Consult an Attorney before Making Changes to Employee Compensation to Avoid Violating FLSA

An employer in Ohio recently learned that Benjamin Franklin’s advice of “an ounce of prevention is worth a pound of cure” can be applied to employee compensation systems.  When the new owner took over the Brown Derby Roadhouse restaurant, it decided to reclassify restaurant servers as independent contractors.  In doing so, the owner implemented a “table renting” system, where the servers received no pay from the restaurant, kept all of their tips, but had to pay the owner a “one dollar per table per shift” fee.  While the servers still had to clock in and out, the owner zeroed out their work hours for payroll purposes. 

Not surprisingly, some of the servers objected to the new system.  Sensing that there could be a problem, the owner finally consulted with an attorney who confirmed that the practice of table renting is illegal under the Fair Labor Standards Act (“FLSA”).  The owner then ended the practice and returned the servers to the payroll.

Unfortunately for the employer, the Department of Labor (“DOL”) began an investigation of its compliance with the FLSA.  When the DOL discovered the employer’s prior use of “table renting,” it filed suit seeking unpaid minimum wages and overtime compensation.  During the litigation, the employer admitted that it violated the FLSA and had treated its employees as if they were contractors.

The FLSA allows courts to impose liquidated damages on violating employers, but a court has the discretion to award no liquidated damages if it finds that an employer acted in good faith and had reasonable grounds to believe it was not violating the law.  To demonstrate good faith, the employer has to show that it took steps to determine the requirements under the FLSA but unknowingly violated the requirements.

The restaurant employer argued that it acted in good faith because it eventually consulted with a lawyer regarding the legality of its payment system.  The court found that, while there was no evidence of bad faith, the employer bore the burden of proving that its actions were in good faith.  The court then stated that this required the employer to show that it sought legal counsel before it implemented its system, and that the fact it eventually sought legal advice did not absolve it for implementing an illegal system.  The court then ordered the employer to pay liquidated damages in an amount equal to the total back overtime and minimum wages it owed.

If your company is considering making changes to its compensation system or how it classifies employees and independent contractors, run the changes by an employment attorney before they are implemented to avoid potential liability.

Jeff Wilson is a labor and employment attorney at Pender & Coward who works with employers to design employment policies and procedures that help prevent problems before they occur. Contact Jeff at (757) 502-7341 or jwilson@an-orange.com.