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Denny’s to face collective action asserting it applied tip credit improperly to non-tipped tasks

By Marjorie Johnson, J.D.

Denny’s argument that the lawsuit should be tossed based on the DOL’s new guidance on the tip credit was premature, but the employer convinced the court that it lacked personal jurisdiction over collective members who worked for Denny’s outside of Ohio.

A Denny’s server advanced her FLSA collective action lawsuit asserting that the restaurant chain improperly applied the tipped credit when servers performed non-tip-producing tasks. Though Denny’s argued that her claims failed based on a recent change in DOL guidance on when an employer may apply the tip credit to non-tipped duties, a federal district court in Ohio found that argument would have to be considered at the summary judgment stage, and not on a motion to dismiss. However, the employer’s motion was granted to the extent it sought dismissal for lack of personal jurisdiction of the FLSA claims of any putative collective members not arising from employment by Denny’s in Ohio (Rafferty v. Denny’s, Inc., July 8, 2019, Lioi, S.).

The employee’s lawsuit alleged FLSA claims on behalf of herself and other Denny’s servers. The employer paid her as a tipped employee under the FLSA and she performed various tipped and non-tipped duties, including serving drinks and food to customers, cleaning, busing tables, washing dishes, and other side work. Though she had not yet moved for conditional certification, her complaint sought to certify a nationwide collective.

Three FLSA claims. The employee alleged three separate FLSA claims against Denny’s, which she further asserted were willful. First, she alleged that the employer violated the statute by failing to provide notice of the FLSA’s provisions of the “tip credit.” Second, she claimed that it violated the FLSA by enforcing a policy or practice of paying servers sub-minimum, tip-credit wages even when it required those employees to perform non-tipped work that was unrelated to their tipped occupation. Finally, she claimed that the employer also enforced a policy or practice of requiring servers to perform non-tipped work that, even if it was related to their tipped occupation, exceeded 20 percent of their time worked in one or more individual workweeks.

Plausible non-tipped labor claims. Denny’s sought dismissal of both of her non-tipped labor claims for failure to state a claim. As to her unrelated non-tipped labor claim, the employee alleged that Denny’s willfully failed to comply with the FLSA and with relevant regulations and sections of the Department of Labor (DOL) Field Operations Handbook, by requiring her and the collective members in a given workweek, and during each and every workweek they were employed by Denny’s, to perform non-tipped labor unrelated to their tipped occupation over the course of their regular workweek, while paying them at the tip credit rate.

Her related non-tipped labor claim similarly alleged that Denny’s willfully failed to comply with the FLSA and with relevant regulations and sections of the DOL Field Operations Handbook by requiring her and the collective members to perform non-tipped labor related to their tipped occupation in excess of twenty percent of their regular workweek, while paying them at the tip credit rate. Further, Denny’s allegedly failed to pay the full applicable minimum wage for time they spent performing non-tipped labor related to their tipped occupation, despite requiring them to perform such work in excess of twenty percent the time.

Premature reliance on new DOL guidance. In its motion to dismiss, Denny’s extensively argued the merits of these two claims based on what the employee asserted was “new guidance” issued by the DOL on November 8, 2018. Thus, it did not argue that the employee failed to state a claim, but that she could not prevail on the claims she stated. But this was not the appropriate standard for a motion to dismiss as Denny’s was arguing that although her allegations might have been sufficient prior to the new DOL guidance, this was no longer the case.

Application of guidance disputed. Indeed, the employee had countered that even if the new guidance applied (which was not entirely clear), by its express terms, it governed “from today forward,” and was not to be applied retroactively. She claimed that since her claims spanned a time period both before and after the new guidance letter, even if it applied it would only affect how liability and damages should be analyzed.

The employee also relied upon a recent opinion of another district court that rejected the same argument presented by Denny’s. In that case, the judge agreed that the relevant regulations were ambiguous, but found that he need not defer because, for reasons he set forth in some detail, there were “significant signs that the new letter does not ‘reflect the agency’s fair and considered judgment on the matter in question.’”

Court won’t weigh in. The court declined to weigh in on the merits of either side’s argument at the motion-to-dismiss stage. The employee’s complaint was sufficient to give Denny’s fair notice of what her claim was and the grounds upon which it rested and did not fail to raise her “right to relief above the speculative level.” In fact, the parties’ briefing “sharply revealed the contours of the parties’ dispute.” Accordingly, their arguments would be more appropriately raised on summary judgment.

Lack of jurisdiction over non-Ohio residents. However, due to the absence of personal jurisdiction, Denny’s was entitled to dismissal without prejudice of any FLSA claim that arose out of employment at restaurants operated by Denny’s outside of Ohio since it was incorporated in Florida and has its corporate headquarters in South Carolina. It also owned and operated 181 restaurants in 21 states but directly owned and operated only four restaurants in Ohio.

Personal jurisdiction in class and collective actions must comport with due process just the same as any other case, explained the court. Because due process requires a connection between the forum and the specific claims at issue, nationwide class actions can’t be brought in a forum where the defendant is not subject to general jurisdiction. Moreover, the putative collective members were not prevented from filing a nationwide collective action; they only had to do so in one of the states that had general jurisdiction over Denny’s (i.e., Florida or South Carolina). Thus, the court held that exercising personal jurisdiction over Denny’s for claims of any out-of-state putative collective member would violate due process.