Don’t Get Burned: Misclassifying Managers under the FLSA.

In 2001, a Tennessee federal court slapped Treetop Enterprises, Inc., a Waffle House franchisee, with a damage award of over $2.8 million dollars (plus prejudgment interest and attorneys’ fees) in a lawsuit alleging that Treetop had misclassified its managers as exempt from overtime compensation under the Fair Labor Standards Act (“FLSA”). While astonishing at the time, it proved to be the precursor to a cottage industry of copycat lawsuits — with companies like Taco Bell and a whole host of others being hit with huge damage awards or agreeing to costly settlement demands.

While claims alleging misclassification of managers have made headlines in the hospitality industry for years, it is still “business as usual” among today’s plaintiffs bar. In fact, this issue is even more significant now because, under the Obama Administration’s directive, the U.S. Department of Labor (“DOL”) has amplified its efforts to crack down on employers (especially restaurant owners) that misclassify employees as being exempt from the overtime provisions of the FLSA. Indeed, New York restaurant owner Mario Batali recently agreed to a $5.25 million dollar FLSA settlement, which serves as a stark reminder as to the importance of reviewing whether your managers are properly classified as exempt.

According to the DOL, both restaurants and quick-service eateries, defined as “establishments which are primarily engaged in selling and serving to purchasers prepared food and beverages for consumption on or off the premises,” are subject to the FLSA overtime provisions as long as they have annual gross sales that amount to at least $500,000 from one or more locations. If your eatery meets this definition, you are potentially subject to FLSA overtime obligations.

Under the FLSA, the general requirement is that all employees are entitled to be paid at least minimum wage for all hours worked and one and one-half times their “regular rate” of pay for all hours worked over 40 in a work week. There are, however, several exceptions (or exemptions) to this general rule.

If all of your managers are paid on an hourly basis and receive overtime compensation for all hours worked over 40 in a work week, then you have little, if anything, to worry about. However, if your managers do not receive overtime compensation, then you must make sure that they satisfy one of the FLSA’s overtime exemptions.

Generally, federal law requires exempt managers to be paid a guaranteed weekly salary, often in excess of $455 per week. The guaranteed salary must be paid for any week in which the employee at issue performs any compensable work, and the salary must not be subject to deductions based on an employee’s quantity or quality of work. While certain limited deductions are permitted to be taken from a manager’s wages, including, for example, absences for one or more full days for personal reasons other than sickness or disability and certain disciplinary suspensions, no deductions are allowed for things such as cash register shortages, broken wine glasses, rule violations, etc. Significantly, improper deductions have the ability to convert an otherwise exempt employee to non-exempt status.

Once this “salaried basis test” is met, the inquiry turns to whether the manager is performing the types of duties required to be exempt. The most likely exemptions at issue for restaurant employees are the FLSA’s executive and administrative exemptions. For the executive exemption to apply: (1) the employee’s primary duty must be management of the enterprise or of a customarily recognized department or subdivision; (2) the employee must customarily and regularly direct the work of two or more other employees; and (3) the employee must have the authority to hire or fire other employees (or their suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees must be given particular weight). For the administrative exemption to apply: (1) the employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and (2) the primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

Because many restaurant managers, particularly assistant managers, have little to no discretion as to business matters and spend much of their time cooking, cleaning, expediting, refilling water glasses, etc., they often do not meet the “duties test” part of either exemption. Federal law makes clear that in order to be an exempt executive, the manager must supervise the equivalent of two, full-time employees, have discretionary authority, and be able to make, or effectively recommend, personnel changes. The administrative exemption can also be difficult to satisfy in the restaurant context, as it requires an employee’s primary duty to be the performance of non-manual work, and the employee must exercise of discretion and independent judgment with respect to matters of significance. Because each of the elements for the executive and administrative exemptions have been thoroughly analyzed and interpreted by the DOL and the courts, it is important to have a labor and employment attorney evaluate whether your employees meet these threshold requirements.

To help avoid significant, costly misclassification issues, employers in the restaurant industry should be careful to implement and adhere to the following guidelines.

1. Understand wage and hour obligations. Managers should review with human resources personnel their current wage and hour commitments and obligations.

2. Know policies and classify employees properly. If your company already has policies in place regarding job duties, wages, and hours worked, they must be carefully reviewed and properly implemented. Also, review the company’s written policies and look for disparities between company policy and practice and the provisions of the FLSA, and you should consult with labor and employment attorneys to confirm proper interpretation of current obligations, including employee classification.

3. Maintain timecards and other records. Employers should consider maintaining adequate and accurate timecards and records for all employees (hourly and salaried) to guard against frivolous claims and minimize exposure to valid claims. Documents should be maintained in a safe, secure location for at least three years. Employees claiming wage and hour violations, including owed overtime, may be keeping their own records, and, for restaurant owners that have no way to track work hours of employees, including those believed to be exempt, they will be at a significant disadvantage if faced with an FLSA lawsuit.

4. Audit wage and hour practices. If your company already has policies and procedures in place, they must be adequately audited on a regular basis. For example, review the company’s written policies and, through direct consultation with employees at different levels, look for disparities between company policy and practice and the FLSA’s requirements.

5. Issue new or revised written policies as necessary. If written policies or practices do not align with applicable wage and hour laws, the company should remedy deficiencies immediately to affirm the company’s ongoing commitment to wage and hour compliance.

6. Training managers. When new or corrected policies or procedures are put in place regarding job duties, hours worked, wages, etc., supervisory employees must be fully trained on such policies and procedures to ensure that they understand their proper implementation.

7. Titles are not everything. It is important to remember that titles are not determinative of whether an employee is exempt from the provisions of the FLSA (i.e., putting “Manager” in a job title does not automatically qualify an employee for an exemption). Rather, all of the above-described elements must actually be demonstrated for the exemption to apply.

8. Do not assume. Do not make assumptions when dealing with wage and hour issues, as the consequences can be costly and burdensome. For example, do not assume that because an employee is paid a salary that he or she is exempt from the overtime requirements of the FLSA. Often, employees that receive a salary may be non-exempt (or entitled to overtime) under the FLSA. Also, do not make the costly assumption that your employees will not try to sue you for wages they believe to be owed.

The failure to implement and follow these guidelines can have business-shuttering consequences. Indeed, the existing penalties for FLSA violations include liquidated damages (i.e., double back wages) and attorneys’ fees and court costs. As such, the financial impact can be devastating because double back wages could be awarded to tens, if not hundreds of employees, extending as far back as three (3) years for willful violations of the FLSA. Too many restaurants have learned about these penalties the hard way.

For example, Boston Market Corporation recently faced two FLSA collective class actions, one brought by managers and one brought by hourly employees. According to the managers, they were considered exempt under the FLSA and denied overtime despite working in excess of 50 hours a week and spending the majority of their time on non-exempt work. The managers claimed that the company’s management job requirements were uniform throughout the country and required them to regularly handle the same responsibilities as non-exempt hourly employees. Managers were allegedly required to greet customers, run cash registers, and help prepare food. Boston Market Corporation decided to settle both for a combined total of $3.75 million dollars, and this case illustrates that employers must be aware of how exempt, management-level employees are spending their time. If managers routinely help out with non-exempt work, the employer could be liable for unpaid overtime.

Similarly, the managers of another restaurant chain recently secured more than $500,000 in settlement proceeds from their employer as a result of claims that they were misclassified as exempt employees under the FLSA. Like the managers from Boston Market, the managers here alleged that they routinely worked more than 40 hours a week and were denied overtime and rest and meal breaks, while handling non-exempt duties. The settlement figure was smaller than some seen in recent years, but it was still notable in that there were a mere six plaintiffs. Indeed, big, nation-wide restaurant chains which classify all management-level employees as exempt and have standard job requirements are open to significant liability.

This was recently illustrated in a case dealing with assistant manager trainees at McDonald’s. There, a federal district court in Delaware approved a settlement that would provide over $2.4 million dollars to a collective class of assistant manager trainees nationwide. According to the allegations made by the assistant managers, they were misclassified as exempt employees even though they did not perform exempt duties. According to the plaintiffs, assistant managers are trained for one to three months on aspects of the business. During this time, the assistant managers do not perform managerial duties, but instead perform nonexempt tasks generally handled by hourly employees, like cooking and managing registers. While the exempt status of non-trainee assistant managers was not at issue in the case, the seven-figure settlement should serve as a clear warning to restaurant owners that management-level employees should not be classified as exempt if they function as non-exempt employees during training.

As yet another example of the costly impact misclassification can have on your restaurant operations, CWN Management, Inc. d.b.a. Claim Jumper Restaurants, was recently forced to settle FLSA claims brought by 76 former assistant managers by paying $6.5 million dollars. There, the named plaintiffs in the case, both assistant kitchen managers, claimed that they spent the majority of their time performing non-managerial tasks but were, nevertheless, classified as exempt employees under the FLSA.

Most recently, Taco Bell faced an FLSA collective action containing allegations that the company wrongly categorized assistant general managers as supervisors and denied them overtime pay. There, an assistant general manager at the fast food company’s Littleton, Colorado restaurant sued Taco Bell on behalf of other employees who held the same title or position. According to the plaintiff, who had worked for the company for several years, she and other assistant managers’ responsibilities included the same low-level work performed by subordinate employees, including cleaning, checking inventory and supplies, bussing tables, cooking, and manning cash registers. However, because Taco Bell claimed the assistant managers were covered by an FLSA exemption for supervisors, the assistant general managers were salaried employees, they were not paid for overtime when they worked more than 40 hours a week, and they were never fully compensated for the hours they worked. Taco Bell agreed to settle the case for $2.5 million dollars.

Published by: Georgia Restaurant Association