More Employees Sue Restaurant In Wage Disputes

Under the above headline, The Wall Street Journal recently reported that wage disputes against restaurants have proliferated in troubling and damaging numbers:

“…The number of wage-violation lawsuits has been on the rise for more than a decade, driven by a successful worker-organization movement, increased attention by plaintiffs’ attorneys and complicated labor laws that leave some employers confused, according to legal analysts and industry leaders.

Nationwide, these lawsuits have doubled in the last 10 years in federal courts. In New York state, such lawsuits have nearly tripled in the last six years, rising to 1,738 in the fiscal year that ended June 30, compared with 652 in fiscal year 2009, records show.

‘The numbers are just scary’, said Carolyn Richmond, a lawyer with two decades of experience representing restaurants. ‘We started seeing this trend in 2005 and it’s never waned. It’s continued to go up exponentially every year.’….”

The truth is that wage and hour laws are complex and employers frequently fail to know and properly apply the law. Furthermore, restaurants employ “tipped employees” which poses a special set of requirements that complicate compliance considerably. Further, additional pay practice requirements particular to restaurants, such as tip-pooling, amplify the possibilities for failure.

If the employer fails to legally compensate its tipped employees in any material aspect, this failure causes the whole pay regime to fail as a whole, thereby exposing the employer to a far greater downside than may be understood.

This aspect of the law incentivizes plaintiffs’ lawyers to sue restaurants. Once there is a compliance failure, the payment owed by the employer to all affected tipped employees (in New Jersey) escalates from $2.13/hour (provided that tips make up the difference to meet the minimum wage) to the current minimum wage of $8.38.

Consider the case of a theoretical restaurant employing 50 tipped employees in a work-week for 40 hours (assuming that there is no overtime). The restaurant’s mistake in following the law on compensating tipped employees would result in the restaurant owing the affected employees an additional $650,000 for one year.

But that’s not where it ends. Plaintiffs are permitted to seek back pay for up to three years if the non-compliance is deemed to be intentional ($1,950,000) and this is doubled as a penalty ($3,900,000) and to this would be added attorneys’ fees (let’s say $350,000 if fully litigated), so the total damages owed in this scenario could be as much as $4,250,000!

In addition to exposing the restaurant entity to such damages, Supervisor(s) that participate in the decision that causes such pay failures are also personally liable.

In order to encourage lawyers to bring these lawsuits, the law permits them to bring a “collective action” against the employer which presents the lawyer with the relative easy opportunity to bring the action on behalf of an entire class. The law is designed in this way because it is understood that, where an employer makes a mistake for one employee, it frequently makes that mistake for all.

Please understand that these examples cover only a portion of the possible wage and hour issues that frequently arise. According to National Economic Research Associates, Inc.’s report, 2012 Update: Trends in Wage and Hour Settlements, the hospitality industry is not alone in paying hefty settlements to resolve these types of allegations. It found that wage and hour settlements for U.S. companies totaled $467 million in 2012. On average, companies paid $4.8 million per case.

Other common employer faults involve the failure to keep track of all hours worked, working “off the clock,” the misclassification of “exempt” employees under the “White Collar Exemptions” and the misclassification of employees as independent contractors. In the Wall Street Journal article quoted above, it relates the story of a coat-check employee at a high-end New York City restaurant being incorrectly classified as an independent contractor. The quoted article reveals that some of the top restaurants in New York City have been sued and lost significant amounts in damages.

Misclassification can lead to significant claims for unpaid minimum wage, overtime and can even lead to ERISA claims if the restaurant maintains one or more employee benefit plans. It can also result non-compliance with the requirements of the Patient Protection and Affordable Care Act.

These many damaging impacts for non-compliance underscore that employers must know the law and apply it properly. The severe consequences for cutting corners should make clear that the “reward” may not be worth the risk. In any event, we all should be reminded that “ignorance of the law is no excuse.”