The Wage and Hour Litigation Blog

Co-authored by John W. Egan and Robert Whitman

We reported [here] in November on the Second Circuit’s referral of two important Labor Law questions to the New York Court of Appeals in a challenge to Starbucks’ tip-pooling policy.  Briefing is now complete and oral argument is scheduled for next week. 

The consolidated appeal, in Barenboim v. Starbucks and Winans v. Starbucks, will clarify Section 196-d of the Labor Law, which prohibits employers and their “agents” from participating in employee tip pools and tip-sharing arrangements.

In a relatively rare occurrence, the New York State Department of Labor filed an amicus brief with the Court of Appeals.  The Department argues that its Hospitality Industry Wage Order [here] fully answers the first question certified by the Second Circuit: what factors make an employee an “agent” of his employer under Section 196-d such that he or she is ineligible to participate in a tip pool? 

Under the Wage Order, employees who personally serve customers as a principal and regular part of their job duties may participate in tip pools, while those who do so only occasionally or incidentally may not.  The Starbucks “baristas” argue that shift supervisors are “agents” of their employer because of their supervisory responsibilities and therefore should not be permitted to obtain a share of their tips.  In its amicus brief, the Department took direct aim at that argument, stating that the Labor Law does not categorically bar employees with supervisory titles or authority from participating in tip pools, so long as they regularly provide direct personal service to customers.

On the second question certified on appeal -- whether the Labor Law permits an employer to exclude otherwise eligible employees from participating in a tip pool -- the Department’s answer is: not necessarily.  Whether such a practice is valid depends, it says, on whether the practice is consistent with two underlying purposes of Section 196-d: the protection of subordinate employees and the reasonable expectations of customers. 

The Department concluded, however, that the Court of Appeals cannot properly assess Starbucks’ policy of excluding Assistant Store Managers from tip pools, since the federal district court did not resolve factual disputes over their actual responsibilities and whether customers reasonably expect the proceeds of their gratuities to be shared with these employees.

We will continue to follow these cases and will grind out further updates (as well as additional coffee puns) as warranted.

Co-authored by Arthur J. Rooney and Jeremy W. Stewart

When should a tipped employee no longer be treated as a tipped employee?  Plaintiffs’ lawyers argue that restaurants cannot utilize the tip credit, or pay tipped employees a sub-minimum wage, if tipped employees perform any “non-tipped” duties, such as washing dishes or taking out the trash.  Earlier this week, a District Court in the Northern District of Indiana rejected this argument.  (See here)  Specifically, the court dismissed a former server’s claim that the FLSA was violated by restaurants paying servers, bartenders, and hosts a sub-minimum wage while they performed non-tipped duties.  This decision could be far reaching because restaurants across the country are being hit with similar class or collective action lawsuits.  

The FLSA’s tip credit provision allows employers to pay tipped employees a sub-minimum wage as long as the employer:  (1) pays a cash wage of at least $2.13 per hour; (2) informs its employees of the FLSA’s tip credit provisions; (3) permits its employees to retain all their tips (w/ some exceptions); and (4) ensures that the cash wage plus the tip credit equal at least the minimum wage each week.  The rub is that the FLSA does not permit an employer to utilize the tip credit for all time worked by employees, just for time spent in a tipped occupation.  An example the regulations use is the hotel worker who is both a maintenance man and a waiter.  In this dual job scenario, the tip credit can be taken for the time the worker spends as a waiter, but not as a maintenance person.  There is no clear demarcation between when waiter becomes the maintenance person, but the DOL takes the position that if a tipped employee spends “substantial time” (more than 20%) performing related, but non-tipped duties referred to as “general preparation work or maintenance,” then the entire tip credit is lost.  The problem for employers is no authority explaining what duties constitute “general preparation work or maintenance.” 

Here, the plaintiff alleged that servers, bartenders and hosts were improperly denied minimum wage for time spent performing allegedly non-tipped duties such as dishwashing, food preparation, kitchen and bathroom cleaning, trash removal and other similar duties.  The Court reasoned that plaintiff’s bare claim that employees must be paid a minimum wage for performing these duties is “based on a faulty legal conclusion” that duties like these are those of a separate and distinct non-tipped occupation.  While leaving open the possibility that employees may, at times, be entitled to minimum wage for these duties, the district court stated that “[s]ervers, bartenders, and hosts - who directly related with customers - are not also employed in the second occupation of a dishwasher, cook, or janitor simply because an unspecified amount of time during their shift is spent performing duties that may be performed by individuals in those occupations.”  In other words, some overlap between tipped in non-tipped duties, however they are defined, is ok.

Because it was not before it, the district court refused to decide if the 20% formulation set forth in the DOL Handbook is entitled to controlling deference, but cautioned plaintiff that an order of dismissal would be imminent if she did nothing more than amend her complaint to include an allegation that the defendants required her to spend more than 20% of her time on duties that did not generate tips or that were outside her tipped occupation.  Rather, she must provide factual support for any such claims, such as the non-tip producing duties she performed, how many minutes or hours they took to perform, and place that time in the context of the hours worked during the entire shift.  

This decision potentially raises the bar as to the level of specificity that must be pled to support a tip credit claim.  Moreover, the decision underscores why tip credit cases are not susceptible to collective or class action treatment.  Because there is no clear line between tipped and non-tipped duties, tip credit claims must be determined on an individual-by-individual basis. 

Co-authored by Rob Whitman and Adam Smiley

Two court filings this week show that when one internship lawsuit goes down, another one quickly rises to take its place.

In one case, a judge in the Southern District of New York on May 8 denied class certification (See here) for a group of magazine interns, holding that the interns failed to meet the commonality and predominance requirements of Rule 23.  But just two days earlier, a similar case was filed (See here) in the Western District of Pennsylvania, alleging that an Arena Football League team violated the FLSA and state law by treating the plaintiffs as unpaid interns.

In the New York case, former unpaid interns for The Hearst Corporation claimed that they should have been paid for work performed for about 20 magazines.  Judge Harold Baer, Jr. denied class certification (and denied summary judgment) for the interns, relying largely on Wal-Mart Stores, Inc. v. Dukes (See Dukes discussion here) and holding that the interns could not establish the key elements of “commonality” and “predominance.”

In siding with Hearst, Judge Baer found that the commonality requirement “is not satisfied because Plaintiffs cannot show anything more than a uniform policy of unpaid internships” and that no “significant proof” existed “abridging the gap between an individual and a class claim.”  Even though the plaintiffs raised questions applicable to the class as a whole, Judge Baer held that, under Dukes, he must also “consider dissimilarities” within the proposed class.  While the plaintiffs urged the court to consider the nature of the work performed by interns in general, Judge Baer ultimately found significant variation in their duties, stressing the “glaring problem” of not having any common proof to “determine the very nature of interns’ work.”

As to predominance, the court held that “there is no uniform policy among the magazines with respect to the contents of the internship, including…duties, training, and supervision,” such that an analysis of the internship program would be individualized.

Meanwhile, the sports world continues to be a magnet for unpaid internship lawsuits.  In January, this blog reported on (See here) a class and collective action filed by an intern for the Hamilton College Athletic Department.  On May 6, 2013, a former intern for the Pittsburgh Power, an Arena League team, also sued, claiming that he and other Power interns worked at least 20 hours per week, and sometimes more than 40, without compensation.  (It was perhaps a sign of things to come when the Power lost earlier this week to a team called the Predators.)  Apparently seeking to alert the court to a brewing trend, the plaintiff cited in his complaint a recent New York Times article, which stated that “unpaid interns are becoming the modern-day equivalent of entry-level employees, except that employers are not paying them.” 

Similar to prior internship lawsuits, the plaintiff described his duties as attending meetings and strategy sessions, planning and organizing marketing events, taking photographs, attending games, and uploading and editing photographs.  The interns, he alleged, did not receive any education credit for the work performed.

Stay tuned for developments as the Power plays defense against the former interns.  Meanwhile, although the denial of certification in the Hearst case may comfort employers utilizing unpaid internship programs, complacency should not set in.  The fact that the internship program covered 20 different magazines and lacked a cohesive internal structure likely tipped the scales in favor of denial.  As the Power lawsuit shows, the plaintiffs’ bar continues to aggressively pursue these claims, and unpaid internship programs with more common threads may ultimately survive the certification process.

Authored by Alex Passantino

Independent Contractors.  Subcontractors.  Franchises.  Employment Agencies.  According to the Wage & Hour Division, use of these relationships is an action that requires special scrutiny.  When WHD states that it is targeting "fissured industries," it means those industries in which it is more likely that workers are performing under one of these relationships -- anything where there is something less than a direct employee-employer relationship.

In recent weeks, WHD has brought the fissured industries back into the forefront.  In a lawsuit filed in federal court, WHD seeks to recover back wages for 800 workers who WHD alleges were misclassified.  See here.  The workers -- who apparently performed construction work -- were classified as members and owners of a limited liability company that provided workers to construction contractors.  WHD is using a full complement of enforcement tools, seeking back wages, liquidated damages, and a permanent injunction, and asserting joint employment among the companies that provided the workers and the companies that used the workers.

In a separate enforcement action [See here], WHD assessed back wages on behalf of four construction employees determined to have been misclassified as independent contractors.  

Why is WHD Pursuing this Fissured Industry Initiative?

WHD provides a pretty concise description in its press releases:

The misclassification of employees as something other than employees, such as independent contractors, presents a serious problem for affected employees, employers and to the economy. Misclassified employees are often denied access to critical benefits and protections, such as family and medical leave, overtime, minimum wage and unemployment insurance, to which they are entitled. Employee misclassification also generates substantial losses to the Treasury and the Social Security and Medicare funds, as well as to state unemployment insurance and workers’ compensation funds.  

With its recent agreements with state and federal taxing authorities, WHD's efforts in the fissured industries often have the result of increasing depleted government coffers in addition to the pockets of workers for whom it recovers back wages.  It's a win-win for WHD.  But for employers in the fissured industries -- hotels, restaurants, construction, janitorial services, employment agencies -- it's a cause for concern:  the entire industry is targeted for enforcement actions, not simply the companies that use the relationships.

Well . . . What Should We Do?

For companies that use one or more of the relationships above, take time to ensure that you have properly classified workers as independent contractors.  In addition, if you use subcontracting, franchising, or employment agencies, make sure that the entities providing these services are compliant with state and federal laws, including the FLSA.  As is the case in the lawsuit described above, the users of the services may be subject to liability under a joint employment theory. 

Of course, all employers in the hotel, restaurant, construction, janitorial services, employment agency, or other fissured industries -- regardless of whether they use one or more of the relationships -- should ensure that their wage and hour practices are in compliance.  (And consider attending our upcoming webinar.)

W.H.D.? (“What Happened, Dude?”) is a weekly blog post in which we break down recent enforcement activity by the U.S. Department of Labor’s Wage & Hour Division (WHD), look at what went wrong for the employer, and share some lessons for other employers.

Co-authored by Richard Alfred and Patrick Bannon

Did the Supreme Court’s decision last month in Comcast v. Behrend make it harder for plaintiffs to pursue wage and hour claims as class actions?  An early consensus says “Yes.” 

As we reported previously [read here], the Supreme Court itself, in Ross v. RBS Citizens, N.A., immediately applied Comcast to a wage and hour case, instructing the Seventh Circuit to reconsider whether off-the-clock work claims under Illinois law could be pursued as a class.

Since then, four federal district courts have considered the impact of Comcast on state law wage and hour class certification.  One court denied class action status to two of the plaintiffs’ three claims.  The other three courts refused to allow any class action at all.  All four judges interpreted Comcast to mean that cases requiring significant individualized proof of damages -- as most wage and hour cases do -- should not proceed as class actions. 

In Martins v. 3PD, Inc., issued the day after Comcast was announced, a federal judge in Massachusetts refused to allow the plaintiffs to pursue a claim for alleged unlawful pay deductions or “unjust enrichment” on behalf of a proposed class of more than 66 delivery drivers.  Citing Comcast, the judge noted that calculating what was deducted from whom “would require complex individual inquiries not suited to class-wide litigation.”  The only claim as to which the judge approved a class action was one that the judge found would not require individualized evidence. 

In Roach v. T.L. Cannon Corp., the plaintiffs claimed that a restaurant chain operator had a policy of denying employees extra pay required by state law for work days spanning more than 10 hours and of deducting non-existent rest periods from employee time records.  Relying on Comcast, a federal judge in the Northern District of New York refused to allow a class action, finding that damages could only be proven individually and that individual damages questions would inevitably overwhelm questions common to the class. 

In Smith v. Family Video Movie Club, Inc., a federal district judge in Illinois refused to allow two former employees of a video rental store chain to pursue off the clock work and miscalculation of overtime claims as a class action.  In finding that the plaintiffs failed to satisfy several of the requirements for pursuing damages on behalf of a class, the court noted that Comcast requires that “damages must be susceptible to measurement across the entire class, and individual damages calculations cannot overwhelm questions common to the class.” 

Most recently, on April 17, 2013, in Ginsburg v. Comcast Cable Commun. Mgmt. LLC a district court judge in Seattle relied on Comcast in refusing to allow call center employees to pursue pre-shift work claims under Washington law as a class.  The court  concluded that each employee’s damages would inevitably depend on individualized evidence of his or her pre-shift activities.  Accordingly, citing and quoting Comcast, the judge denied class certification on the grounds (among others) that individual damages issues would overwhelm issues common to the class.

We are not aware of any other wage and hour cases in which courts have interpreted Comcast or any cases that have found Comcast inapplicable to the predominance requirement of wage and hour state law class claims. Thus, an early consensus is forming that Comcast means what it says:  courts must carefully analyze whether the need for individualized proof of damages makes many wage and hour cases unsuitable as class actions.

We will continue to report on the impact of this important Supreme Court decision on wage and hour cases.