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Home / Expert Opinion / Civil Litigation / Civil Litigation: Restaurants, hotels beware – Labor Dept. is watching

Civil Litigation: Restaurants, hotels beware – Labor Dept. is watching

Steven G. Carling

The U.S. Department of Labor, Wage and Hour Division, is significantly stepping up its scrutiny in Western New York to ensure that restaurants and hotels are obeying the Fair Labor Standards Act. The efforts involve surprise visits with increased focus on tipped employees, misclassifying employees as exempt from minimum wage and overtime, and off-the-books cash payment of wages that lead to overtime violations.

The hospitality industry is particularly susceptible to violations of the wage and hour laws because misperceptions about these often confusing laws are perpetuated among management-level employees as they travel between jobs and create a sense that something must be the law because “everyone else is doing it.”

Additionally, restaurants in particular often grow from small businesses that do not have the benefit of payroll or human resources consultants or corporate structures. The owners may be very adept at preparing great food or accommodations that draw in customers and grow the business, but inexperienced at managing the complex wage and hour issues that result as their employee base grows with the business.

Tipped Employees

The Fair Labor Standards Act (and similar New York State labor laws) requires that employees must receive the minimum wage of $7.25 per hour. Employees who routinely receive tips, such as waiters and bartenders, may be paid $5 per hour so long as they earn and report at least $2.25 per hour in tips. The $2.25 per hour is called the “tip credit.” Misapplication of this often misunderstood provision of the law has led to violations and back wage payments for many local businesses.

The only time that an employer can pay the tip credit minimum wage is when the employee is primarily receiving voluntary tips. If the employee is a banquet server or a room service employee where the “tips” are mandatorily added to the customer’s check such as a “service charge” or “gratuity,” then the employee is not voluntarily tipped and must receive the $7.25 minimum wage. It does not matter that these employees usually earn well in excess of minimum wage with these mandatory charges.

Even when a tipped employee is properly paid at $5 per hour, the calculation of overtime is often done wrong. Employers must pay 1 1/2 times an employee’s “regular rate” for each hour worked over 40 in a week. In the case of a tipped employee, the regular rate for overtime is actually $7.25 per hour, not $5. Many employers mistakenly pay tipped employees $7.50 per hour for overtime by first deducting the tip credit ($5 x 1 1/2). However, the tip credit is supposed to be deducted after the overtime calculation. Therefore, the proper overtime rate for tipped employees is $8.63 per hour ($7.25 x 1 1/2 = $10.87 – $2.25).

Misclassified Management Employees

The law requires that all employees must be paid minimum wage and overtime for all hours worked over 40 in a week unless the employee meets one of the very narrow exemptions provided by the law. Just paying someone a salary and having the employee agree to work as many hours as needed is not enough. To be exempt from minimum wage and overtime, the employee must meet tests based upon the duties of the job as well as his or her salary.

In order to meet the duties test, the employee’s primary duty must involve using discretion and independent judgment in significant matters. The most common violation of this provision occurs with “managers.” To be an exempt manager, an employee must directly supervise two or more employees and have significant input into hiring, firing, discipline, scheduling, and performance reviews.

For example, the general manager of a restaurant who interviews new hires, disciplines employees, and has oversight over the whole staff is exempt even if he or she occasionally does dishes, clears tables, or serves food.

Conversely, a bar manager in a restaurant or a front desk manager in a hotel who works scheduled weekly shifts as a bartender or on the front desk and reports problems with other employees to the general manager to deal with likely is not properly exempt and should be paid hourly, including overtime if worked in a pay week.

In addition, the employer must pay a weekly salary of at least $455 under federal law ($543.50 under New York law) that does not fluctuate based upon the quantity or quality of the work. The Department of Labor looks back over several months to ensure that the salary is paid consistently. If an employer fails to consistently meet the salary test, then the employee may be owed overtime for the prior weeks in which he or she worked over 40 hours.

Cash Payments and Overtime Violations

The wage and hour laws require that all private sector employers must pay overtime to all non-exempt employees. Cash payment to employees for overtime hours at their regular hourly rate is not uncommon in the hospitality industry, even though it is illegal and creates an enormous potential liability for employers.

Employers who pay cash to employees without generating a payroll record run a significant risk of having to double pay employees. The law requires that employers must record and maintain proof of all hours worked and wages paid. If an employee claims to have worked without pay, the employer must produce records to prove that all wages were paid.

If the employer does not have those records because it did not have employees punch or sign in and out, or because it paid employees cash “off the books,” then the only evidence is the word of the employees. Employees can actually lie about both the number of hours worked and that they were not paid for these hours, and the employer may have to pay back wages including overtime to these employees.


It is no longer safe to assume that business as usual or the way that everyone else does it is OK. If a restaurant or hotel has any doubts about its pay practices, it is wise to consult with an employment attorney or a human resources company to save significant legal bills and unpaid wage claims in the future.

Steven G. Carling is an associate in Underberg & Kessler’s Labor & Employment and Litigation Practice groups. He concentrates his practice in the areas of employment discrimination, wage issues, trade secrets, non-competes and other employment-related matters.