Tips Do Not Count Towards the Minimum Wage Unless a Worker Qualified as a “Tipped Employe"In Romero v. Top-Tier Colorado LLC, the Tenth Circuit Court of Appeals ruled that tips received by a restaurant server for hours in which she did not qualify as a tipped employee were not “wages” under the FLSA, and therefore should not be considered in determining whether she was paid the minimum wage.

Tipped Employees & the FLSA

The FLSA provides that employers may take a “tip credit” and pay employees as little as $2.13 per hour if: (i) the tip credit is applied to employees who customarily and regularly receive tips; (ii) the employee’s wages and tips are at least equal to the minimum wage, and (iii) all tips received by a tipped employee are retained by the employee or pooled with the tips of other tipped employees.

In Romero, the Tenth Circuit noted that an employee may hold both tipped and non-tipped jobs for the same employer.  In those cases, the employee is entitled to the full minimum wage while performing the job that does not generate tips.

Moreover, the Circuit Court cited to the directive in the Wage Hour Division’s Field Operations Handbook stating that, if a tipped employee spends more than 20% of his or her time performing related-but-nontipped work, then the employer may not take the tip credit for the amount of time the employee spends performing those duties.

The Plaintiff’s Claims

The plaintiff in Romero worked as a server at the defendants’ restaurant.  The defendants paid her a cash wage of $4.98 an hour, and took a tip credit to cover the gap between the cash wage rate and the federal minimum wage.

The plaintiff contended that she also worked in nontipped jobs for the defendants, and that she spent more than 20% of her workweek performing related-but-nontipped work. Therefore, she concluded she was entitled to a cash wage of at least $7.25 per hour during certain hours, and filed a lawsuit in the U.S. District Court for the District of Colorado claiming violations of the federal minimum wage.

The defendants’ moved to dismiss the complaint because plaintiff did not allege that her total weekly earnings, when divided by the number of hours worked, ever fell below the federal minimum wage rate. The District Court reasoned that a minimum wage violation is determined by dividing an employee’s total pay in a workweek by the total number of hours worked that week.  Because the plaintiff did not allege facts that would establish such a violation, the District Court granted the defendants’ motion and dismissed the complaint.

In light of that reasoning, the District Court never considered whether the plaintiff was properly considered a tipped employee.

When are Tips Considered “Wages” Paid by the Employer?

The Tenth Circuit Court of Appeals reversed the judgment of the District Court. The Tenth Circuit “assumed” that the district court correctly stated that an employer satisfies the FLSA’s minimum wage requirements so long as, after the total wage paid to each employee during any given week is divided by the total time that employee worked that week, the resulting average hourly wage is $7.25 per hour or more.

But the Tenth Circuit held that the existence of a minimum wage violation depends on the “wages” paid by an employer to an employee. The Court stated that tips are “wages” paid by an employer only when the tips are received by a worker who qualifies as a tipped employee under the FLSA.

Accordingly, the Tenth Circuit reversed the District Court’s dismissal of the plaintiff’s complaint. The Tenth Circuit directed the District Court to reconsider its ruling by examining the threshold question of whether the tips received by the plaintiff were “wages” for purposes of the minimum wage requirements of the FLSA.

What is the Impact of an Improper Tip Credit?

Assume, for example, that the plaintiff worked 40 hours in a given week, was paid cash wages of $199.20 (or $4.98 per hour) and received tips of $90.80.

If the evidence demonstrates that the plaintiff was a tipped employee at all times, she was paid wages of $290.00 (or $7.25 per hour) and the defendants did not violate the federal minimum wage.

However, the evidence could demonstrate that the plaintiff performed so much related-but-nontipped work that she did not qualify as a tipped employee at any time. As explained by the Tenth Circuit, the plaintiff’s tips would not count as wages and therefore she was paid $90.80 below the minimum wage.  The defendants could then be liable to her for that amount (as well as potential liquidated damages and attorneys’ fees).

The Tenth Circuit’s decision is consistent with the rulings of other circuit courts. Therefore, employers who are taking tip credits therefore must pay close attention to the specific requirements of the FLSA, and should not consider themselves insulated from liability merely by the fact that their tipped employees are earning more than the minimum wage.

Michael D. ThompsonThe Missouri Supreme Court has overturned a lower court’s ruling that St. Louis’ minimum wage ordinance is invalid, finding that the ordinance is not preempted by the state law.

St. Louis City’s Ordinance 70078 (“the Ordinance”) provides for a series of increases to the minimum wage for employees working within the boundaries of St. Louis. The plaintiffs argued that Ordinance 70078 was preempted by the state minimum wage law.  The plaintiffs contended that state law affirmatively authorized employers to pay as little as $7.65 per hour, the state minimum wage rate.

A trial court accepted the plaintiffs’ argument and, in October 2015, held that the Ordinance was invalid.

The Missouri Supreme Court reversed the trial court’s ruling and rejected the plaintiffs’ argument.  Because the state minimum wage law merely prohibits employers from paying employees a wage lower than the state minimum, local ordinances imposing higher minimum wages did not conflict with the state statute.

Furthermore, Missouri’s minimum wage law did not “occupy the field” of minimum wage laws. In fact, the Missouri Supreme Court noted that the state legislature had recognized and authorized local ordinances addressing minimum wages.

Notably, both the trial court and the Missouri Supreme Court rejected the plaintiffs’ argument based on Section 67.1571 of the Missouri Statutes, which prohibits “political subdivisions of this state from establishing or requiring a minimum wage that exceeds the state minimum wage.” The courts agreed that the Missouri Constitution prohibits bills containing more than one subject, and Section 67.1571 violated this requirement because its primary purpose was to establish community improvement districts.

Under the phase-in schedule in the Ordinance, the minimum wage in St. Louis was set to rise to $10.00 per hour on January 1, 2017 and $11.00 per hour on January 1, 2018, after which the minimum wage will be increased annually to reflect the rate of inflation.

St. Louis city officials issued a statement explaining that businesses will be provided “a reasonable grace period to adjust to the new minimum wage rate,” but will be subject to revocation of their business licenses if they do not comply with the Ordinance.

The District Court for the Eastern District of Texas has denied the U.S. Department of Labor’s application to stay the case in which the district court enjoined the DOL’s new overtime regulations. The DOL had asked the court for a stay while the Fifth Circuit Court of Appeals considered an interlocutory appeal of the injunction.

As wage and hour practitioners know:

  • In May 2016, the U.S. Department of Labor announced that it would implement new regulations increasing the salary threshold for the executive, administrative, and professional overtime exemptions to $47,476 ($913 per week);
  • In September 2016, a group of 21 states filed a Complaint in the Eastern District of Texas challenging the new regulations. A similar lawsuit was filed in the same court by several private industry groups, and those plaintiffs moved for summary judgment; and
  • In November 2016, the district court issued a nationwide preliminary injunction against the new regulations. The district court made a preliminary conclusion that, because the FLSA did not reference any salary thresholds, the DOL had exceeded its authority.

The Fifth Circuit Court of Appeals granted the DOL’s application for interlocutory review, and ordered that briefing be concluded by January 31, 2017.

The DOL then sought a stay of the proceedings before the district court.

In denying the DOL’s motion, the district court stated that the decision to grant or deny a discretionary stay pending an interlocutory appeal depends on: (1) whether the application is likely to succeed on the merits; (2) whether the applicant will be irreparably injured without a stay; (3) whether a stay will substantially injure other parties; and (4) where the public interest lies.

The district court stated that the DOL’s application argued only that the outcome of the case “will likely be controlled in large part by the Fifth Circuit’s decision on appeal.” Because the DOL did not “present a substantial case on the merits,” its application for a stay was denied.

Accordingly, the proceedings before the Fifth Circuit and the district court will proceed concurrently. We will continue to monitor each of these matters, and share any significant developments.

Even employers who were opposed to the new overtime regulations are in a quandary after the District Court for the Eastern District of Texas enjoined the Department of Labor from implementing new salary thresholds for the FLSA’s “white collar” exemptions.

Will the injunction become permanent?  Will it be upheld by the Fifth Circuit? 

Will the Department of Labor continue to defend the case when the Trump Administration is in place? 

What does the rationale behind the District Court’s injunction (that the language of the FLSA suggests exempt status should be determined based only on an employee’s duties) mean for the $455-per-week salary threshold in the “old” regulations?

As noted in our post regarding the injunction, whether employers can reverse salary increases that already have been implemented or announced is an issue that should be approached carefully.

For example, employers should be aware that state law may specify the amount of notice that an employer must provide to an employee before changing his or her pay.

In most states, employers merely need to give employees notice of a change in pay before the beginning of the pay period in which the new wage rate comes into effect.

But some states require impose additional requirements.  The New York Department of Labor, for example, explains that if the information in an employee’s wage statement changes, “the employer must tell employees at least a week before it happens unless they issue a new paystub that carries the notice. The employer must notify an employee in writing before they reduce the employee’s wage rate. Employers in the hospitality industry must give notice every time a wage rate changes.”

Maryland (and Iowa) requires notice at least one pay period in advance.  Alaska, Maine, Missouri, North Carolina, Nevada and South Carolina have their own notice requirements.

Employers who are making changes to wage rates based on the status of the DOL’s regulations should be nimble – while also making sure that they are providing the notice required under state law.

Over the past year, there has been an increased discussion of Fair Labor Standards Act (“FLSA”) requirements for tipped employees. The courts have focused on a number of issues related to tipped employees, including addressing who can participate in tip pools and whether certain deductions may be made from tips. While the FLSA requires employers to pay a minimum wage of $7.25 per hour in most cases, Section 203(m) of the FLSA provides that employers may take a “tip credit” and pay as little as $2.13 per hour to employees who customarily and regularly receive tips, so long as two criteria are satisfied:

  • the employee’s wages and tips are at least equal to the minimum wage, and
  • all tips “received” by a tipped employee are actually retained by the employee or added into a tip pool that aggregates the tips of a group of tipped employees.

Notably, 29 CFR § 531.55 states that a “compulsory charge for service . . . imposed on a customer by an employer’s establishment, is not a tip . . . .” However, some states (such as New York) have their own requirements for determining whether a service charge will be considered a “tip.”

Who Can Be Treated as a Tipped Employee?

When a tip pool is covered by Section 203(m) of the FLSA, an employer may not divert tips from tipped employees by including “non-customarily tipped employees” in the tip pools. But whether an employee customarily (and regularly) receives tips may be unclear.

In Montano v. Montrose Restaurant, the U.S. Court of Appeals for the Fifth Circuit considered a tip pool in which the employer included a “coffeeman,” and the parties submitted conflicting evidence regarding the coffeeman’s duties. The Fifth Circuit concluded that an employee can be part of a tip pool if it can be expected that the customer intended the employee to receive a portion of the tip. Satisfying that requirement depends on such factors as whether the employee had more than a de minimis interaction with the customers who leave the undesignated tips and whether the employee is engaging in customer service functions.

In Schaefer v. Walker Bros. Enterprises, the Seventh Circuit evaluated a plaintiff’s contention that he and other employees at his restaurant (who primarily worked in a tipped capacity) had to be paid the full minimum wage during any time spent performing non-tipped work. The Seventh Circuit noted that the DOL’s Field Operations Handbook states that an employer may pay the tip-credit rate for time that tipped employees spend on non-tipped duties “related to” their tipped work. According to the Seventh Circuit, making coffee, cleaning tables, and “ensuring that hot cocoa is ready to serve” and that “strawberries are spread on the waffles” are activities related to a tipped server’s work. The Seventh Circuit characterized other duties, however, such as wiping down burners and woodwork and dusting picture frames, as “problematic” because they did not seem to be “closely related to tipped duties.” But the time spent on those duties was “negligible” and therefore did not require the restaurants to pay the normal minimum wage rather than the tip-credit rate for those minutes.

Can Credit Card Fees Be Deducted from “All Tips”?

In Steele v. Leasing Enterprises, Ltd., the Fifth Circuit considered whether an employee is receiving “all tips” when an employer deducts the costs and fees associated with collecting tips that are paid through a customer’s credit card.

To offset costs associated with credit card tips, the defendant retained 3.25 percent of any tips paid by credit card. According to the defendant, the costs included not only fees charged by the card issuer, but also the cost of cash deliveries made by an armored vehicle three times per week to ensure that the employees could be paid their tips on a daily basis (as the employees had requested).

Based on prior authority from the Sixth Circuit and a DOL opinion letter, the Fifth Circuit agreed that the defendant could offset credit card tips by the amount of the credit card issuer fees and still satisfy the requirements of Section 203(m). One week later, the Southern District of Ohio reached a similar conclusion in Craig v. Landry’s, Inc., ruling that “controlling precedent specifically permits” the deduction of credit card processing fees as long as the amount of the deduction “reasonably approximates the charge incurred by the employer.”

What Other Fees or Costs Can Be Deducted from “All Tips”?

After approving the deduction of credit card issuer fees from the gross tips in Steele, the Fifth Circuit turned to the question of whether an employer violates Section 203(m)’s requirements if the employer deducts costs other than direct fees charged by the credit card issuers. The defendant argued that employers could deduct the additional expenditures associated with paying credit card tips and still maintain the tip credit. Specifically, the defendant argued that the additional costs that it was incurring in arranging for the payment of tips paid via credit card, such as the cost of the armored car deliveries to its restaurants, could be deducted from the gross tips.

The Fifth Circuit concluded that “an employer only has a legal right to deduct those costs that are required to make such a collection.” While the defendant had no choice but to pay to credit card issuer fees, the costs relating to its thrice-weekly armored car deliveries were discretionary costs resulting from internal business decisions by the defendant. Therefore, deducting those amounts from employees’ tips was a violation of Section 203(m).

It is worth noting the Eastern District of New York added an interesting twist to this principle in Widjaja v. Kang Yue USA Corp. The court had previously ruled that the defendant violated the minimum wage as a result of, among other things, improperly withholding 11.5 percent of credit card tips. In a late-2015 ruling on damages, the court found that the defendant was liable for the difference between the minimum wage and the hourly wage that it actually paid its tipped employees. Moreover, the court in Widjaja held that the wage deficiency could not be offset by the tips actually received by the tipped employees because those tips were not an hourly wage. Consequently, because it improperly applied the tip-credit rule, the employer received no credit against the minimum wage for the tips actually received by its tipped employees.

Is There a Cause of Action for Withheld Tips If the Employer Does Not Take a Tip Credit?

Several years ago, the DOL revised 29 C.F.R. § 531.52 to provide that all tips are the property of the employee and, thus, must be passed along to the tipped employee or a pool of tipped employees regardless of whether the employer has taken a tip credit under Section 203(m). Because the FLSA, on its face, does not specifically prohibit or address wage deductions that do not result in minimum-wage violations, there has been substantial controversy regarding the DOL’s authority to issue this regulation.

Earlier this year, in Oregon Rest. & Lodging Ass’n v. Perez, the Ninth Circuit noted that Section 203(m) of the FLSA is silent as to employers that do not take a tip credit. Therefore, the Ninth Circuit concluded that the DOL has the authority to regulate “tip pooling” practices even if employers do not take tip credits. Conversely, this past summer, federal courts in Florida and Georgia arguably joined with the position taken by the Fourth Circuit and courts in Maryland, New York, and Utah that Section 203(m) of the FLSA does not create a cause of action for improperly withheld tips unless the employer is taking a tip credit.

A version of this article originally appeared in the Take 5 newsletter Five Critical Wage and Hour Issues Impacting Employers.”

Claims that employees have been misclassified as independent contractors remain a focus for private plaintiffs and government agencies. Contracts that exert control over the business of another company may be a particularly fertile source of misclassification claims by plaintiffs seeking unpaid wages.

Two recent suits arising from franchise agreements with Jani-King, described by the Third Circuit as “the world’s largest commercial cleaning franchisor,” demonstrate the potential liability that can arise under these circumstances.

Wage Hour Division Sues Based on Misclassification of Franchisees

Last week, the Department of Labor filed suit claiming that franchisees of Jani-King of Oklahoma Inc. are actually employees under the Fair Labor Standards Act.

The DOL alleges that the franchisees typically have no employees of their own, but rather are individual who are required to pay Jani-King a franchise fee, royalties, and other payments to receive cleaning assignments.

The suit contends that Jani-King, among other things, sets customer cleaning rates; negotiates with customers over the cleaning contracts under which franchisees work; reassigns cleaning contracts from one franchise to another; handles “all aspects of how and whether cleaners are paid for the work they perform;” and collects payments from customers.

Notably, the only claim in the DOL’s Complaint is for an injunction requiring Jani-King to begin keeping records of the wages and hours its alleged employees. The fact that the DOL has chosen to pursue injunctive relief in the absence of any other remedy suggests a strong interest in the principles at issue in the case.

Third Circuit Affirms Class Certification Based on Franchise Agreement & Manuals

The DOL suit was preceded by a September 21, 2016, decision by the Third Circuit Court of Appeals.  That decision upheld a district court’s order certifying a Rule 23 class action of approximately 300 Philadelphia-area franchisees who claim to be Jani-King employees.

In determining whether an employee has been misclassified as an independent contractor under Pennsylvania law, the Third Circuit stated that “the paramount factor is the right to control the manner in which the work is accomplished.”

The District Court’s opinion had pointed to specific provisions in the Jani-King franchise agreement, policy manual and training manual through which Jani-King (among other things) mandated how often a franchisee communicated with customers and dictated how franchisees addressed customer complaints, maintained their records and solicited business.

The District Court stated that “[t]hose documents also demonstrated that Jani-King controlled the franchisees’ work assignments, has the right to inspect the franchisees work, and has the ability to change the policies and procedures as it sees fit.”

Because the Jani-King franchise agreement, policies manual, and training manual were common to the class, they supported the conclusion that common issues would predominate in misclassification cases by franchisees. Therefore, the Third Circuit affirmed the District Court’s class certification order.  The plaintiffs will therefore be able to pursue class claims against Jani-King under the Pennsylvania Wage Payment and Collection Law.

The sometimes-rigid nature of franchise relationships can not only be evidence of the level of control characteristic of an employment relationship, but can also provide a basis for arguing that claims should joined in a Rule 23 class action. Companies, therefore, should consider whether the controls imposed by franchise agreements (or any other contracts) are justified by their potential to create unwanted employment relationships.

A group of 21 states (“the States”) has filed a Complaint in the Eastern District of Texas challenging the new regulations from U.S. Department of Labor that re-define the white collar exemptions to the overtime requirements of the FLSA.  The States argue the DOL overstepped its authority by, among other things, establishing a new minimum salary threshold for those exemptions.

Pursuant to the new regulations from the U.S. Department of Labor, effective December 1, 2016:

  • the salary threshold for the executive, administrative, and professional exemption will effectively double from $23,660 ($455 per week) to $47,476 ($913 per week);
  • “Highly Compensated Employees” (“HCEs”) must earn annual compensation of at least $100,000; and
  • an indexing mechanism will be applied to automatically update the salary threshold and the HCE compensation requirement every three years.

The Complaint challenges each of the new regulations, and seeks declaratory and injunctive relief.

The Salary Threshold Allegedly Violates the FLSA

The Complaint filed by the States points out that the FLSA itself makes no reference any salary threshold, but rather speaks only to the duties of exempt employees.

Specifically, the plain language of 29 U.S.C. §213 states that the FLSA’s overtime requirements do not apply to “any employee employed in a bona fide executive, administrative, or professional capacity…” The Complaint states that the statute “speaks in terms of ‘activities,’ not salary.”

The new salary threshold would take away the exempt status of millions of executive, administrative and professional employees. On that basis, the Complaint alleges that the new regulations violate the FLSA and are an improper exercise of legislative power by an Executive agency.

The Complaint also alleges that the language of the FLSA does not allow for (i) the salary basis test itself, (ii) the distinct compensation threshold for highly compensated employees or (iii) the indexing mechanism in the new regulations that would automatically update the salary threshold.

The Complaint notes that DOL regulations have provided for a salary threshold at some level since 1940, but suggests that the DOL’s authority to do so was never challenged.

The Tenth Amendment Allegedly Precludes Applying the Regulations to the States

The Complaint further alleges that the new salary threshold violates the Tenth Amendment by allowing the Executive Branch to infringe upon state sovereignty and federalism by dictating the wages that States must pay to their own employees.

The Complaint admits that the U.S. Supreme Court has upheld the application of the FLSA to the states, but suggests that the issue should be revisited in light of the new regulations and the burdens they impose on the 21 States seeking relief.

Moreover, the Complaint points to the potential for future abuse through the application of a salary threshold to States. Because “there is apparently no ceiling over which DOL cannot set the salary level,” the DOL could raise the salary threshold however it sees fit.  The Complaint therefore contends that the Executive Branch could “deplete State resources, forcing the States to adopt or acquiesce to federal policies, instead of implementing State policies and priorities.”

The New Regulations Allegedly Violate the APA

The Complaint proceeds to contend that (i) the automatic updates to the salary threshold and HCE compensation requirements violate the notice-and-comment requirements of the federal Administrative Procedure Act and the FLSA’s requirement that the white collar exemptions be “defined and delimited from time to time by regulations of the Secretary ….”; and (ii) the new regulations are arbitrary and capricious in violation of the APA.

More than 50 business groups including the U.S. Chamber of Commerce, the National Association of Manufacturers and the National Retail Federation filed a separate lawsuit in the same court and on the same day.  The business groups also contending the new DOL regulations were implemented in violation of the APA.

The States lawsuit alleges some novel and interesting theories to challenge the Department of Labor’s new regulations, and the District Court’s response to these claims bears watching as the effective date of the new regulations draws near.

Michael D. Thompson
Michael D. Thompson

In Gonzalez v. Allied Concrete Industries, Inc., thirteen construction laborers filed suit in the Eastern District of New York.  The plaintiffs claimed they worked in excess of forty hours per week, but were not paid overtime in violation of the Fair Labor Standards Act and the New York Labor Law.

To obtain information regarding the plaintiffs’ activities during hours they claimed to have been working, the defendants sought an order compelling discovery of their ATM and cell phone records.

ATM Receipts

The defendants asserted that records of the plaintiffs’ ATM transactions were likely to lead to the discovery of admissible evidence because they could reveal each plaintiff’s “whereabouts and activities during hours they claim to have been working.” The defendants relied in large part on Caputi v. Topper Realty Corp., a 2015 case decided by the same court.  In Caputi, a plaintiff asserting overtime claims was ordered to produce “a sampling of records of her ATM transactions” for the time period in question.

In denying the defendants’ motion, the Court acknowledged the ruling in Caputi.  However, the Court concluded that the discovery of ATM records was allowed in that case because the Caputi defendants stated that witnesses would testify that the plaintiff attended prolonged lunches during the workweek and withdrew cash from ATMs for that purpose.

Conversely, in Allied Concrete, the Court concluded that the defendants had not shown any “evidentiary nexus between the en masse discovery sought and a good faith basis to believe that such discovery material is both relevant and proportional to the needs of the case.”

Cell Phone Records

The defendants in Allied Concrete also sought the release of the plaintiffs’ cell phone records in order to determine whether the plaintiffs “engaged in personal activities such as non-work related telephone calls, extended telephone calls, [and] frequent text messaging” during times they claimed to have been working.

The defendants cited to Caputi and to Perry v. The Margolin & Weinreb Law Group, another Eastern District of New York case from 2015.  In both cases, the plaintiffs asserting wage hour claims were ordered to produce cell phone records based on testimony that they had made personal telephone calls during the workday.  Allied Concrete had not obtained any such testimony.  Accordingly, the Court stated that the defendants’ speculation that the cell phone records might contain relevant evidence did not warrant a “wholesale intrusion into the private affairs” of the plaintiffs.

Employers, therefore, should be aware that electronic evidence of an employee’s activities may be discoverable in FLSA cases – provided that there is a sufficient basis for seeking the discovery.

New York Attorney General Contends Domino’s is a Joint Employer with Franchisees

After spending the last few years litigating with Domino’s franchisees over wage hour violations, the New York Attorney General has filed suit contending that franchisor Domino’s Pizza Inc. is a joint employer with three franchisees, and therefore is liable for the “systematic underpayment” of franchise employees.

The New York Attorney General also claims that, regardless of whether it’s a joint employer, Domino’s is liable for misrepresentations and nondisclosures that led to the underpayment of employees at the three franchises and violated the New York Franchise Sales Act.

Background

Through settlements in March 2014 and April 2015, twelve Domino’s franchise owners paid a total of approximately $1.4 million to settle the Attorney General’s claims for violations of New York’s minimum wage and overtime laws.

After the second settlement, New York Attorney General Eric Schneiderman accused Domino’s Pizza, Inc. of “turn[ing] a blind eye to illegal working conditions.”  Mr. Schneiderman stated:  “My message for Domino’s CEO Patrick Doyle is this: To protect the Domino’s brand, protect the basic rights of the people who wear the Domino’s uniform, who make and deliver your pizzas.”

Domino’s was thus left to choose its poison:  It could involve itself directly in addressing the alleged “illegal working conditions” at the risk of making itself a joint employer; or it could maintain a hands-off approach in an effort to avoid joint employer status, while further violations might increase its potential liability.

Nevertheless, Domino’s attempted to balance these concerns.  In a March 18, 2016 letter to the New York Attorney General’s Labor Bureau Chief, Domino’s offered to fund legal compliance training for franchisees, require franchisee’s to accept a code of conduct and pay for a monitor to inspect franchisee stores for compliance.  Domino’s further stated that it would “work with its franchisees in an effort to create a pool of funds to pay restitution to any underpaid franchisee employees.”

Allegations of Joint Employment

The Attorney General apparently found Domino’s proposal to be insufficient.  Therefore, in May 2016, the Attorney General filed a Verified Petition in New York Supreme Court alleging that Domino’s was a joint employer with its franchisees because it had:

  • required Franchisees to purchase hardware and software for Domino’s PULSE management system;
  • maintained payroll and employment records for franchisees;
  • exerted control over franchisee hiring, firing and disciplining of employees;
  • controlled aspects of employee compensation at franchisee stores;
  • dictated staffing and scheduling requirements for franchisee stores;
  • imposed an antiunion policy on franchisees; and
  • required a franchisee purchasing existing stores to keep the prior staff largely intact and in the same positions at the same rates of pay.

Domino’s status as a joint employer in this case will be evaluated under New York law.  However, it is notable that in Patterson v. Domino’s, the California Supreme Court examined Domino’s practices in 2014 and found it was not a joint employer under California law.  The California Supreme Court based its decision on uncontradicted evidence that the franchisee (i) made day-to-day decisions involving the hiring, supervision, and disciplining of his employees, and (ii) ejected the franchisor’s suggestion that an alleged sexual harasser should be fired, and neither expected nor sustained any sanction for rejecting that suggestion.

Alleged Misrepresentations

In addition to joint employment, the Verified Petition alleges:

Domino’s itself caused many of the wage violations because Domino’s encouraged franchisees to use a “Payroll Report” function in the software system Domino’s required franchisees to install and use in their stores (known as “PULSE”), even though Domino’s knew since at least 2007 — yet failed to disclose to franchisees — that PULSE’s “Payroll Report” systematically under-calculated the gross wages owed to workers.

The Verified Petition further alleges that, while failing to tell franchisees about the problems with PULSE, Domino’s charged franchisees $15,000 to $25,000 for the PULSE hardware and software.

Therefore, the New York Attorney General contends that Domino’s is liable for fraud and violations of the New York Franchise Sales Act (which requires a franchisor to provide a prospective franchisee with detailed information regarding “all written or oral arrangements,” including those for the sale of goods or services, in which the franchisor has an interest).

Wage Hour Violations

Underlying these theories for imposing liability on Domino’s are the allegations that its franchisees failed to pay the proper overtime rates to tipped employees.

For example, the Verified Petition alleges that PULSE fails to properly calculate overtime pay for tipped employees under New York law.  12 NYCRR § 146-1.4 states that when “an employer is taking a credit toward the basic minimum hourly rate…, the overtime rate shall be the employee’s regular rate of pay before subtracting any tip credit, multiplied by 1½, minus the tip credit.”  The regulation goes on to state:

It is a violation of the overtime requirement for an employer to subtract the tip credit first and then multiply the reduced rate by one and one half.

The New York minimum wage was $8.75 per hour in 2015, and the maximum tip credit was $3.10 per hour.  Thus, the overtime rate of any tipped employee should have been at least ($8.75 per hour x 1.5 for overtime) minus ($3.10 per hour tip credit), or $10.03 per overtime hour.

However, according to the Verified Petition, the software used by the Domino’s franchisees subtracted the tip credit first, and then multiplied the reduced rate by 1.5.  The Petition states:  “PULSE calculates the employee’s overtime rate at $8.48 per hour ($5.65 times 1.5), which is $1.55 per hour less than the then-current 2015 legal overtime rate for tipped delivery employees.”

Accordingly, the Verified Petition contends that “PULSE systematically undercalculates the gross overtime wages owed to franchise delivery workers who were paid tipped rates.”

The New York Attorney general further contends that Domino’s is liable because the franchisees (i) did not aggregate the hours worked by employees who worked at more than one location; (ii) claimed tip credits for employees on days when they works at a non-tipped position for more than 20% of the employee’s shift or for two hours or more during the shift; (iii) did not calculate or pay the required “spread of hours” pay when a daily shift is longer than 10 hours; and (iv) required drivers to pay their own expenses for delivery vehicles in violation of New York Labor Law §193.

Conclusion

Undoubtedly, the franchise business model will continue to give rise to claims of joint employment.  To the extent possible, franchisors should attempt to eliminate any appearance that they control the employment with a franchisee, particularly in regard to hiring, firing and the payment of wages.  Where involvement by the franchisor is unavoidable, a franchisor must make every effort to comply with the law and communicate any potential concerns to franchisees.

The top story on Employment Law This Week – Epstein Becker Green’s new video program – is the Department of Labor’s Wage and Hour Division’s new interpretation of joint employment.

The federal Wage and Hour Division issued an Administrator’s Interpretation with new guidelines for joint employers under the FLSA and Migrant and Seasonal Agricultural Worker Protection Act. The Division makes it clear that it believes employers are regularly part of joint employment relationships with their vendors and business partners. If an employee files a claim or lawsuit and a joint-employment relationship is found, both employers can be found liable for violations. Michael Thompson, co-editor of this blog, explains it more in depth on the show.

View the episode below or read more about this decision in an earlier blog post.