Labor lawsuits: the next hot thing

Starbucks. Smith & Wollensky. Rapper Jay-Z’s 40/40 Club. In New York and elsewhere across the US, these popular spots have made recent headlines. Although most such outlets actively seek publicity, the kind of buzz these businesses have been attracting is far from desirable. That’s because they have become news fodder for allegedly failing to properly compensate employees.

It’s a trend that has taken hold in the last two to three years, and it is showing few signs of abating. Increasingly, restaurant owners are becoming the target of wage and hour disputes, saddled with the burden of defending themselves in Fair Labor Standards Act (FLSA) collective action claims and state labor law-related lawsuits from current and former employees. As a result, some employers must now pay hundreds of thousands of dollars in back wages that can cover as far back as six years.

Especially prevalent in the restaurant industry, the trend has caught many business owners by surprise. Typically, owners are astounded when served with such a lawsuit, believing they would never be charged with underpaying employees or forcing staff to work overtime without adequate compensation, often citing situations where they treated employees like family or helped them out in their times of need. Naively, they believe neither the government nor their employees would ever pursue such charges, perhaps on the grounds that these outlets – often the heart and soul of a neighborhood and its economy – would be forced out of business, ultimately hurting the very communities they serve.

Yet the increased number of lawsuits and government audits against restaurants has proven these owners terribly wrong. As a result, the hospitality community is just now waking up to the fact that it may easily become the subject of such serious accusations.

And while all business owners are vulnerable to charges of cheating on wages, it is the restaurant industry, with its history of poor record keeping, reliance on the receipt of gratuities to compensate for low pay and transient nature of its employees, that is being hit particularly hard.

A perfect storm

The food services industry is often rife with unexpected operations costs, especially for independent and inexperienced owners who struggle to stay profitable. While they strive to get a handle on expenses and comply with health regulations, they are often less strict when attempting to comply with labor requirements. What they don’t recognize is that they are setting themselves up for big trouble ahead. Many large, publicly listed companies also fall short in this area.

Typically, kitchen staff and food servers work long hours, but employers often neglect to pay overtime wages, not realizing that they may be in violation of the FLSA or applicable state law. Employers frequently do not handle tips properly, or force tip-sharing with management, again violating statute.

Yet another concern is that they tend to pay employees in cash, not grasping that it is the owner’s obligation to track hours properly and keep necessary payroll records. This is especially prevalent with kitchen staff and busboys, who – even if working illegally – are still covered by the FLSA.

All it takes is one employee to file a lawsuit, which could evolve into a class or collective action. What’s more, many attorneys see these cases as risk-free, knowing they are likely to win the case and get their fee – especially when they can ascertain that an establishment kept sloppy records.

Once employees in one establishment win a case, or settle for a substantial sum, word of mouth typically spreads to other restaurants where staffers’ friends or family may work. These staffers, having seen lawsuits successfully won at other venues, may file claims of their own. Or they may get the idea simply by walking down the streets of New York, where workers have been known to picket their employers, citing unfair labor practices. Or they may pursue a claim after hearing the numerous attorney advertisements soliciting such cases.

Combined, these elements make for a perfect storm; in such a climate, those employers that do not have all of their records in order may soon find themselves the subject of a lawsuit. It’s an accident waiting to happen.

What can you do?

At a time of such fierce competition and spiraling costs, a lawsuit can prove detrimental to a restaurant’s very existence. It behooves owners and all levels of management at larger establishments to familiarize themselves with all of the FLSA requirements, or they may well find themselves charged with wage and hour violations.

In particular, they must become diligent record keepers, documenting items such as hours worked, hourly rates, and the names and addresses of each of their employees. Without meticulous records, they will lose track of those hours worked, leaving themselves susceptible to lawsuits.

Employers must also ensure that they are meeting minimum-wage requirements, which, under federal law,  is $7.25 an hour as of July 24, 2009, for their non-exempt employees – that is, workers who are subject to overtime pay. Employers must define who among their staffers is non-exempt (including kitchen and waiting staff with no supervisory functions) and who is exempt (typically those who are in managerial, administrative or professional positions), and they must see to it that those non-exempt employees who work more than 40 hours per week receive adequate overtime pay as required by the FLSA.

Suit filed – now what?

Employers that are the subject of a lawsuit should consult with a skilled employment attorney who can advise them about their options as well as litigate and fight the case. They can explore whether there is a potential liability, and if it turns out that the employer has probable exposure, whether it should work to settle the case quickly. This way, the employer will limit the attorney fees incurred as well as the time and energy it spends on the case. Those who discover that there is a problem should also strive to get their records in order to prevent further problems in the future.

The FLSA has a two or three-year statute of limitations. Under state law, the statute differs – in New York, for example, it is six years. Those companies that believe they are vulnerable are advised to fully comply with the wage and hour requirements under state law and the FLSA. In doing so they will essentially turn off the spigot, ensuring that, in the future, they will encounter one less day of possible exposure.

Of course, employers cannot predict whether they will be accused of pay violations but, by ensuring compliance with the FLSA, business owners can limit their liabilities while at the same time creating a positive work environment – a quality staffers are sure to appreciate.

What’s more, as savvy restaurateurs already know, happy employees tend to resonate with customers, who will likely frequent the establishment in the future – a win for business all round.