Ms. Bailey

Hospitality Law

Why is the Hotel Industry a Target for FLSA Prosecutions?

By Amy Bailey, VP of Finance and HR, TSheets

There's a big red bulls eye in the hotel industry. In fact, accommodation and food services ranks #1 in sheer volume for wage and hour prosecutions by the Department of Labor. That's 24.4% of all the cases that have been brought since 1985. To put that number into perspective, hotels, restaurants, and bars-from the behemoths to the holes in the wall-have been required to pay more than $276 million in government prosecutions alone, with an average payout of $9.5k for every business affected.

Why? Does this trend represent shady business owners getting their comeuppance? Not quite. As Daniel Abrahams, employment law specialist of Brown Rudnick LLP says, "Other than the IRS, the FLSA is about the most regulated area of American jurisprudence. A dispute with the DOL or a group of employees doesn't mean you're a bad employer. It just means that you ran afoul of some very complicated rules. There's no shame to be had in not knowing all the rules offhand, or running into trouble with these requirements."

That said, not knowing all the rules offhand is very different from failing to keep a pulse on emerging trends in FLSA wage and hour lawsuits, or understanding the factors that have placed the accommodations industry on the front lines.

Several factors emerge in the search for why this industry in particular has a target on its back.

Salary Thresholds

The salary range for accommodations and food services employees varies wildly, with chefs and restaurant managers earning upward of 40K. However, hourly rates hover just above minimum wage for a large contingent of employees in the food service/accommodations industry, and hover closer to $10 per hour for positions like line cooks. The industry is filled with middle-management positions that fall between the current overtime threshold of $23,600 and the new threshold of $47,467-meaning, these workers are currently considered exempt and allowed to work until the job gets done, even if that means putting in a 70 hour workweek.  Workers who currently find themselves in this limbo between the old cutoff and the new cutoff are those most likely to pursue-and win-a wage and hour lawsuit on the basis of misclassification and owed back wages for overtime. Because the salary cutoff hasn't been updated since 2004, workers just above the current cutoff who don't meet the job duties test are especially likely to bring lawsuits for misclassification against employers. And with the threshold nearly doubling in December of 2016, the number of misclassification lawsuits is likely to continue its upward trend.

Case in Point

Treetop Enterprises was required to pay $2.8 million in back wages (not to mention prejudgment interest and attorney fees) for misclassifying its managers as exempt from overtime. Why? It's tale as old as time in the accommodation and food services industry. Many business owners make the mistake of classifying managers as exempt solely on the basis of salary. However, the job duties test must be met as well. To put it simply, the employee must manage two or more employees regularly, have the authority to hire and fire other employees, and-here's the kicker-must spend the majority of their time on office-related tasks (not manual work) managing the enterprise (or a department of the enterprise) using independent judgment with respect to matters of significance.

Most restaurant and hotel managers have only minimal discretion when it comes to significant business decisions, and many spend the majority of the day pitching in with business as usual-cleaning, cooking, refilling water, checking in with customers, etc.

Multiple Locations

Employees scattered across multiple locations-whether that be in a franchise model or multiple stores-are a recipe for FLSA lawsuits. The ability to accurately keep track of employee hours across multiple locations can easily turn into a guessing game, or a shaky exercise in trust-that may come back to haunt an unsuspecting business owner.

Daniel Abrahams says, "Often you have employers who find themselves in legal trouble because they've done something they thought was actually 'employee friendly.'" In other words, employers who sees trusting employees and managers to keep an accurate log of hours may see it as a good thing and a sign of confidence in those employees. However, when disputes arise over hours paid, the evidence becomes 'he-said-she-said' rather than a concrete record of clock ins/clock outs and any edits made to the record. And with 80% of DOL prosecutions finding success when it comes to wage and hour lawsuits, he-said-she-said isn't holding up very well.

Implementing a solution that keeps track of employee hours in real time-and offers insight across multiple locations of who's on the job, when they arrived and departed, what they worked on during a shift, and whether or not overtime was accrued are all factors that can mean the difference between a brewing lawsuit and business as usual.

Paper Recordkeeping Practices

Most employees in the accommodations and food service industries (65%) still use paper or spreadsheets to track their time. Unfortunately, these dated manual processes far too easily lead to incomplete and lost records, rounded timesheets, he-said-she-said disputes, inaccurate payroll hours, and a significant record-keeping challenge (employers are required to keep employee time records for two years). It's important to understand that paper processes also increase business owners' vulnerability to lawsuits for the fact that speed is of the essence when a lawsuit threatens. Employers who do not respond to an employee's complaint in the short window of time allotted can mean that the statute of limitations (two years in an FLSA case) is tossed out-opening the door to higher damages and back payments. Scrambling through a backlog of paper timecards can take time you don't have-and cost a significant amount if the statute of limitations is rendered void.  Paper records may not hold as well in court-unlike an electronic record that shows exact times, and even locations and tasks completed.  

Doug Miller of Elarbee Thompson says, "Employers should consider maintaining adequate and accurate time cards 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."

Minimum Wage Violations

Because the margins for profit are often incredibly thin in the food service and accommodations industry, a significant portion of employees are low-wage or, often, minimum wage workers. Many others are tipped employees, which carries additional challenges in negotiating minimum wage laws.

It's for these reasons that minimum wage violations are especially problematic in the accommodation and food services industry. The DOL found that minimum wage violations were, "concentrated in the leisure and hospitality industry" and "most prevalent in the service occupations." And, because the department has deemed the industry a high risk for such violations, they're not only continuing their vigilance in prosecuting violations-they're stepping it up.

U.S. Secretary of Labor Thomas Perez said, "To address the scale of this problem, we will redouble our enforcement efforts and partnerships to ensure workers take home the wages they earned and deserve."

Overtime and Off-the-Clock Work

A sobering 80 percent of wage and hour lawsuits brought to court by the DOL involve overtime-or more accurately, the lack of payment for overtime hours. Players in the accommodation and food services industry don't often keep an 8-5 schedule, with many staying open 24-7 in some capacity. This can easily lead to regular overtime through extra shifts, covering for another employee, or short staffing-meaning a major vulnerability to lawsuits. Bonuses and tips also impact an employee's hourly wage significantly, which has a direct impact on an employee's overtime rate. Many employers in the accommodations and food service industries get into hot water for failing to take bonuses and tips into account when calculating an overtime rate.

Off-the-clock work is another significant weakness to lawsuits. Known as 'wage theft', off-the-clock work is when an employee is explicitly asked or implicitly encouraged to work without pay-whether that be spending a few extra minutes helping out after the employee has clocked out for the day, forcing the employee to work before or after a shift, insisting employees work through a meal break, or deducting the cost of uniforms or other mandatory items from paychecks. While employers may see these extra minutes or extra dollars as insignificant, for an employee working at a low-paying job, a few extra dollars or minutes add up and can make significant difference in the month's budget-and provide motivation to sue.

What's Next?

Digging into the factors at play in pushing the accommodations and food service industry to #1 when it comes to wage and hour lawsuits is a critical step but, unfortunately, it's just the beginning in protecting your business.

However, with a few ounces of prevention and expert advice, it's possible to minimize the risk and avoid potential lawsuits. Employment law experts Daniel Abrahams, Maria Hart, and Lee Schreter offer advice about how to avoid and respond to FLSA wage and hour lawsuits in What You Need to Know About FLSA Wage and Hour Lawsuits.

Amy Bailey oversees all of the finance, human resource, legal, and facilities operations at TSheets — a time tracking and employee scheduling app that’s used by 20,000 businesses worldwide. Her key role is to make the entire enterprise run smoothly, so the TSheets team can stay hyper-focused on helping its customer’s journey into greatness. TSheets is just one of a number of high-growth companies that Ms. Bailey has worked for during her career. Before TSheets, Ms. Bailey spent eight years working in the business assurance group at Coopers & Lybrand, now better known as PricewaterhouseCoopers following its 1998 merger with Price Waterhouse. Ms. Bailey can be contacted at 888-836-2720 or amy@tsheets.com Please visit http://tsheets.com for more information. Extended Bio...

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