Business Insurance

Common Pay Mistakes Restaurant Owners Should Avoid

by Douglas Duerr of Elarbee, Thompson, Sapp & Wilson, LLP


State and federal labor departments and plaintiffs’ lawyers have determined that the restaurant industry is a “target rich” environment, and even famous restaurateurs such as Mario Batali and Bobby Flay have paid as a result. While the claims against these iconic and lesser-known names have varied, we find that our clients often are making the same mistakes. Addressing the top mistakes now will help you avoid a lawsuit or costly audit:

1. Including the wrong employees in the tip pool.  If you require tipped employees to pool their tips, it is imperative that the pool not include “non-tipped” or supervisory employees.  For example, servers should not be required to share tips with cooks, dishwashers, or assistant managers.

2. Not counting all hours worked.  At some restaurants, we have come across a practice of requiring employees to leave together at night for safety reasons or to clock out before settling up.  Sometimes, employees will come to the workplace early for their own convenience and then volunteer to perform tasks or get an early start on their own jobs before clocking in.  Unfortunately, the time an employee is required to be on the premises or is allowed to do any work must be counted as “time worked” for minimum wage and overtime purposes.  An employee cannot volunteer to work for free.

3. Requiring uniform purchases.  Because of employee turnover as well as the fact that some employees do not take good care of items they do not own, there is a temptation to require employees to buy uniform items such as shirts, caps, etc.  However, if you, like most, pay at or just above the minimum wage or the lower “tip credit” wage (which is the minimum wage), any deduction for business expenses (such as uniforms) would violate the minimum wage law.

4. Misclassification of employees as exempt.  Because of the long hours, there is often a desire to classify managers, cooks, and others as “exempt” from overtime.  The rules about who can be exempt are complex and often difficult to apply.  Generally, positions such as cooks, kitchen managers, assistant managers, and similar positions do not meet the legal requirements for exempt status.  Management trainees are almost always correctly classified as non-exempt.

5. Deductions for “walk outs” or “shortages.”  As with uniform purchases, because most hospitality employers pay the minimum wage to servers, it is not permissible to make deductions from wages other than for taxes, 401k, and other permitted deductions.  Business losses, even if caused by the employee’s negligence or failure to follow the rules, cannot result in deductions that take an employee’s wages below the minimum wage (and might also violate your state’s wage payment laws).

6. Using the wrong rate to calculate overtime.  When an employee works over 40 hours a week, overtime compensation is required.  Overtime must be paid at 1½ times an employee’s “regular rate,” which might not be the same as the employee’s hourly wage.  The “regular rate” takes into account all of an employee’s earnings, except for things like retirement contributions, health insurance, and the like.  Thus, shift differentials and bonuses, for example, must be added to determine an employee’s “regular rate.”  If you are taking advantage of the “tip credit,” overtime compensation is not based on the lower cash wage (e.g., $2.13/hour under federal law) but on the higher minimum wage (currently $7.25/hour).

7. Failing to give required breaks.  Although this article focuses on federal wage and hour law, which does not require breaks for meals or otherwise, many states do have laws that require breaks for employees.  Because of the unique issues arising in the restaurant industry, there are special challenges in compliance with laws requiring breaks while providing customer service.  While some states have special or limited exemptions for food service establishments, many do not.  Make sure you keep very good records documenting your compliance with these laws.

8. Not paying “make up” pay.  If you utilize the tip credit, you must make sure that employees receive enough in tips to “make up” the difference between the cash wage and the minimum wage.  If employees do not report receiving enough in tips, then you need to “make up” the difference.

9. Failing to keep good records.  The law places the obligation on the employer to monitor and record the hours worked and the compensation paid to employees.  In the absence of records, the employee’s statements regarding the hours worked and compensation received will normally be accorded more weight than a manager’s or supervisor’s after-the-fact claims.  This is one of those times when the more records you have, the better off you are likely to be.

Contact your Leavitt Group insurance advisor for further information regarding wage and hour insurance coverage.  If you have any legal questions or concerns, we can have our legal professionals in the hospitality industry, Douglas Duerr, with Elarbee, Thompson, Sapp & Wilson, LLP contact you.

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