How Franchise Systems Can Minimize Risks of Labor Violations

by Nexsen Pruet, PLLC

No one enjoys being the center of attention when that attention is coming from federal regulators. Yet that’s where franchise systems have found themselves of late – especially in the hospitality sector, which accounts for a third of franchise systems. The Wage and Hour Division of the U.S. Department of Labor (DOL) has focused increasingly on businesses such as restaurants and hotels, looking specifically for violations of the Fair Labor Standards Act (FLSA). The DOL typically informs employers before conducting investigations. But, as part of a strategic crackdown, DOL has begun performing unannounced workplace inspections.

The Subway franchise system has taken a proactive approach in response to this enforcement trend. Subway’s restaurants are independently owned and operated, so “laying down the law” would expose the franchisor to a risk of vicarious liability. (Franchisors have learned this lesson all too well from court decisions holding them potentially liable as “employers” of franchisees based on actions they took that were deemed to exert control over the franchisees’ operations.)  Instead, Subway is working with the Wage and Hour Division to ensure that franchisees are educated about the wage and hour laws and aware of the risks of failing to comply with them.

We’ll tell you more about Subway’s efforts below. But first, if you should find a DOL investigator knocking at your door, here’s a checklist to guard against wage and hour violations and fines:

  • No Automatic Deductions for Meal Times and Break Periods 

All hours worked for non-exempt employees are compensable under the FLSA. Although meal times and break periods generally are not included in “hours worked,” breaks lasting 20 minutes or less generally are compensable. And even longer breaks and meal times are compensable when employees are not allowed to spend the time for their own benefit. If non-exempt employees work through any portion of their meal times or break periods, those times must be included as hours worked. The bottom line: Never automatically deduct meal periods or breaks without verifying that the time was actually taken.

  • Make Up the Difference Between Tips and Minimum Wage

A “tipped employee” is defined as one who customarily and regularly receives more than $30 per month in tips. The tip credit allows employers to count tips toward satisfying the federal minimum wage requirement of $7.25 per hour. Employers may pay “tipped employees” a reduced hourly wage, which can be as low as $2.13 per hour. But when tips combined with hourly wages do not meet the federal minimum wage, the employer must make up the difference.

  • No Weekly Average of Hours to Calculate Overtime 

Non-exempt employees may be paid by salary or hourly. Whether an employee is exempt from overtime pay depends on the duties of the position, not the manner in which the employee is paid. Whether salaried or hourly, all non-exempt employees must be paid an overtime premium for all hours worked over 40 in any single work week. Never average the number of hours worked over a period of two weeks or more to avoid paying overtime.

  • Deductions and Expenses Cannot Drop Pay Below the Minimum Wage

The cost of any item used primarily for the benefit of an employer may not be deducted from an employee’s pay to the extent that the deduction would reduce the employee’s wages below the federal minimum wage. For example, if an employer requires an employee to bear the cost of purchasing and maintaining a uniform, that cost cannot reduce the employee’s wage below the minimum wage. The same rule applies when an employee must bear the cost of tools or equipment. Likewise, an employer may not deduct cash register shortages, losses from customers’ not paying their bills, or losses from theft of employer property to the extent such deductions would result in the employee earning less than the federal minimum wage.   

  • Keep Accurate Pay Records for Three Years

Employers must keep accurate and complete records of all hours worked and amounts paid to non-exempt employees. These records must include all overtime pay and any additions or deductions from the employee’s wages. The FLSA requires that payroll records be kept for at least three years.

This checklist addresses some of the most common wage and hour issues that affect franchise systems in the hospitality industry. To ensure continued compliance with the FLSA, it’s important to conduct annual audits and implement measures to minimize the risks of wage and hour claims. Specifically, consider reviewing your classification of exempt and non-exempt employees, analyzing deductions from employees’ pay (including deductions for break times and meal periods), and verifying correct use of the tip credit. 

Now, back to Subway’s efforts to ensure compliance with the FLSA: The franchisor enlisted the DOL’s Wage and Hour Division staff to help educate franchisees by speaking at Subway’s annual meetings and publishing articles in Subway’s weekly electronic newsletter outlining federal minimum wage and overtime requirements under the FLSA. Subway placed a link to the Wage and Hour Division's website on its own intranet site for franchisees to reference, and the franchisor’s corporate training department provides FLSA training materials to new franchisees. Most significantly, according to the DOL, the franchisor has agreed to enforce sanctions provided for under its franchise contract if it becomes aware of a legal disposition that a franchisee knowingly violated a federal labor law. The DOL is touting Subway’s “good faith efforts” as “good business sense” and encouraging franchisors in all industry sectors to take similar steps to promote FLSA compliance by their franchisees 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nexsen Pruet, PLLC | Attorney Advertising

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