It may come as a shock to some that hospitality is the industry most affected by the Department of Labor (DOL) prosecutions, with 39,705 Fair Labor Standards Act (FLSA) cases on record since 1985. In total, these FLSA violations have cost businesses over $378 million, with an average fine of $9,533 per business.
Despite the fact FLSA fines can be costly, many managers and higher-ups still fail to recognize and address some of the most prevalent violations prior to investigation.
And according to a recent study by TSheets that found FLSA wage and hour lawsuits to be up by 417 per cent over the last 20 years, that’s a gross business mistake.
Leadership must take the time to understand the risks of breaking the law and act quickly to limit the likelihood of an expensive FLSA lawsuit down the line.
An example of bad behavior
To better understand the scope of the FLSA and the potential implications of breaking the law, it may help to look at an example from the hospitality industry.
Take T.G.I. Fridays. The company was forced to settle for more than $19 million in 2017, as a result of minimum wage violations, illegal paycheck deductions, and not paying overtime.
One of their policies required tipped workers to spend more than 20 per cent of their time on non-tip producing tasks, without paying them the minimum wage for that time, violating the “80/20 rule.”
Employees also reported they were not allowed to clock in until after their first table was seated, even though they’d been at the restaurant earlier, performing other tasks for an hour already. The same went for the end of their shift, where workers were required to clock out prior to performing their closing tasks.
Besides underpaying employees by not compensating them for all work performed, T.G.I. Fridays also failed to pay workers overtime and took unlawful deductions from employee wages when customers walked out.
Finally, the restaurant forced tip workers to pool their tips and distribute them to employees who were not then eligible to receive tips (this law was recently amended in March 2018 as part of the Consolidated Appropriations Act).
In total, 28,000 workers took part in the settlement, as a result of the franchise breaking both national laws and the labor laws of nine different states.
4 examples of the most common FLSA violations
Looking at T.G.I. Fridays, with the facts laid out against them in black and white, it’s easy to see how the company got itself into a $19.1 million lawsuit. But examined more closely, it’s also easy to see how simple it is to break the law, even unknowingly, as the result of misguided policies or ill-informed management.
It’s important businesses in the hospitality industry take the time to review the DOL’s fact sheets regarding tipped employees, hotel and motel establishments, and restaurants and fast food establishments.
Here are four of the most common FLSA violations in the hospitality industry.
1. Not paying overtime correctly.
Calculating overtime can be a bit of a beast, particularly when you’ve got a large staff, all with different shifts and compensation. Part of the confusion stems from misclassifying workers (i.e., making an employee exempt when they should be nonexempt). More commonly, though, businesses make the mistake of not paying overtime at the correct rate.
For instance, if you have tip workers on the payroll, it’s important you calculate overtime using the full minimum wage, not the lower direct wage you might normally pay. Employers must also be sure they’re paying overtime based on the employee’s regular rate of pay and not their straight-time pay.
This means taking into account how much the employee makes, including commissions, bonuses, service charges, or other compensation on top of their typical hourly rate.
2. Failing to meet the minimum wage requirements.
The hospitality industry employs many minimum wage workers, and it’s important employers are aware of the minimum wage requirements set down for them not only by the FLSA but by their own state labor laws.
In the food and drink sector, it’s common for tipped workers to make a required cash wage of $2.13. Employers must then supply a tip credit that makes up the difference between $2.13 and the federal minimum wage (currently $7.25), should the employee not make at least $5.12 in tips that hour.
Regardless of the worker’s job, the most important rule to remember is that no matter what deductions are made by an employer, the employee must still make the minimum hourly wage. Any less than that and the employer is putting themselves at risk for a major FLSA lawsuit.
Employers should also be aware of the minimum wage requirements in their area, as they pertain to youth. A 1996 amendment to the FLSA allows employers to pay employees under the age of 20 $4.25 per hour for the first 90 consecutive calendar days of employment.
3. Making illegal paycheck deductions.
Remember when Disney got in trouble for making their employees pay for the care and laundering of their costumes and uniforms? Those deductions caused some employees’ salaries to dip below the federal minimum wage — a major FLSA violation. The mistake cost the company $3.8 million and tarnished its happiest-place-on-Earth reputation.
Interestingly enough, uniforms are one of the few deductions an employer can legally take from an employee’s paycheck, provided the deduction doesn’t drop the employee’s salary below minimum wage.
The employer can also make deductions when “such facilities are furnished primarily for the benefit or convenience of the employee.” These include food credits for restaurant workers (though these meals must be provided at cost), childcare that’s provided by the employer, and some transportation or lodging costs when the reason for the trip doesn’t solely benefit the employer.
In contrast, items that provide more benefits or convenience to the employer cannot legally be deducted from an employee’s paycheck. This includes any tools the employee might need to do their job (like a desk chair for an office worker or a firearm for a security officer).
Other illegal deductions include damage done to the employer’s property by the employee or someone else and financial losses that might be attributed to an employee’s poor service or lack of attention (for instance, when T.G.I. Fridays made their servers cover the cost of a customer not paying their bill).
This is especially true of any deductions that might cause the employee’s compensation to dip below minimum wage.
4. Stealing tips.
If you were thinking fast-food restaurants would take the cake in FLSA violations, you’d be sorely mistaken.
Full-service restaurants are responsible for half (26,893) of all FLSA violations, even compared to hotels, bars, limited-service eateries, and RV parks.
So what do full-service restaurants have that most fast-food restaurants do not? The answer: tips.
The issue of tips and who should be allowed access to them has been in the news a lot lately, particularly after the Trump administration announced plans in December 2017 to undo portions of a 2011 regulation that had made it illegal for employers to take an employee’s tips and redistribute them to include back-of-the-house employees.
In March 2018, the Consolidated Appropriations Act went into law, and with it, a 36-word paragraph that briefly outlines a new standard for tip pooling.
The paragraph states, “Any employer may not keep tips received by its employees for any purpose, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”
While the paragraph does not outrightly state that employers may pool tips, the DOL issued a statement following the law’s passage, saying “the omnibus appropriations bill includes a bipartisan statutory provision to ensure that workers in the back of the house (i.e., cooks, bussers, dishwashers) can participate in tip pools in appropriate circumstances.
Importantly, this same provision makes clear that employers themselves cannot keep tips.” Employers who do choose to pocket tips, even for business purposes — such as to offset a cash drawer shortage or pay for food dropped by an employee — are violating the law.
Craft an exemplary reputation
FLSA violations aren’t just expensive — they’re embarrassing. And they have grown over the past decade in the USA and globally.
No one likes doing business with a company that’s seen as greedy or unfair to its employees. In the hospitality industry, especially, where reputation rules all, it’s important to understand state and federal labor laws to not only avoid fines but avoid negative press as well.
Treat your employees right, and reap the rewards of business as usual.
About the Author
She has a BA in English literature and has spent her career writing and editing marketing materials for small businesses.
She recently started an editorial consulting company.
*All views expressed and facts presented in Guest posts at the Global Hospitality Portal Blog are by the Authors of the respective posts.