Restaurant failed to comply with preconditions for tip credit

Because a restaurant failed to provide its employees with sufficient notice, it was not able to offset its minimum wage obligations based on their receipt of tips, ruled the First Circuit. The employer’s contention that its due process rights were infringed because the Secretary of Labor failed to allege that the notice requirements of the tip credit were in dispute was without merit since the issue was plainly in the case. Moreover, the employer was required to present evidence that its waiters received notice of the tip credit in order to defeat the Secretary’s motion for summary judgment on this issue.
The employer operated a popular restaurant in Puerto Rico. In 2008, the Wage and Hour Division of the Department of Labor (DOL) commenced an investigation into the restaurant’s payroll practices. An investigator found that certain deductions taken from waiters’ pay violated the FLSA’s minimum wage provisions. Specifically, the restaurant deducted a “spillage fee” which frequently reduced their weekly pay below the minimum wage. The investigator also determined that certain employees had been misclassified as exempt from the overtime pay requirements, and that proper records had not been maintained for those employees.

Against this backdrop, the Secretary of Labor sued the restaurant alleging minimum wage, overtime, and recordkeeping violations. Following discovery, the Secretary moved for partial summary judgment on the minimum wage claims, arguing that the spillage fee constituted an impermissible deduction from the employees’ wages and that the restaurant had failed to provide sufficient notice to employees to enable it to offset their minimum wage obligations. The restaurant filed a cross motion for summary judgment. A magistrate judge recommended denying the restaurant’s motion and granting the Secretary’s motion. The district court agreed and awarded damages in the form of payment of wages owed. After the district court denied the restaurant’s motion to alter or amend the judgment, this appeal ensued.

Due process claim

On appeal, the restaurant first challenged the district court’s determination that it failed to provide the waiters appropriate notice of the tip credit and so was ineligible to claim it. Here, the employer asserted that its due process rights were violated, and it was “ambushed” by the Secretary’s summary judgment motion because the lack of notice was never raised in the DOL’s investigation, nor pleaded in the complaint. However, because the restaurant did not mount any due process argument until after the district court had adopted the magistrate’s recommendation and entered judgment against it, it waived that argument.

At any rate, the restaurant’s Rule 59(e) motion to alter or amend the judgment was reviewed for abuse of discretion. Because its due process challenge was without merit, no abuse of discretion occurred in the district court’s denial of its motion. Here, the Secretary consistently alleged that the employer violated the minimum wage provisions of the FLSA. These allegations were sufficient to put the restaurant on notice that if it wished to assert eligibility for the tip credit as an exemption from the minimum wage requirement, it would have to carry the burden of showing that it met the requirements for such eligibility. The restaurant’s right to claim the tip credit was disputed throughout its negotiations with DOL.

Minimum wage violation

The Secretary asserted both that the waiters had not received proper notice of the restaurant’s intent to credit their tips against the minimum wage and that deductions taken from waiters’ pay were invalid for FLSA purposes. Thereafter, the Secretary moved for summary judgment on the minimum wage claim, which the district court granted. However, the restaurant asserted that a genuine issue of fact existed with respect to whether it provided notice to the waiters regarding the tip credit. Here, the restaurant faulted the district court’s reliance on testimony from a waiter that, when he was first hired, he was not told that any portion of his tips would count toward the minimum wage. To defeat summary judgment on this issue, the restaurant had to do more than point to a dearth of evidence. It had to adduce definite, competent evidence showing that its waiters were informed of the tip credit. It failed to do so.

Individual liability

Finally, the restaurant asserted that the district court erred in entering summary judgment against the individual defendants in this case, and that to cure this error, the court should have granted the motion to alter or amend the judgment. The individual defendants were the owner and general manager of the restaurant. However, the individuals admitted that they had “active control and management of the corporation, regulated the employment of persons employed by the corporation, and acted directly and indirectly in the interest of the corporation in relation to the employees.” In view of these admissions, the appeals court observed that it was difficult for the individual defendants to overcome the imposition of individual liability.

Moreover, the individual defendants never questioned the Secretary’s claim that they were personally liable before the magistrate judge. In this instance, the individual defendants admitted a string of material facts strongly suggestive of individual liability. Further, they made no effort to withdraw those admissions or to pursue arguments against individual liability until after both the magistrate judge and the district judge had ruled against them. Thus, the district court did not abuse its discretion in refusing to vacate the judgment as to the individual defendants. (Perez v Lorraine Enterprises, Inc dba Piccolo e Posto, 1stCir, 164 LC ¶36,267).

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