Tips, Service Charges, and Automatic Gratuities Continue to Cause Problems for Employers

Hospitality employers nationwide continue to be hit with class action lawsuits alleging failure to properly pay/distribute tips, as well as failure to correctly characterize service charges and automatic gratuities.  These lawsuits have the potential to result in verdicts or settlement amounts more costly than virtually any other employment-related matter.  As a result, it is important to periodically review what is or is not permissible under the law is it relates to tips, service charges, and automatic gratuities.  shutterstock_waiter

Most employers are familiar with the basic premise that a tip is a voluntary amount a guest leaves for an employee over the amount due for the goods sold or services rendered, while a service charge is an amount agreed-upon in advance by a venue for services provided, often in connection with large pre-planned events.  However, service charges are treated differently than tips for tax and other purposes, and automatic gratuities add an extra complicated layer in this analysis. A brief synopsis of the differences of these terms from a legal perspective is set forth below:

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California Court Negates FLSA’s “de minimis” Rule

As most of our blog readers are aware, the Fair Labor Standards Act (“FLSA”) requires employers to keep records on wages, hours and other items, as specified in Department of Labor regulations.  Most of the information is of the kind generally maintained by employers in ordinary business practice and in compliance with other laws and regulations.

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In recording working time under the FLSA, infrequent and insignificant periods of time beyond the scheduled working hours, which cannot as a practical matter be precisely recorded for payroll purposes, typically need not be compensated. Until now, the courts have held that such periods of time are “de minimis” and thus need not be compensated. The FLSA’s de minimis rule applies only where there are uncertain and indefinite periods of time involved, a few seconds or minutes in duration, and where the failure to count such time is justified by industrial realities.

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DC Voters Approve Measure Eliminating Sub-minimum Wage for Tipped Employees

Under current law, D.C. employers are able to pay their tipped workers a base (sub-minimum) wage of $3.33 per hour, so long as the workers make enough in tips to push their earnings to at least the District’s minimum wage, which is currently $12.50 per hour.  If the tipped worker does not earn at least the minimum wage for all hours worked, the employer is required to make up the difference.

However, on June 19, 2018, Washington D.C. voters approved Initiative 77, a contentious ballot initiative that would change this law.  Specifically, this Initiative would raise the city’s minimum wage to $15 per hour and phase out the sub-minimum wage for tipped workers; it will gradually hike the tipped minimum wage by $1.50 each year until it waiterreaches $15 in 2025, and by 2026, the minimum wage will be the same for all workers.  Through this Initiative, the District of Columbia would become the first major city to outlaw the practice of allowing employers to pay a lower hourly wage to workers who earn tips, although that practice is unlawful in California, Oregon, Washington, Alaska, Nevada, Montana, and Minnesota.  And officials in New York and Michigan are also considering ending their tipped-wage system this year.

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New Wave of ADA Website Lawsuits

Recently, there have been a slew of lawsuits filed across the country alleging that owners and operators of hotels and other places of lodging are using websites that violate the Americans with Disabilities Act (“ADA”).  These lawsuits are different than the wave of lawsuits and demand letters sent to so many hotels and other places of public accommodation the last few years alleging that those companies failed to make their websites accessible for users with visual, hearing and physical impairments by not adhering to the Web Content Accessibility Guidelines (WCAG).  (For more information about the WCAG issue, check out our prior posts on that issue here and here.)ADA website picture

ADA regulations require hotels to make reasonable modifications in their policies and practices when necessary to afford goods, services, facilities, privileges, advantages, or accommodations to individuals with disabilities.  Because the purpose of a hotel’s website is, in large part, to allow members of the public to review information pertaining to the goods and services available at the hotel and then reserve appropriate guest accommodations, such websites have been found to be subject to the requirements of ADA regulations.  According to these regulations, a hotel must identify and describe accessible features in the facilities and guest rooms offered through its reservations service in enough detail to reasonably permit individuals with disabilities to assess independently whether a given facility or guest room meets his or her accessibility needs. Thus, rather than alleging that the website itself is inaccessible to users with disabilities, these “new” website accessibility lawsuits claim that a hotel’s website violates the ADA by failing to sufficiently identify and describe the physical “brick and mortar” accessibility features of the hotel.

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Maryland Employers Beware — Paid Sick Leave is Quickly Approaching

On January 12, 2018, the Maryland General Assembly overrode Gov. Larry Hogan’s veto to pass the Maryland Healthy Working Families Act (the “Act”), and in so doing, Maryland became the ninth state in the country to require paid sick and safe leave for qualifying employees. shutterstock_fever sick

Pursuant to the Act, any business in Maryland with 15 or more employees during the preceding year, including part-time, full-time, temporary, and seasonal workers, must provide their workforce with paid sick leave.  Maryland employers with 14 or fewer employees are also required, at a minimum, to provide employees with unpaid sick and safe leave.

The Act currently is scheduled to take effect as of February 12, 2018.  However, on January 23, 2018, as a result of concerns expressed by various lawmakers that employers would not have a sufficient amount of time to come into compliance with various provisions of the Act, Senator Thomas Middleton, the chief sponsor of the law, introduced a bill that would delay enforcing requirements of the law until mid-April.  Senator Middleton stated that the delay in enforcement would give labor officials the requisite time to draw up necessary regulations and to spread the word to companies that are affected.  He also emphasized that he wanted to “hold harmless” companies that are figuring out the details of how to set up their sick leave programs, and that “ninety days should give the administration enough time to get a guide together.”

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Employers Must Consider the ADA before Requiring Medical Examinations

Depending on your industry, it may be commonplace for you as an employer to require medical examinations of employees for a specific purpose in order to ensure the safety and health of those employees.  This often occurs, for example, in situations where employees have been exposed to a dangerous chemical and relevant laws, such as OSHA regulations, require medical examinations/testing for purposes of assessing and monitoring the impact of the exposure.  From an employer’s perspective, however, the question sometimes arises as to whether, as a reasonably prudent measure, it can also require those employees to submit to medical examinations for other purposes, even if the examinations are not absolutely necessary or required at the time — such as whether there was exposure to any other chemicals or exposure below levels at which medical evaluation is mandated by OSHA.

Medical ExamTo answer that question, an analysis of the Americans with Disabilities Act (“ADA”) is required.  Of course, other federal laws, such as the Genetic Information Non-Discrimination Act (“GINA”), the Health Insurance Portability and Accountability Act (“HIPAA”) and OSHA, also may be implicated in this analysis, as could state disability-related laws and/or privacy laws, but for purposes of this blog post, our analysis is limited to the ADA.

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Obama Era Overtime Rule Officially Struck Down

On August 31, 2017, a Texas federal judge invalidated the Obama administration’s controversial rule expanding overtime protections to millions of white collar workers, saying the U.S. Department of Labor (DOL) improperly used a salary-level test to determine which workers are exempt from overtime compensation.

As you likely will recall, the Obama administration’s “overtime rule” (which we explainedOvertime Business Man Clock in detail here) raised the minimum salary threshold required to qualify for the Fair Labor Standards Act’s “white collar” exemption to just over $47,000 per year.  In granting summary judgment to the Plano Chamber of Commerce and other business groups who had filed a lawsuit challenging the “overtime rule,” U.S. District Judge Amos Mazzant said that the “significant increase” to the overtime threshold amount would essentially render meaningless the duties, functions, or tasks that an employee performs if their salary falls below the new minimum salary level.  Judge Mazzant further stated that “[t]he department has exceeded its authority and gone too far with the final rule,” and that “[t]he department creates a final rule that makes overtime status depend predominately on a minimum salary level, thereby supplanting an analysis of an employee’s job duties. Because the final rule would exclude so many employees who perform exempt duties, the department fails to carry out Congress’s unambiguous intent.”

As we previously informed you here, the “overtime rule” had been on hold by way of an injunction since late November 2016 as a result of a legal challenge brought by states and business groups, and as a result, employers have been waiting for clarity since that time.  Through his decision, Judge Amos Mazzant has now provided employers with much needed clarity.  Based on previous statements made by the current administration’s Labor Secretary, Alex Acosta, it is expected that at some point in the future the DOL will propose a new rule, setting the salary threshold somewhere between the current level of $23,660 and the $47,476 level set by the Obama administration.  However, based on Judge Mazzant’s harsh criticism, as well as the tenor of the Trump administration, it is unlikely that a new rule will be promulgated anytime soon.  So, for now, employers can continue to abide by the traditional overtime threshold that has been in place for more than a decade.