The U.S. Department of Labor and Private Litigants Target Restaurant Industry

The U.S. Department of Labor has undertaken several major investigations against employers in the restaurant industry. The Department of Labor has classified restaurants as a “high-risk industry” for violations of the Fair Labor Standards Act (FLSA), believing that low-wage employees in the restaurant industry are particularly vulnerable to unlawful wage-and-hour practices. These investigations will continue through 2013. These cases are bad news with an average settlement amount for  restaurant industry employers at more than $2 million.

As if that news wasn’t bad enough, there has also been an upward trend in litigation by private litigants. One attorney even runs a website (, which is focused solely on alleged violations of wage-and-hour laws by the restaurant industry. Cases are being brought by both former and current employees with claims such as working off the clock after their shift ends or before the employee clocks in, unlawful tip pooling, gratuity-skimming and other compensation practices.

Most restaurant employers are aware of the lower hourly rate they are permitted to pay waitstaff and bartenders because these employees also receive tips. However, employers may not be aware that these lower wages are only permissible if the employee makes tips enough to bring their hourly wage above the full minimum wage rate. Otherwise, the employer must make up the difference.

Deductions or other employee charges that reduce an employee’s wages below the minimum wage are prohibited. Employers often take deductions for customer walk-outs, breakage of plates or glassware, meals, uniforms and even housing, but this can lead to problems if the tips earned are low.

Another issue that has been problematic is tip pools. Tip pool arrangements may not include employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs, etc.

Restaurants are considered high-risk because they are often razor-thin margin cash businesses. Restaurants rarely have in-house HR professionals or legal counsel. In fact, small establishments forego these functions entirely and proceed to operate without guidance or an understanding of their legal obligations.

Since wage-and-hour issues can be litigated on a collective basis with representative proofs, class actions are profitable for attorneys, especially against franchises. General liability insurance policies and most employment practices liability (EPL) policies contain exclusions for wage-and-hour exposure, including defense costs.

Wondering what the most common claims have been?

  • Required kitchen prep work that is performed off-the-clock
  • Required cleanup work that is performed off-the-clock
  • Failure to ensure that tipped employees earn at least minimum hourly wages, inclusive of tips received during the shift.
  • Tip-sharing pools benefiting management
  • Tip-sharing pools benefiting staff who do not customarily and regularly receive tips (host/hostess. dishwashers, cooks, chefs)
  • Failure appropriately to pay an employee the full minimum wage when working in non-tipped capacities (ex. Clean up and prep work, mandatory training, hostess duties or cashier)
  • Fixed compensation per shift (or per pay period) which does not take into account the number of hours worked or overtime
  • Misclassification of employees as exempt (salaried management)
  • Misclassification of employees as independent contractors.
  • Deductions from employees’ pay for customer walk-outs, breakage of plates or glassware and uniforms that result in employees being paid below the required minimum wage

What can you do to reduce your risk and liability?

Self-audit for compliance with payroll and work-time practices. Start with evaluating the issues listed above and be sure you are not at risk for any of these claims. If so, of course, take corrective action. Also, add these to your self-audit checklist:

  • Reviewing timekeeping practices to ensure that employees are recording all time worked, including activities performed before or after a scheduled shift(i.e., ensure that bonuses, shift differentials and other remuneration required to be considered for overtime calculation purposes is included)
  • Be sure employees are paid for mandatory training
  • Assess average tips to be sure the employer is able to claim the tip credit
  • Look at tip-sharing practices to be sure tips only benefit front of the house employees who work for tips (buspeople, bartenders and waitstaff)
  • Eliminate improper pay deductions
  • Auditing job classifications to ensure that employees have been properly classified as exempt or independent contractors.
  • Posting required information regarding wage-and-hour laws and educating employees of their rights
  • Training supervisors and others involved in the payroll process on legal requirements and compliance
  • Be sure you comply with certain restrictions applicable to workers under 18 years of age.

Speak with your attorney and your accountant for guidance on conducting your self-audit. An ounce of prevention often is worth a pound of cure. Owners and operators of restaurants will receive a positive ROI for assessing their current wage-and-hour practices. In addition to peace of mind and positive employee morale, restaurant employers can avoid a large financial risk in the form of a Labor Department investigation or litigation and some bad publicity.