this was time-and-a-half pay between 15 and 40 hours a week over a period of several years for 125 current and former managers.

Consider the consequences of a restaurant operator's failure to train the staff as to how to respond to a harassment complaint. In 2017, a federal District Court returned a $1.55 million verdict for five former employees of a Florida restaurant.

Filed on behalf of the employees by the EEOC, the complaint alleged that the former waitresses and hostesses were subjected to "egregious" acts of verbal and physical sexual conduct on the part of one of the employer's assistant managers. The employees further alleged that despite repeated complaints to management, and one area manager in particular, the corporate defendants failed to take necessary corrective action, allowing the offensive conduct to continue and escalate.

Compliance Starts with Your Education

Human resources (HR) compliance requires alignment of a business's HR policies and practices with regulations and laws to protect workers from wage and hour violations and unlawful discrimination. This requires an understanding of the law and regulations governing these policies and practices.

Who says? At the federal level, Congress creates these laws, but via "enabling statutes" creates government agencies. Congress delegates power to the agency to perform the regulatory purpose of these laws, and to monitor, enforce and adjudicate non-compliance.

The Department of Labor (DOL) regulates wage and hour laws, such as minimum wage, overtime, child labor, and tipping. The Equal Employment Opportunity Commission (EEOC) regulates laws to prevent employment discrimination, such as Title VII of the Civil Rights Act and Title I of the Americans with Disabilities Act. The DOL monitors and enforces EEOC regulations through the Civil Rights Center and the Office of Federal Contract Compliance Programs.

States and counties may also regulate wage and hour and employment discrimination and are free to impose more strict requirements to protect workers, although they may not conflict with federal law. For example, states may require a higher minimum wage than the federal threshold. You need to be aware of employment and labor laws at all levels of government. If you are unsure of your liability in a certain situation, you are wise to consult a qualified employment and labor attorney.

Wage and Hour Issues

"The minimum wage laws, overtime, recordkeeping, the employment of minors, the tip laws and the laws that govern whether you are legally allowed to pay somebody a salary and exempt them from overtime are a priority," says Verderosa. "No matter how smart you are, no matter how clever you are, there is no scheme to get around paying somebody time and a half after they have worked 40 hours. Many, many, many people have tried," she adds. Consider the Treetop Enterprises, Inc. case described in the introduction of this article.

Verderosa says that business owners are prone to believe they "found a loophole" to dodge liability. First, they are likely not lawyers. Moreover, employees are savvier than ever regarding their rights, with a plethora of employment and labor law information at their fingertips on the Web. That is a dangerous game warns Verderosa, "And it will be an expensive lesson if an audit reveals any violations."

Restaurants are also vulnerable to wage and hour overtime violations by not monitoring employee hours worked and accounting for them appropriately. Verderosa advises operators to pay employees while on breaks if they require them to monitor their stations; in case it gets busy. They still are on the clock.

That said, if the employer is not paying them while they are on break, they must allow them to spend that time off the clock as they see fit. In short, if you are directing employee activity, they are on the clock.

Tipping is also an area in which operators are vulnerable to FLSA violations. Says Verderosa, "Tipped employees must retain all the tips that they earn other than mandatory tip pools, she says, adding managers may not take any portion of service employee tips under any circumstance. (See "Tip Pooling 101" below.)

Verderosa implores every independent operator to be familiar with the federal and state laws governing the tip credit. The so-called "tip credit" was first introduced by Congress in 1966 through amendments to the Fair Labor Standards Act (FLSA). Congress has repeatedly amended the tip credit – in 1967, 1974 and again in 1996 – and the Department of Labor has provided guidance through regulations and opinion letters, leading to the current version of the rule. Presently, the tip credit allows employers to count a portion of an employee's tips as a "credit" toward the federally mandated minimum wage.

As a result, an employer may pay an employee a cash wage less than the minimum wage if the employee's total income, after tips, is over the minimum wage and the employer otherwise complies with the tip credit rules and regulations.

Based on the current FLSA tip credit rules, an employer may pay tipped employees a cash wage of $2.13 an hour and use a tip credit of $5.12 an hour to satisfy the federally mandated $7.25 minimum wage.

Bear in mind, not all states permit tip credit. Some states permit the tip credit, but require a higher hourly minimum wage than the current federal $2.13. If you take advantage of the tip credit, it is necessary to comply with both federal and state law.

As an example, Verderosa notes, "In Washington DC, the minimum wage is $16.10 an hour, but pay a minimum cash wage for tipped employees of $5.35 an hour. That is all on the up and up. If the employee makes $10.75 an hour in tips, they are earning minimum wage, at least, and everything is cool. That $10.75 is called the tip credit. You can only take that tip credit for hours the untipped employee is doing work that produces tips."

An attendee of Verderosa's RestaurantOwner.com webinar queried, "We pay our servers minimum wage, we tip pool with the kitchen and dishwashers, is this okay since we pay our servers the full minimum wage?"

According to Verderosa, "As long as you pay your servers minimum wage, that is okay. All you must worry about is whether your servers are happy and content enough with the wages that they are making after they tip out."

Verderosa raised another issue regarding FLSA compliance. If there is a 30-minute period within any hour that they are not actively earning tips, you cannot take a tip credit on them and you must pay them the full minimum wage for that hour, plus their earned tips, of course.

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Proper Manager Classification

Verderosa also stressed the importance of properly classifying employees as managers. This is an area in which unsophisticated (or unscrupulous) operators can find themselves in trouble with the DOL. Consider the Treetop Enterprises, Inc. case referenced earlier.

Why is proper classification of managers crucial? First, managers may not share in tip credits. In addition, they may be exempt from overtime requirements if they meet the DOL's classification as properly exempted from overtime requirements as "administrative, professional, or executive employees".

The DOL has a specific test for managers. Written job titles, descriptions or what they do during a shift does not qualify them to be paid as a manager. What does is if they are paid a "salary" of at least $684 per week or just over $35,000/year.

In addition, to qualify as a manager the employee must regularly direct the work of at least two full-time employees or more and have the authority to hire, fire, promote, demote or at least be able to strongly influence with their own opinion, the ultimate decision maker, the hiring, and the firing. Finally, their primary duty must be one of spending a high percentage of their time performing management functions such as strategy, marketing, purchasing or financial duties.

Why is proper classification of managers crucial? First, managers may not share in tip credits. In addition, they may be exempt from overtime requirements if they meet the DOL's classification as properly exempted from overtime requirements as "administrative, professional, or executive employees".

For more detailed information, see "Correctly Classify Your Restaurant Concept's Managers" below. Also, be aware there is no substitute for a qualified employment and labor attorney. While HR consultants are highly knowledgeable on DOL and EEOC regulations, they are not qualified to offer a legal opinion on these subjects.

Employee Handbooks

Employee handbooks are not required by law, but they should be used because the handbook is where all the information that shows that the restaurant is compliant. Says Verderosa, "The handbook is the place for restaurant policies so that you show your employees and the government, 'we don't tolerate sexual harassment, and here's our policy.'"

A sound employee handbook can prove beneficial in several ways, including improving employee morale, avoiding litigation, and increasing consistent application of workplace policies and discipline. From an employee perspective, the employee handbook provides guidance, sets expectations, and provides information regarding policies and procedures that apply to the workplace. The employee handbook can also prove a valuable resource for employees with respect to employee benefit plans and free up managers' time from answering questions regarding such programs.

As for employers, the greatest benefit that an employee handbook can provide is the legal protections that can be secured by properly drafted and disseminated policies and procedures. An employee handbook can legally protect an employer in several ways. For example, in today's workplace, an employer can be held liable for the bad behavior of an employee (or even a customer), especially when that behavior injures or otherwise negatively affects other employees, customers or individuals.

Clearly establishing a set of behavioral expectations can go a long way toward establishing that an employer is not contributing to the employee's bad behavior. Setting clear performance and behavioral expectations can also help the employer consistently spot and address violations. Relying on loosely defined standards that are not properly documented, violations become subjective and open to interpretation. The result of such ambiguity is often inconsistent treatment, which can lead to litigation.

Employers often adopt exhaustive written personnel policies that govern relationships with current employees because they know that a written policy can be an effective tool for defending lawsuits. But putting policies and procedures in written form also provides practical benefits.

From the manager's perspective, the employee handbook, if written properly, regularly updated, and consistently provided to employees, can serve as a tool for communicating performance expectations, establishing applicable work rules, setting disciplinary policies, and telling employees about the benefit plans that the employer offers. An employee handbook can also provide support to your managers. When faced with a personnel issue, an employee handbook can provide guidance and certainty to the decision-making process.

To be effective, however, the key to developing an effective employee handbook is to devote the time and resources necessary to tailor the policies to your business, goals and workforce. It is an investment that can pay dividends in increased productivity, improved employee morale, and minimized litigation.

Verderosa also reminds operators not to forget wall posters. The Fair Labor Standards Act (FLSA) Posters must be displayed/posted by employers in a conspicuous place in all their establishments to permit employees to readily read it.

There are several commercial services that offer easy-to-read "posters" or they can be ordered at no cost from the Department of Labor website: https://www.employer.gov/EmploymentIssues/required-posters/

Equal Employment Opportunity Matters

The U.S. Equal Employment Opportunity Commission (EEOC) is responsible for enforcing federal laws that make it illegal to discriminate against a job applicant or an employee because of the person's race, color, religion, sex (including pregnancy and related conditions, gender identity, and sexual orientation), national origin, age (protects workers 40 years or older), disability, or genetic information.

Most employers with at least 15 employees are covered by EEOC laws (20 employees in age discrimination cases). Most labor unions and employment agencies are also covered.

The laws apply to all types of work situations, including hiring, firing, promotions, harassment, training, wages and benefits. Be aware that states, and even counties, can have laws and regulations that offer protection to employees against discrimination that go above and beyond federal law.

No laws will penalize you for not hiring someone you do not like, need, or want. That is if your refusal to hire that person is not based on discrimination, as the law defines it. Discriminatory practices include not just bias in the recruitment, hiring, and firing of an employee.

It is unlawful to discriminate regarding compensation, assignment, or classification of employees; transfer, promotion, layoff, or recall; job advertisements; testing; fringe benefits; pay, retirement plans, and disability leave; or other terms and conditions of employment. An employee can also raise a discrimination claim if he is harassed in the workplace as a result of bias.

Since the early 1960s, Congress has passed several laws related to employment discrimination. Many states and municipalities followed the federal government's lead with their own anti-discrimination laws. It can be complex. That is why you should become familiar with the major federal anti-discrimination laws, which are enforced by the EEOC.

• The Equal Pay Act prohibits paying wages based on sex by employers and unions.
• Title VII of the Civil Rights Act of 1964 makes it unlawful for employers with 15 or more employees "to discriminate against any individual with respect to his or her compensation, terms, conditions, or privileges of employment because of such individual's race, color, religion, sex, or national origin." The Pregnancy Discrimination Act expanded these laws to make it unlawful to discriminate against a woman who is pregnant. As the number of married and single mothers in the workforce increases, so have legal claims based on these laws.
• The American with Disabilities Act of 1990 (ADA) prohibits employers from discriminating based on disability.

And that is just a portion of the laws that prohibit discrimination. As noted, most states have enacted their own employment discrimination laws, which may bestow even greater rights to employees than federal laws do.

Depending on the offended employee's claim, an employer could be subject to administrative actions by the EEOC or state labor department, or a lawsuit in state or federal court. You will note that Title VII of the Civil Rights Act of 1964 applies to employers with 15 or more employees; many restaurants have fewer than 15 employees.

Even though you are a small business, you may not be immune from liability; in Oregon, for example, state anti-discrimination laws apply to all employers. And some states have expanded these anti-discrimination concepts to include laws designed to prevent employment discrimination based on sexual orientation or political affiliation.

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According to Verderosa, Title VII protection of workers has expanded. For example, LGBT employees are now protected under federal law from employment discrimination based on sex. EEOC enforcement priorities for 2023 include eliminating barriers in recruitment and hiring, protecting immigrant, migrant and other vulnerable workers, and enforcing equal pay laws. Again, as noted, if you have 15 or more employees, then these federal laws pertain, and in many states, all you need are one to five employees for state laws to apply.

How do restaurant owners and operators find themselves across federal and state equal employment opportunity laws? Most of us do not consider ourselves sexist, bigoted, age-conscious, or insensitive to those who are different from us; nevertheless, it is easy to allow prejudices to influence hiring decisions if you are not actively aware of them. "None of us intentionally discriminate," says Verderosa, "but it is very easy to unintentionally discriminate because of somebody's protected characteristic. The reason is because our common sense gets in the way of not discriminating, if that makes sense."

"For example, we have got very physical jobs that we are hiring for" Danielle points out. "We will look at someone who is older or pregnant or a tiny female or disabled, and we will think to ourselves, 'There's no way they can do this job,' but that turns out to be unintentional discrimination."

To employers, of the many laws related to discrimination, Title I of the Americans with Disabilities Act and its state law counterparts are among the most perplexing. Under the ADA, "the term 'employer' means a person engaged in an industry affecting commerce who has 15 or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year, and any agent of such person..." Again, note that "mirror" state laws might apply to employers with fewer employees.

Pursuant to the ADA, "the term 'qualified individual with a disability' means an individual with a disability who, with or without reasonable accommodation, can perform the essential functions of the employment position that such individual holds or desires."

Hiring employers should also be mindful of the laws related to age, on both ends of the age spectrum. While a large percentage of restaurant employees are relatively young, in a tight economy, you may find a greater percentage of non-traditional workers knocking on your door. Do not dismiss those baby boomers. The Age Discrimination in Employment Act (ADEA) of 1967 prohibits employment discrimination against persons 40 years of age or older. Among other provisions, the ADAE makes it unlawful "to fail or refuse to hire or to discharge any individual or otherwise discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's age." Several states have enacted mirror laws into their statutes.

Title VII of the Civil Rights act prohibits employment discrimination based on race, color, religion, sex, and national origin. And that means any race, any color, any religion, any sex, and any national origin, even if you do not consider someone part of a protected class. Verderosa emphasizes this point with the example of a kitchen that has employed exclusively Latinx workers who get along "so harmoniously, it is like an orchestra, and we think, 'let's not mess with that. Let us not hire anyone but Latinx employees to work in the kitchen' and we reject applicants who fall under other ethnic classifications." Says Verderosa, "that is an example of unlawful discrimination, pursuant to Title VII."

Verderosa also cautions operators to assure sexual harassment is not tolerated in their businesses. Although no industry is immune from workplace sexual harassment claims, restaurants are particularly vulnerable. For one thing, to attract customers, many restaurant chains have adopted entertaining, party like atmospheres.

Additionally, restaurants recruit employees with outgoing personalities for the frontline positions of host/hostesses, servers and bartenders. Once hired, these employees are encouraged to be fun, friendly and flirtatious – and there often is a high degree of social interaction between employees both during and after-hours. In this type of informal, jovial atmosphere, it is easy for employees to get mixed signals from each other as the line between acceptable employee banter and social flirtation is blurred.

Furthermore, many restaurants have managers and/ or supervisors very similar in age to the staff. This leads to the problems associated with having young people – with little or no real-world experience, managing other young people. For example, a 26-year-old shift manager may not fully appreciate the ramifications of "hitting on" a 24-year-old server and then altering her shift schedule when she rebuffs his advances.

Because of the unique social relationships and interactions in the restaurant industry between managers and staff, the need for those employees to be trained on the perils of inappropriate conduct cannot be understated. While it is impossible to eliminate the threat of sexual harassment from the restaurant environment completely, establishing an unambiguous harassment policy and providing managers and staff with the proper sexual harassment training offers restaurant operators the best hope of limiting their liability. The failure to do so can prove extremely costly. This includes defending the claim as well as the cost of a settlement or, in a worst-case scenario, an adverse verdict.

While sexual harassment is a particularly thorny problem for the restaurant industry, employee harassment based on other protected classes, including race, religion, color, and national origin can be the basis of a Title VII complaint against the business.

Be Prepared

RestaurantOwner.com offers a library of articles and webinars on employment and labor matters and templates for vital forms to monitor these activities. Managers and decision-makers should be held accountable for documenting discussions with employees, performance evaluations, and other decisions involving the terms and conditions of their subordinates' employment. In the fast-paced and high-demand environment of a restaurant, there is little opportunity for managers and supervisors to write lengthy memoranda regarding employee misconduct. However, it is an action that can pay significant dividends, both in increasing employee performance and defending a future lawsuit.

In her webinar, Verderosa described what she calls an HR Foundation; that is a list of documents that show your restaurant to be well prepared to answer any questions or doubts about how you run your business. Having these organized along with your paper or digitized employee records may seem overkill, but if someone complains, you are ready. These include:

• Hiring Process Checklist
• Job Ad Template
• Job Application
• Structured Interview Questions
• Job Offer Letter Template
• Federal and State Required Employee Notices
• Arbitration / Mediation Agreement
• Non-Compete / Non-Solicitation / Non-Disclosure Agreement
• Employee Handbook
• Employee Classification Analysis
• Job Descriptions Performance Management
• Performance Reviews
• Counseling / Corrective Action Form
• Performance Improvement Plan Template
• Termination Checklist

Templates for many of these documents can be found in our Resource Library.

Correct Classification of Managers and Assistant Managers
in the DOL's Own Words

The Department of Labor provides the following guidance on correctly classifying managers and assistant managers as noted below.

Note that compliance with federal law on tip pooling does not mean that the restaurant necessarily complies with state law. In Kentucky, for example, while voluntary tip pools are permissible and an employer may provide an employee with information about the voluntary pool, mandatory pools are not permitted. But even in states that permit mandatory pools, there may be additional limits. Restaurant owners, general managers, and human resource employees can use the following guidelines to help them to determine which managers and assistant managers are exempt from the overtime requirements of the Fair Labor Standards Act (FLSA), and which are not.

The FLSA, enforced by the U.S. Department of Labor's Wage and Hour Division (WHD), requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half times the regular rate of pay for all hours worked over 40 hours in a workweek. Section 13(a)(1) of the FLSA, however, provides an exemption from both minimum wage and overtime pay requirements for employees employed as bona fide executive, administrative, professional, and outside sales employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis of not less than $684 per week.

Job titles do not determine exempt status. For an exemption to apply, an employee's specific job duties and salary must meet all the requirements of the Department's regulations. Exemptions most applicable to managers and assistant managers in the restaurant industry are the executive and the administrative exemptions.

To qualify for the executive exemption, all the following tests must be met:

• The employee must be compensated on a salary basis of at least $684/week;
• The employee's primary (principal, most important) duty must be management of a customarily recognized department or subdivision;
• The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
• The employee must have the authority to hire or fire other employees, or the employee's recommendations must be given weight.

A kitchen manager directly overseeing a staff of 25 full-time employees and earning a salary of $1500/week would likely be exempt. A beverage manager, supervising no one and earning $400/week, however, would not be exempt.

To qualify for the administrative employee exemption, all the following tests must be met:

• The employee must be compensated on a salary basis of at least $684/week;
• The employee's primary (principal, most important) duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
• The employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

A comptroller charged with the financial management of a 5-restaurant enterprise, who can bind the firm in financial matters and earns $1200/week would likely be exempt. A restaurant's human resources manager, who supervises no one directly but is responsible for employee benefits, labor relations, government relations, and regulatory compliance, and earns $900/week, would also likely be exempt. A restaurant's only maintenance employee, earning a salary of $425/week, would not be exempt even if the employee's title is maintenance manager.

Payment on a salary basis on its own does not render the employee exempt from the overtime requirements of the FLSA. Exemption requires that both the salary and the duties tests be met. When state laws differ from the federal FLSA, an employer must comply with the standard most protective to employees. Links to state labor departments can be found at: http://www.dol.gov/whd/contacts/state_of.htm

Exemptions are applied on a case-by-case basis, and factors other than those outlined in this brief summary may impact the determination. This guidance is for general information and is not to be considered in the same light as official statements of position contained in the regulations. For additional information, please visit the Wage and Hour Division's website at http://www.dol.gov/whd

Tip Pooling 101

If you decide that a tip pool arrangement fits within or even advances your business model, then it will be necessary to comply with federal and state law. Under federal law, mandatory tip pools are permitted; however, if an employer is taking advantage of the tip credit, tips can only be redistributed to other employees who work in an occupation that customarily and regularly receives tips. According to the regulations, such would, for example, include other servers, bartenders, service bartenders, counter personnel, and bus persons. There is case law expanding this list to the maître d'/host positions as well.

Cooks and dishwashers are listed in the regulations as not being tipped- employees. While this list is certainly not exhaustive of all the positions in a restaurant (e.g., dish polisher, sommelier, expediter), basically a tipped- position is limited to those with significant guest interaction, i.e., front-of-the-house positions. Managers and supervisors may not participate in a tip pool.

Federal law on mandatory tip pools limits the amount of tip an employee is required to contribute to the pool. The Wage and Hour Division, which enforces federal wage and hour law, will not challenge a requirement that employees contribute up to 15 percent of their tips to a tip pool (after considering any tips returned to the employee). Although this position has not been uniformly adopted by the courts, whatever formula is used to determine how much an employee must contribute to the pool should take this limitation into account. Of course, regardless of the contribution and distribution formulas, an employee must end up with enough in tips to cover any amount taken as a tip credit by the employer.