Recently, Philadelphia sports bar and restaurant chain Chickie’s & Pete’s (“C&P”) signed a consent judgment with the Department of Labor agreeing to pay current and former employees more than $6.8 million in back wages and damages for improperly taking tips from servers and violating federal minimum wage, overtime and record-keeping requirements. At the time of this article went to press, the proposed consent judgment had been filed in the U.S. District Court for the Eastern District of Pennsylvania and will be subject to the review and approval by the Court. In what the Department of Labor described as one of its largest tipped employee investigations in recent years, C&P and its owner, Peter Ciarrocchi, Jr., have agreed to pay $6,842,412 to 1,159 employees at nine of the company’s locations, plus a $50,000 civil money penalty. The remaining $1.68 million is to settle federal lawsuits by about 90 current and former employees.
Under the Fair Labor Standards Act (“FLSA”), tips are the property of the employee who receives them; however, restaurant operators can benefit by claiming a credit based on the tips towards their obligation to pay those employees the full minimum wage. If an employee’s tips combined with the employer’s direct wages do not equal the minimum wage, the employer must make up the difference during the pay period. An employer that claims a tip credit is required to pay a tipped employee only $2.13 an hour in direct wages provided that amount plus the tips received equals at least the federal minimum wage of $7.25 an hour. The federal minimum wage of $7.25 per hour was last increased in 2009 and the federal tip credit’s cash wage requirement of $2.13 has not been increased since 1991. According to the Department of Labor, C&P’s behavior is “…troubling because [it] both unlawfully took tips from its workers and failed to pay them even the $2.13 per hour the law requires when an employer takes a tip credit.” Investigators found that the company improperly retained a fixed portion of the tips servers received from customers.
The investigation disclosed that C&P required servers to contribute a portion of their tips to an improper “tip pool,” or tip-sharing arrangement, which was approximately between 2 percent and 4 percent of the server’s daily table sales. C&P illegally retained approximately 60 percent of the tip pool. According to published reports, about 40 percent of the tip money collected by managers went to bartenders on duty, which is legal according to the DOL, while management kept the rest. This amount had come to be known as “Pete’s Tax” and was required to be paid to the manager in cash at the end of each shift, even if the server received all tips on credit cards and therefore did not have cash on hand. In some cases, the company required employees to use their own money to contribute to this pool by withdrawing cash from a nearby ATM or borrowing from another server. Also, the DOL indicated that the exact loss to employees could be calculated because the chain kept meticulous records of the amounts as part of its business model.
Additionally, servers and bartenders were paid only a flat rate of $15 per shift at all locations except for C&P’s airport establishment — an amount that was not sufficient in all cases to even cover the minimum cash wage of $2.13 per hour that must be paid to a tipped employee when an employer claims a tip credit under federal law. Additionally, the employer failed to pay the required overtime wages to these employees when they worked in excess of 40 hours in a week. Investigators also determined that employees were not paid for time spent in mandatory meetings and training, and were improperly required to pay for uniforms.
Under the provisions of the consent judgment filed in U.S. District Court for the Eastern District of Pennsylvania, and subject to court approval, the company will pay minimum wage and overtime back wages and is required to return the improperly retained tips to the servers, as well as pay liquidated damages. In addition, the company has agreed to enhanced compliance, including:
External compliance monitoring for an 18-month period;
Internal compliance monitoring for an additional 18-month period;
Training for all employees on their rights under the FLSA;
Providing a statement to any employee required to contribute to a tip pool detailing the amounts that were contributed by the employee, the job categories of workers included in the tip pool and the specific percentage each category receives; and
Peter Ciarrocchi, Jr., will write an article for a restaurant trade publication that addresses an employer’s obligations under the FLSA.
The consent judgment also calls for C&P and Ciarrocchi to be permanently enjoined and restrained from violating the provisions of the FLSA in the future.
The FLSA requires that covered, nonexempt employees be paid at least the federal minimum wage of $7.25 per hour for all hours worked, plus time and one-half their regular rates of pay for hours worked beyond 40 per week. Employers also are required to provide employees notice about the FLSA tip credit provisions, to maintain accurate time and payroll records and to comply with the hours, hazardous orders and other restrictions applying to workers under age 18.
If you are an “employer” in the hospitality industry it is very likely that you have heard of cases involving employees who have sued their employers for wage and hour violations. You could be next. Taking some time to audit how you classify and pay your employees and correcting any problems could save you a significant amount of money in legal fees, back taxes, back wages and penalties. Plaintiff lawyers, along with state and federal regulatory agencies, are on the hunt for business owner violators.