Employment Law “Kitchen Fires” – Common Restaurant Wage and Hour Issues to Watch Out For

This alert was originally published by Phelps on July 21, 2022, and was expanded for additional publication by the Louisiana Restaurant Association in the Summer 2022 edition of Á La Carte Magazine.

Following the Fair Labor Standards Act (FLSA) can be confusing, particularly in the restaurant industry. Let’s break down some of the most common restaurant wage and hour violations and how to avoid them and the penalties that come with them.

As written, the Fair Labor Standards Act (FLSA) seems pretty simple. The FLSA is the federal law that requires most employers to pay their workers at least minimum wage, and be paid overtime at a rate of one and one-half their standard rate of pay for hours worked in excess of 40 in any workweek. The FLSA also addresses wage and hour record-keeping requirements and child labor laws. 

However, in practice, the FLSA can be complicated. And violations can result in expensive and potentially business-ending litigation and expose employers to civil monetary penalties from the U.S. Department of Labor (DOL). Such violations are common in the restaurant industry. Earlier this year, the DOL ordered the owners of three steakhouses in Pennsylvania and West Virginia to pay $1.45 million in back wages and damages to 116 workers who were denied overtime.

Common restaurant wage and hour violations include:

Off-the Clock Work

The FLSA requires that employees be paid for all hours worked, and that all hours worked count toward eligibility for overtime pay. Work that is off the clock is any work done for an employer which isn't compensated and not counted toward overtime, and is illegal under the FLSA. Restaurants are regularly sued and fined for requiring employees to do pre-shift preparation before clocking in or requiring employees to clock out before they do cleanup or other job duties at the end of a shift. Employers can be liable for up to two years of back wages for unpaid regular or overtime pay, and up to three years if the violation was willful.  Such violations rarely involve a single employee, and collective actions involving multiple employees have the potential to bankrupt a business forced to repay years of back wages.

Tip Credit Violations

Under the FLSA, many restaurants take advantage of the “tip credit” method of paying employees. This allows paying a subminimum wage, as low as $2.13 per hour, provided that the employer makes up the difference with tips earned by and paid to the employee.  Compliance with tip credit can be complex and mistakes are common and costly. Failure to abide by the strict rules can invalidate the employer’s entitlement to the tip credit and make the restaurant liable for unpaid wage claims, liquidated damages and attorneys’ fees.  The basic requirements for restaurants to use the tip credit include:

• • The employer must notify workers in advance that: (a) the employer intends to utilize the tip credit and treat tips as satisfying part of the employer’s minimum wage obligations and (b) if the amount of tips plus hourly wages does not match or exceed the applicable minimum wage, the employer must make up the difference. The FLSA does not require this notice to be in writing, but it is a good idea to do so and have the employee agree by signing a form.
  • Tipped employees must retain all tips earned by that employee. The restaurant or managers cannot receive any portion of the tips.
  • Only employees who customarily receive tips, such as servers, may be paid utilizing the tip credit. Typically, back-of-house workers, such as cooks and dishwashers, cannot be paid using the tip credit.
  • The exception to restaurant employees retaining all tips is if there is a valid tip pooling arrangement where all tips are combined and shared among all tipped employees according to a pre-determined formula. A tip pool will be considered invalid if non-eligible workers or managers are allowed to participate.

Compliance with the tip credit has recently become even more problematic. Effective Dec. 20, 2021, the Biden Administration’s DOL reinstated the so-called “80/20” rule. Under the reinstated policy, when tipped employees spend at least 20% of their workweek performing duties that support their occupation but don’t directly produce tips, their employers are required to pay them a direct cash wage of $7.25/hour for that work, instead of a direct cash wage of $2.13/hour, with the remainder made up by tips. Examples of work that is not tip producing might include a server preparing food for a salad bar or cleaning the kitchen or bathroom or a bartender cleaning the dining room. 

The current DOL has made clear its hostility to the tip credit method of payment and its intent to discourage its use, as well as its intent to vigorously investigate any allegations of noncompliance. For this reason, restaurants should make sure they are meeting all of the requirements and potentially consult with counsel on alternative payment methods.

Misclassification of Employees

Restaurants frequently violate the FLSA by improperly classifying some employees as “exempt” and as such, not subject to the overtime requirements of the law. To be exempt, an employee must receive a guaranteed salary of at least $684 per week, or $35,568 per year, and meet strictly construed duty requirements. A typical restaurant error is improperly classifying an assistant manager or shift manager as exempt, even though their duties are essentially the same as the rest of the hourly workers. In such an instance, the restaurant would be liable for all unpaid overtime for every employee who was misclassified, along with an equal amount of liquidated damages.

Record Keeping Violations

A restaurant is required under the FLSA to maintain certain records for each employee. In addition to being a legal requirement, properly maintained records can provide a valuable defense in a DOL investigation or to defend against a private lawsuit alleging FLSA violations. The FLSA does not require you to use any particular type of form, but whatever system you use, it must identify information about the employee and data about the hours worked and the wages earned. The law requires this information to be accurate. The following is a listing of the basic records that an employer must regularly maintain and keep available for at least three years:

1. 1. Employee's full name and social security number.
   2. Address, including zip code.
   3. Birth date, if younger than 19.
   4. Sex and occupation.
   5. Time and day of week when employee's workweek begins.
   6. Hours worked each day.
   7. Total hours worked each workweek.
   8. Basis on which employee's wages are paid (e.g., "$9 per hour", "$440 a week", "piecework")
   9. Regular hourly pay rate.
   10. Total daily or weekly straight-time earnings.
   11. Total overtime earnings for the workweek.
   12. All additions to or deductions from the employee's wages.
   13. Total wages paid each pay period.
   14. Date of payment and the pay period covered by the payment.

Child Labor Laws

Many restaurant professionals get their start working in restaurants as teenagers. However, the FLSA has strict provisions as to what jobs a minor can and cannot perform in a restaurant and the hours of work. Violations of the FLSA’s child labor provisions can result in severe penalties. Restaurants cannot employ anyone under the age of 14. Restaurant owners and managers should be aware of the following restrictions on employing workers under the age of 18:

 

16 & 17 Years of Age	Sixteen- and 17-year-olds may be employed for unlimited hours in any occupation other than those declared hazardous by the Secretary of Labor.  Examples of equipment declared hazardous in food service establishments include:
	Power-driven meat processing machines (meat slicers, meat saws, patty forming machines, meat grinders and meat choppers), commercial mixers and certain power-driven bakery machines. Employees under 18 years of age are not permitted to operate, feed, set-up, adjust, repair or clean any of these machines or their disassembled parts.
	Balers and compactors. Minors under 18 years of age may not load, operate or unload balers or compactors. Sixteen- and 17-year-olds may load, but not operate or unload, certain scrap paper balers and paper box compactors under certain specific circumstances.
	Motor vehicles. Generally, no employee under 18 years of age may drive on the job or serve as an outside helper on a motor vehicle on a public road, but 17-year-olds who meet certain specific requirements may drive automobiles and trucks that do not exceed 6,000 pounds gross vehicle weight for limited amounts of time as part of their job. Such minors are, however, prohibited from making time-sensitive deliveries (such as pizza deliveries or other trips where time is of the essence) and from driving at night.

Hours and times of day standards for 14- and 15-year-old workers	Occupation standards 14- and 15-year-old workers
Outside school hours. School hours are determined by the local public school in the area the minor is residing while employed.	They may perform cashiering, shelf stocking, and the bagging and carrying out of customer orders.
No more than three hours on a school day, including Fridays.	They may perform cleanup work, including the use of vacuum cleaners and floor waxers.
No more than eight hours on a non-school day.	They may perform limited cooking duties involving electric or gas grills that do not entail cooking over an open flame. They may also cook with deep fat fryers that are equipped with and utilize devices that automatically raise and lower the "baskets" into and out of the hot grease of oil. They may not operate NEICO broilers, rotisseries, pressure cookers, fryolators, high-speed ovens or rapid toasters.
No more than 18 hours during a week when school is in session.	They may not perform any baking activities.
No more than 40 hours during a week when school is not in session.	They may not work in warehousing or load or unload goods to or from trucks or conveyors.
Between 7 a.m. and 7 p.m., except between June 1 and Labor Day when the evening hour is extended to 9 p.m.	They may not operate, clean, set up, adjust, repair or oil power driven machines including food slicers, grinders, processors or mixers.
	They may clean kitchen surfaces and non-power-driven equipment, and filter, transport and dispose of cooking oil, but only when the temperature of the surface and oils do not exceed 100 F.
	They may not operate power-driven lawn mowers or cutters, or load or unload goods to or from trucks or conveyors.
	They may not work in freezers or meat coolers, but they may occasionally enter a freezer momentarily to retrieve items.
	They are prohibited from working in any of the Hazardous Orders (discussed above for 16- and 17-year-olds).

Breaks

The FLSA does not require an employer to provide lunch or rest breaks. However, if a restaurant offers short breaks (usually 5 – 20 minutes), employees must be paid for such breaks as if they are still on the clock. Lunch periods, usually 30 minutes to an hour, do not have to be paid, so long as the employee is free to do as they wish during the lunch period.  A common source of litigation is when employees claim they were required to perform work during unpaid lunch periods. 

DOL Investigations

In most cases, a DOL investigation into a restaurant’s wage and hour practices is the result of a complaint from a current or former employee. You’ll typically find out about the investigation through a written notice from the DOL requesting your restaurant to produce payroll records and other business documents, which may be followed up by on-site workplace inspections and interviews of employees. 

Restaurant owners and management should never misjudge the seriousness of being the target of such investigations. They should always retain legal counsel to communicate and negotiate with the DOL’s Wage and Hour Division, especially in the event a violation is found. In addition to the financial liability of the restaurant, violations can potentially impose personal liability on managers and owners. Claims of an ”industry standard” or “this is how all restaurants handle this” is not a defense.

As in most employment law matters, an ounce of prevention is worth a pound of cure. At least yearly, restaurants should perform wage and hour audits of the business to make sure all employees are being paid properly, are correctly classified, records are properly maintained, and that there are no child labor violations.

In Part Three of Employment Law Kitchen Fires, we’ll dive into the federal laws against employment discrimination, a restaurant’s duty to reasonably accommodate disabilities and religious practices, and the risks of liability for “English only” policies in the workplace.

Please contact Mark Fijman or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice or guidance.