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WAGE AND HOUR UPDATE1 by David D. Powell, Jr. and Susan P. Klopman Brownstein, Hyatt & Farber, P.C. 410 17th Street, 23rdFloor Denver, Colorado 80202-4437 Prepared for the Academy of Hospitality Industry Attorneys Annual Conference – October 9-11, 2003 Four Seasons Hotel Chicago, Illinois 1 These materials were prepared solely for informational purposes. The authors are not rendering legal advice. The recipients of these materials are encouraged to consult legal counsel concerning any of the topics addressed in these materials. I. Introduction This segment of the conference was originally dedicated solely to a discussion of state and municipal wage and hour issues facing employers. Although the topic is important, it is very broad and certainly cannot be addressed in the allotted time frame. The consensus after consulting other AHIA members is that the movement by many states and municipalities to adopt a living wage is a topic within the scope of state and municipal wage and hour issues that is of particular interest to AHIA members. The other topic included in these materials, therefore, is a discussion of recent trends in class action litigation involving wage and hour issues. II. The Living Wage Movement What is a living wage? A living wage is a wage greater than the hourly federal mandated wage of $5.15 per hour. The basic theory behind imposing a living wage is that the minimum wage does not even come close to enabling workers to support themselves or their families – especially in locales where the cost of living is high. In fact, someone paid $5.50 an hour working full time for 50 weeks only makes $10,300 per year – well below the poverty guidelines for a family of two. Who is required to pay a living wage? The application of the living wage typically depends on the terms of the local ordinance. In most cases, private employers who have municipal contracts or otherwise reap benefits from doing business in a certain locale, must pay a living wage to their employees. Such benefits include financial assistance in the form of loans, bond financing, tax abatements, or other subsidies designed to encourage economic development in a city or county. Further, individuals directly employed by the city or county are often entitled to receive a living wage. How is the living wage calculated? One approach is to determine how much an individual must make in order to earn income above the Federal Poverty Guidelines published by the Department of Health and Human Services. Under the 2003 guidelines, an individual must earn at least $18,400 annually to support a family of four and $15,260 for a family of three. For the family of four, this translates into approximately $8.85 per hour assuming the employee works 52 weeks and 40 hours per week. For the family of three this translates into approximately $7.34 per hour assuming the employee works the same amount of hours as the person supporting the family of four. The other typical basis for calculating the living wage is provided by the food stamp eligibility guidelines. Food stamp guidelines are 130% of the official poverty thresholds. Thus, for a family of four, the applicable living wage would be calculated based upon an annual salary of $23,920 (130 % of $18,400), which requires payment of a living hourly wage of approximately $11.50 per hour. If the same calculation is made for a family of three, the living hourly wage would be approximately $9.54 per hour. 2 How many cities/counties have enacted living wage ordinances? According to the Association of Community Organizations for Reform Now ("ACORN"), there are 112 active living wage laws, nearly all of which apply to employers with municipal contracts or who receive benefits from the city or county in which they do business. The list of cities and counties and the conditions for each ordinance can be found on the ACORN website at www.livingwagecampaign.org. What is the current status of efforts to apply a living wage to all private sector employers regardless of their connection to municipal contracts? In February of this year, the City Council for Santa Fe, New Mexico, approved a living wage ordinance that extends to all private sector employees the same living wage currently enjoyed by city employees. The extension to private sector employees is scheduled to become effective January 1, 2004, assuming it is not defeated in state court. As of that date, all businesses and non-profit organizations in Santa Fe with at least 25 employees will be required to pay their employees $8.50 per hour – $9.50 per hour per hour in 2006. In 2008, the living wage will be increased as the cost of living index increases in Santa Fe. Santa Fe's ordinance also provides a higher minimum pay rate for tipped employees – increased from $2.13 per hour to $5.50 per hour. Even though the minimum wage in California is $6.75, the City of San Francisco has proposed an $8.50 per hour minimum wage for employees who work in the city – a proposal subject to voter approval in November. What are the primary arguments against adopting living wage ordinances? According to a recent article in the New York Times, entitled "Raising Minimum Wages City by City," the opposition to increasing minimum wages comes mainly from small businesses, particularly restaurants and hotels. Many employers in the hospitality and food services industries simply cannot afford or do not want to pay unskilled workers more than the federal or state mandated minimum wages. Thus, one of the main arguments against the living wage is the claim that it will cause unemployment – employers simply will not hire as many entry level employees. Further, in many cases, employers will simply have the higher skilled employees perform work typically performed by less skilled entry level employees. Thus, the living wage movement results in a loss of jobs for those individuals who need the jobs the most – low income urban residents. Opponents also claim that there are a number of other related negative effects of imposing a living wage, including the added disincentive for top notch businesses to enter into municipal contracts – causing cities and counties to contract with firms that may provide poor quality products and services. For more information outlining the arguments against adoption of a living wage, access the website of the Employment Policies Institute at www.epionline.org. 3 What are the primary arguments supporting the Living Wage Movement? One of the professed aims of the living wage campaign is to prevent taxpayer dollars from "subsidizing poverty wage work." ACORN, the grass roots organization at the forefront of the Living Wage Movement, summarized the rationale behind the movement as follows: "When subsidized employers are allowed to pay their workers less than a living wage, taxpayers end up footing a double bill: the initial subsidy and then the food stamps, emergency medical, housing, and other social services, low wage workers may require to support themselves and their families even minimally." See Labor Law: Challenges to the Living Wage Movement: Obstacles in a Path to Economic Justice, 14 U. Fla. J.L. and Pub. Pol'y 229, 230 (Spring 2003). The primary motivation behind the Living Wage Movement is the obvious fact that the current federal minimum wage of $5.15 per hour simply does not provide enough income for an individual to support herself or even a family. The income of a full time worker at the minimum wage falls far below the poverty threshold of $11,940 for a family of two. Thus, the Living Wage Movement seeks to ensure that full time workers are compensated above the poverty level. The rationale of the Living Wage Movement was also noted as early as 1937 in a speech made by Franklin Roosevelt when he stated: "Our nation so richly endowed with natural resources and with a capable and industrious population should be able to devise ways and means of ensuring to all our able bodied working men and women a fair day's pay for a fair day's work." See Full Time Worker's Should Not Be Poor: A Living Wage Movement, 70 Miss. L.J. 889, 891 (Spring 2001). What, if any, successful legal challenges have been made by opponents of the Living Wage Movement? The opponents of living wage laws have experienced the most success when they are able to persuade their respective state legislatures to enact state laws prohibiting the ability of cities and counties to adopt living wages. For example, in February 2001, Utah passed a state law prohibiting local governments from setting a minimum wage higher than the state minimum wage of $5.15 per hour. The rationale behind the legislation was that it would make it easier for "young people" and people who have just entered "this country" to find entry level work. Even before Utah passed its law prohibiting the local enactment of a living wage, the Louisiana legislature in 1997 passed a statute prohibiting local governmental subdivisions from establishing a minimum wage rate. In 2001, however, the City Council of New Orleans passed an ordinance establishing a minimum wage to be paid to employees performing work in the City of New Orleans of $6.15 per hour or $1.00 above the prevailing federal minimum wage, whichever is greater. Further, after the New Orleans' voters approved the ordinance, the New Orleans Campaign for A Living Wage filed a lawsuit against the city asking that the state statute prohibiting local government subdivisions from establishing a minimum wage be declared unconstitutional. Following a trial on the merits, the district court declared the state statute unconstitutional and upheld the validity of the city's minimum wage law. The Louisiana Supreme Court, however, reversed the judgment of the district court and found that the state statute was a legitimate exercise of the police power and, therefore, constitutional. Other states such as Michigan, Arizona and Kansas have considered enacting similar legislation that prohibits 4 local governments from enacting living wage laws. In 2002, South Carolina enacted a statute that bars "political subdivisions" of the state from establishing minimum wage rates that exceed the federal rate. The law, however, does not prohibit political subdivisions from imposing higher wage rates in contracts to which they are a party. Not all legal challenges to living wage laws have been successful. In October 2000, the owner of a Berkeley, California, waterfront restaurant, Skates on the Bay, filed a lawsuit seeking to prevent the enforcement of a living wage ordinance that required all businesses in the city's public marina area with annual gross sales of at least $350,000 and at least six employees to pay employees at least $9.75 an hour or $11.37 an hour if health benefits are not included. The restaurant argued that because the ordinance was written into pre-existing leases, including the lease of the restaurant, the city had invalidly exercised its police powers. The restaurant also claimed that the city had invalidly exercised its police powers because the ordinance affected contracts with at will employees. The U.S. District Court in San Francisco rejected the restaurant's arguments and found that it failed to show any interference with specific provisions in the lease. The court also noted that there was no interference with the contracts of at will employees because such contracts are continually recreated every time the employer offers additional compensation. Thus, the mandated wage increase would create a new contract without violating a pre-existing one. The court also noted that because wages are already highly regulated, the restaurant should have reasonably expected to be subject to more regulation. See Economic Justice, supra, at 257. What are the typical penalties/liability that businesses face for failing to comply with living wage laws? According to the Employment Policy Foundation, the majority of living wage ordinances impose severe penalties against employers who fail to comply. For example, monetary penalties range from $50.00 per day to $500.00 per week for each affected worker during the period in which the violation occurs. Aggrieved employees can also recover back pay, as well as punitive damages, ranging from $250,00 to $10,000. Some ordinances even fail to specify a limit as to the amount of punitive damages a court can award. In addition to the financial liability employers face for non-compliance, many ordinances allow cities and counties to terminate or suspend their contracts with employers who are not complying with the ordinance. However, some ordinances allow an employer a specific period of time to correct non-compliance. On the other hand, some ordinances impose more severe penalties and bar employers from seeking future contracts for a period of up to five years following a violation. See Penalty Chart, attached as Exhibit "A." What is the future of the Living Wage Movement and what should employers do in response? According to ACORN, the Living Wage Movement is gaining momentum. As previously noted, there are at least 112 active living wage ordinances in force across the nation. California, Michigan and Wisconsin have proven to be the most successful venues for living wage campaign organizers. Employers who wish to oppose a living wage campaign in the city 5 or county in which they conduct business are advised to seek help from their state representative. As noted in Utah, Louisiana and South Carolina, opposition to living wage laws in those states was only successful upon the enactment of a state law prohibiting municipalities from adopting a living wage – at least one that exceeds the federal and/or state mandated minimum wage. Employers who conduct business in cities or counties where living wage ordinances have been approved, however, must comply or face stiff penalties, including the termination of their respective contracts and exclusion from bidding on future contracts. Finally, the most recent study addressing the effect of living wage laws is not encouraging for opponents, as it indicates that such laws have actually reduced poverty among urban families. Professor David Neumark, a Professor of Economics at Michigan State University, and a former opponent of the Living Wage Movement, prepared a report that was published in March of 2002 by the Public Policy Institute of California. The report examines how living wage laws have affected poverty levels in 36 cities across the nation. See Research Brief, attached hereto as Exhibit "B." Neumark concludes in his report that: "Living wage laws will lead to some employment loss, but on balance, the steep wage increases make it less likely that families with a living wage worker will live in poverty, especially in cities where the law applies more broadly." The summary of Neumark's report by the Public Policy Institute of California also notes: "The evidence indicates, however, that living wage ordinances may moderately reduce the likelihood that urban families live in poverty." Although the evidence is not always strong in a statistical sense, the best estimates imply that a 50% increase in the living wage would reduce the poverty rate by 1.4 percentage points." Thus, absent studies indicating otherwise, it appears that the Living Wage Movement will continue to grow and that eventually Congress will be forced to address the issue on a national level. III. Collective Actions Under the Fair Labor Standards Act Since 2000, the number of Fair Labor Standards Act ("FLSA") collective actions filed in federal court has surpassed the number of class actions brought under EEO laws. These collective actions are proving to be problematic for employers, in large part because FLSA's exemptions are difficult to practically apply and because employers have not undertaken workplace compliance reviews. Some of the recent trends in FLSA collective action litigation are summarized below. Procedural Issues Typically, FLSA actions are brought by a few named plaintiffs who allege similar violations of the FLSA, and then attempt to persuade a court to certify the lawsuit as a collective action under 29 U.S.C. § 216(b). Increasingly, federal courts are employing a “fairly lenient standard” when evaluating an initial motion to certify a FLSA action as collective. See, e.g., Thiessen v. General Elec. Capital Corp., 267 F.3d 1095 (10th Cir. 2001) (ADEA action employing FLSA collective action standards); Hipp v. Liberty Nat'l Life Ins. Co., 252 F.3d 1208 (11th Cir. 2001) (same);Garza v. Chicago Transit Authority, 2001 WL 503036 (N.D. Ill. 2001) (FLSA). In these cases, courts are allowing plaintiffs to proceed with an opt-in notice period on a simple showing, often supported only by a few affidavits, that numerous potential plaintiffs are similarly situated. This lenient certification standard allows plaintiffs access to an employer’s 6 database of employees early on in an action, a situation which can reveal other FLSA violations in addition to the solicitation of hundreds, if not thousands, of employees. Because this showing involves similarly situated employees, employers in the hospitality industry who operate chains or several similar locations are particularly vulnerable to FLSA collective actions. Chains involve common fact patterns, employee titles, duties and classifications. After the initial opt-in notice and discovery period has passed, a court will entertain a motion to decertify a FLSA collective action. FLSA collective actions are complicated by the fact that plaintiffs often attempt to simultaneously certify a class action under a state wage law. These hybrid cases typically involve advising potential claimants of their rights to opt-in to the FLSA collective action or opt- out of the state law class action. In addition, because FLSA collective actions are typically smaller than class actions because the plaintiffs must choose to be included in the action (“opt- in”), successful plaintiffs are able to put great pressure on employers by certifying a class under Rule 23, thus bumping the number of potential plaintiffs to a far greater number. Management Employee Actions The FLSA exempts from its overtime requirements executives, administrators, professionals and outside sales persons. The current trend in FLSA collective actions involves plaintiffs who allege that they have been misclassified as exempt employees, and that they are owed for several years’ overtime pay. These cases involve low-level and high-level managers who argue that on paper their job descriptions appear to fall under the executive exemption, but in practice they are performing non-exempt duties more than fifty percent of the time. See Cowan v. Treetop Enterprises, Inc., 163 F. Supp. 2d 930 (M.D. Tenn. 2001) (court awarded overtime pay damages in FLSA collective action where Waffle House managers argued they were improperly classified as exempt executive personnel because they routinely filled in for servers and cooks, and vice versa). For example, in 2002, store managers and assistant store managers working at Starbucks in California brought a FLSA collective action persuasive enough to garner an $18 million settlement. The plaintiffs alleged that Starbucks "routinely" misclassified managers and assistant managers as exempt employees and, therefore, denied them overtime pay. In 2003, one of Stop & Shop Supermarket’s general managers brought a FLSA collective action, alleging that he was a non-exempt employee because he performed the same menial, non-managerial tasks such as unloading, sorting and shelving products, stamping prices on products, and taking out the trash, as he did in previous non-exempt manager trainee positions. Although the company presented evidence that: 1) the managerial job description involves responsibility for supervising associates; 2) the “productivity guideline” it provides to managers does not dictate who is to perform the various menial tasks; and 3) managers are responsible for managing and closing an entire store once a week, the court certified the action as a FLSA collective action. See Jacobsen v. The Stop & Shop Supermarket Co., 2003 U.S. Dist. LEXIS 7988 (S.D.N.Y. 2003). This past June, RadioShack’s highest ranking store managers brought two FLSA collective actions, one in Illinois and the other in Pennsylvania, alleging that their primary duties involved sales rather than management. The managers cited the company’s training manual and 7 memos, which stressed the importance of sales, and the fact that they were told Friday and Saturdays were “pure sales days,” in which they were to focus on sales only. In addition, the company emphasized the managers’ sales prowess in their performance reviews. The managers also argued that they were encouraged to spend 40 hours per week in sales and that while on the sales floor, they could not attend to certain management functions. They contended that the non- sales aspects of their jobs, such as arranging products, pricing inventory, approving customer refunds, and making bank deposits, involved little exercise of discretion and could be performed by sales associates. Although both courts allowed the collective actions to proceed, one court noted that, after a completely developed record, RadioShack may be able to show that the managers were exempt executive employees because, among other factors, they only had sporadic direct contact with higher level supervisors, were in charge of their stores and earned substantially more than their sales associates. See Perez v. RadioShack Corp., 2003 U.S. Dist. LEXIS 10152 (N.D. Ill. 2003); Goldman v. RadioShack Corp., 2003 U.S. Dist. LEXIS 7611 (E.D. Pa. 2003). Off-the-Clock Violations Plaintiffs are also bringing FLSA collective actions on the grounds that their employers force them to work through lunch breaks or rest periods without pay. For example, Taco Bell recently settled one such case with 1,100 current and former Oregon employees for $1.5 million, mid-trial, ostensibly in an effort to avoid greater liability. Bank of America recently settled a similar case for $4.1 million involving its client managers and financial relationship managers. These employees alleged that the bank failed to pay them overtime for off-the-clock work performed on evenings, weekends and during lunch hours. In another case, nurses brought a state-based class action, alleging that 36 hospitals in Southern California illegally deducted one- half hour meal breaks from their pay when they worked through their lunches. The nurses argued that because the hospitals under-staffed the facilities, they could not take their rest periods. They also argued that California law requires employers to allow employees to take at least a one half hour unpaid meal period totally relieved from all duties for each five hours worked, as well as a ten minute paid rest break for every four hours worked. These allegations can prove troublesome to hospitality industry employers who require their employees to work almost continuously during their shifts, either due to the fast-based nature of the business or to staffing shortages. Similarly, some restaurants offer their managers incentives to keep expenses down and these managers violate the FLSA when they attempt to keep labor costs down by exerting pressure on workers to work through their breaks. See Harper v. Lovett's Buffet, Inc., 185 F.R.D. 358 (S.D. Ala. 1999) (FLSA collective action certified where managers received bonuses based upon keeping labor costs down, and where hourly employees alleged non-payment for rest breaks they worked through and payment below minimum wage when they substituted in jobs for which no tips could be received). Donning and Doffing Issues Plaintiffs are also increasingly bringing “donning and doffing” cases, in which they allege that their employers require them to put on certain uniforms and safety equipment before clocking in, and clocking out before removing such items. For example, in 2002, Perdue Farms 8 settled a collective action for $10 million, in which processing plant workers alleged that Perdue’s practice of only paying for “line work” violated the FLSA. The plaintiffs argued that they spend an additional eight minutes a day putting on and removing aprons and gloves and doing other preparatory and clean-up work. As a result, plaintiffs in similar industries, including those who work for Tyson Foods, have followed this trend. See DeAsencio v. Tyson Foods, Inc., 2002 WL 31008146 (E.D. Pa. 2002). However, the First Circuit recently uphed a jury verdict finding that processing plant workers could not recover for donning and doffing because such activities were de minimus, ranging from 1 minute to 2 minutes, 16 seconds. The court also concluded that the time spent walking to and from the time clock and waiting to punch in was non-compensable because it was exempted as preliminary and postliminary work under the Portal-to-Portal Act. See Tum v. Barber Foods, Inc., 331 F.3d 1 (1st Cir. 2003). State Class Action Issues Employers can run into trouble by assuming they are covered for wage and hour issues if they are complying with the FLSA. Indeed, some states, such as California, have enacted more restrictive wage and hour laws, which can lead to costly state-based class actions. For example, California’s wage and hour law emphasizes time and a half pay after eight hours of work and double time after twelve hours of work. In addition, California law employs a primary activities test or “stop watch” calculation of sorts, in that what employees actually do throughout the day, rather than the duties they are charged with, governs the determination of their exempt status. Tip Credit and Pooling Issues The FLSA allows employers to take a "tip credit" against the wages of a tipped employee by paying them a slightly lower hourly wage so long as: 1.) the employer notifies the employee; and 2.) all tips received by the employee are retained by the employee. See 29 U.S.C. § 203(m). The same provision, however, does not prohibit the pooling of tips among employees who "customarily and regularly" receive tips. Notwithstanding the clear mandate of section 203 of the FLSA, members of the hospitality industry, especially restaurant owners, often find themselves facing liability because of tip pooling arrangements that require employees to share portions of their tips with other employees who typically do not receive tips. Such a practice can lead employees to pursue collective actions under the FLSA. For example, a former server at a Benihana restaurant alleged that: 1.) the tip credit claimed by the restaurant was unlawful because servers were not informed of the relevant FLSA provision; and 2.) the server, as well as other servers, were required by management to share tips with employees who do not "customary and regularly" receive such tips –kitchen helpers. In this case, the plaintiff also produced evidence that the manager of the restaurant admonished her for not taking her tips straight to the cashier's booth and told her that tips "belong not only to her but to other employees as well." The plaintiff also alleged that she was required to place tips she received in a locked box that was opened only in the presence of a chef and that the chef took about 50% of the tips and would share a portion of the tips with the kitchen helpers. 9 The court concluded that the plaintiff provided sufficient evidence of a mandatory tip pool that included ineligible employees; that there was in fact a tip sharing agreement between servers and the chefs; and that the restaurant management adopted the tip sharing agreement as a matter of restaurant policy. Accordingly, the court authorized the plaintiff to give notice under section 216(b) of the FLSA to other servers who were subject to the unlawful tip sharing arrangement so that they may opt in to the proposed collective action. See Zhao v. Benihana, Inc., 2001 U.S. Dist. LEXIS 10678 (S.D.N.Y., May 7, 2001). Not only does the employer face significant liability if a collective action is brought under the FLSA for inappropriate tip pooling arrangements, owners/managers can also be held individually liable. For example, in the case of Chung v. The New Silver Palace Restaurant, Inc., 246 F.Supp.2d 220 (S.D.N.Y. 2002), waiters sued the restaurant and its owners to recover the tips they were forced to share with management. The court granted the plaintiffs' motion for partial summary judgment, finding that the individual owner-defendants were in fact "employers" under the FLSA and, therefore, were liable for the difference between the reduced hourly wage paid because of the tip credit allowance and the minimum wage mandated by the FLSA. The court's order also found that the restaurant was not entitled to credit the amount of tips received by the waiters against the required hourly minimum wage because the waiters were required to share tips with individuals having managerial authority and ownership interests. In summary, the court found that because individuals with managerial authority and ownership interests took certain shares of the waiter's tips, they directly violated the statutory condition that "all tips" received by waiters must be retained by the waiters. The court also noted the following with respect to the intent of Section 3(m) of the FLSA: Congress gave employers of tipped employees a simple choice: either allow employees to keep all the tips that they receive, or forego the tip credit and pay them the full hourly minimum wage. This does not mean that the tip credit should be lost if waiters decide to pool their tips, or even if management requires that waiters pool their tips, as long as management does not share in those tips. 246 F.Supp.2d at 230. See also Jameson v. Five Feet Restaurant, Inc., 131 Cal.Rptr.2d 771 (Cal. App. 4th Dist. 2003) (restaurant held liable for requiring servers to give ten percent of the tips they receive nightly from patrons to the floor manager and holding that the floor manager was "an agent" and, therefore, faced liability for the unlawful tip sharing arrangement). Employers are encouraged to be cognizant of state requirements regarding tip pooling. For example, unlike the FLSA, California law does not allow employers to claim "tip credits": No employer or agent shall . . . deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer." See Section 351 of the California Labor Code. 10
"WAGE AND HOUR UPDATE"