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Table rental system for restaurant servers not OK under FLSA

By Ronald Miller, J.D.

After an employer conceded that a table rental program for servers at a restaurant violated the minimum wage provisions of the FLSA, it was required to pay back wages and liquidated damages, ruled a federal district court in Ohio. The fact that the employer later consulted an attorney—who advised that the program was illegal—and voluntarily terminated the program, did not absolve it of liquidated damages. Moreover, the court determined that an individual owner of the corporate employer was also an “employer” under the FLSA where she was involved in the day-to-day management of the restaurant and had an ownership interest in the restaurant (Acosta v. CPS Foods, Ltd., November 3, 2017, Pearson, B.).

Table rental system. Shortly after the employer took over the Brown Derby restaurant, the employees voted on two possible changes to the compensation system, choosing to implement a table rental system. Under the table rental system, servers kept all of the tips they made, but they had to pay a one dollar-per-table rental fee. The servers working under the table rental program were treated as independent contractors. The table rental program employees still clocked in and out, but the employer would make changes in the timekeeping system to reflect zero hours worked so the payroll provider would not generate a paycheck for those employees.

Eventually, an attorney informed the employer that the table rental program was illegal. The employer had consulted the attorney after finding that some servers started to develop “unruly attitudes” after implementation of the table rental program. Thereafter, it ended the table rental program after approximately four months.

DOL investigation. In May 2013, an investigator for the Department of Labor began to investigate the employer to determine whether it was in compliance with the FLSA’s minimum wage, overtime, recordkeeping and child labor provisions. Through the investigation, it learned that that the table rental program existed from late January 2013 to mid-May 2013. It was calculated the servers were owed $23,444.31 in minimum wages. The Secretary of Labor filed suit against the owner to recover unpaid minimum wages and unpaid overtime wages, and to obtain an injunction barring the employer from violating the FLSA.

The Secretary subsequently moved for partial summary judgment. The employer conceded that it had unknowingly violated the FLSA minimum wage provisions. It stipulated that “sometime in early 2013, it began treating certain individuals employed as servers as independent contractors. During the period of time that the table rental policy was in effect, servers were paid no wages, were permitted to keep tips they received and were required to pay the employer a fee of $1 per table, per shift in order to work. It was also stipulated that the servers who were treated as independent contractors were “employees” within the meaning of the FLSA.

Individual liability. Among the issues remaining to be sorted out were whether an individual owner of the corporate employer was individually liable as an “employer,” and whether liquidated damages were proper. In this case, eight facts qualified the individual owner as an employer under the FLSA. First, she was owner of the restaurant through her ownership of the corporation that owned the restaurant. Second, she controlled significant day-to-day functions, including supervising the servers, assistant manager, and the kitchen. Additionally, she also had the ability to correct time entries on employee time sheets and resolved a paycheck fee issue. She determined if it was proper to send an employee home due to slow business; participated in the hiring process; and oversaw compliance with trash compactor regulations. Finally, she collected the fees from servers for the table rental program.

Although the individual owner was subordinate to her father in all matters, the court concluded that she could not avoid liability based on that fact. Rather, economic reality controls, and the reality was that she was both heavily involved in the day-to-day management of the restaurant and had an ownership interest in the restaurant.

Damages. Because the employer acknowledged that it did not maintain records of the hours worked by its servers during the period when it used the table rental system, the court found that the Secretary met his burden under Mt. Clemens Pottery to produce sufficient evidence to show the amount and extent of work the employees performed as a matter of just and reasonable inference. The DOL investigator conducted interviews and used the limited records available to reconstruct records. The tip credit was disallowed because the employer failed to show that employees were told that it intended to credit tips toward the employer’s minimum wage obligation, the servers did not retain all tips because they had to pay table rental fees, and it failed to pay servers any wage under the table rental program. Therefore, the Secretary’s calculations stand.

Liquidated damages. To avoid liquidated damages, the employer had to show that she took affirmative steps to determine the legality of the table rental program before classifying the servers as independent contractors. In this instance, the fact that the employer consulted an attorney after the program went into effect did not absolve her of the initial error in negligently misclassifying the servers. Accordingly, the Secretary was granted judgment for back wages and liquidated damages.