Opening a new restaurant means navigating a maze of creative, logistical, and legal challenges that would make American film producer M. Night Shyamalan blush. From tricky wage and hour laws to devilishly short immigration forms, there are employment law hurdles lurking around every turn. With a little forethought, new restaurants can avoid being stuck in a legal nightmare.
Taking Care of Business and Working Overtime
Paying overtime, employing minors, and paying tipped employees—wage and hour concerns are among restaurants’ most enduring and frequent legal terrors.
The federal Fair Labor Standards Act (FLSA) generally requires restaurants to (1) pay a minimum hourly wage of $7.25; (2) pay overtime wages of one and one-half times an employee’s regular rate of pay for hours worked in excess of 40 during a work week; and (3) keep records with accurate information about each employee’s hours worked and wages earned.
A few of a restaurant’s employees, such as a general manager, executive chef and some assistant managers, may be exempt from these requirements, but the vast majority of restaurant employees are entitled to earn the minimum wage and overtime payments for hours worked over 40 in a workweek. This is the case regardless of whether employees are tipped and paid on an hourly basis, which is the most common scenario, or paid on a day-rate or weekly basis, which is more common for kitchen staff.
The most commonly misunderstood FLSA provisions relate to paying tipped employees. While restaurants can pay a direct cash wage lower than $7.25/hour (but no less than $2.13/hour) and count a limited amount of its employees’ tips (no more than $5.12/hour) toward the difference, the crucial take-away is tipped employees must always receive – through direct wage and/or tips—at least the federal minimum wage of $7.25/hour. In order to use this system of payment, known as a “tip credit,” the restaurant must provide prior notice to its tipped employees.
That said, state and local wage hour laws vary wildly. Many impose greater obligations on employers than the FLSA. For instance, California does not allow a lower cash wage for tipped employees; instead, restaurants must pay tipped employees at least the state minimum wage of $11 per hour. Therefore, it’s crucial to keep up to date with the laws in your restaurant’s state and city.
There are more restaurant wage and hour horror stories than Goosebumps novels.
This summer, a Mexican restaurant in the Midwest agreed to pay 23 employees more than $200,000 in back wages after a long-running investigation by the U.S. Department of Labor found a host of FLSA violations, including paying flat daily or weekly salaries to kitchen staff regardless of the number of hours worked, failing to maintain accurate and legally required records of the number of hours employees worked, and requiring minors under 16 to work past 9 p.m. and longer than 3 hours on school nights—a violation of the FLSA’s child labor provisions.
Earlier this year, a Pennsylvania sandwich chain restaurant agreed to pay $2.1 million to settle claims that it failed to satisfy the notice requirements of the tip credit provisions of the FLSA and Pennsylvania minimum wage laws. In addition to the $2.1 million settlement, the court required the sandwich chain to pay the tipped employees’ attorneys’ fees, which amounted to more than $600,000.
In order to avoid issues like this, there are several steps you can take to mitigate your risks.
First, you should work with your employment law attorney to determine from the beginning which positions at your restaurant are exempt from the FLSA’s overtime and minimum wage requirements. An ounce of prevention at the outset will save your restaurant pounds of attorneys’ fees and potential fines later. Next, consider implementing electronic timekeeping.
Also, the simplest method of calculating regular and overtime pay for non-exempt employees is a standard hourly wage that meets or exceeds the minimum wage. If you decide to use a daily or weekly rate for kitchen staff, those employees must still diligently record their time worked so that you or, ideally, your payment processing company, can ensure they are paid the applicable minimum wage and properly calculate overtime. Finally, if your restaurant takes a tip credit, you must inform the tipped workers in advance – preferably in writing and signed by the tipped employee.
Verifying Legal Work Status
Under federal law, restaurants must fill out an I-9 form for every employee at the outset of their employment. The I-9 form is meant to ensure all new hires are legally entitled to hold a job in the U.S. This seemingly simple two-page form is actually more complicated than The Shining.
But it is just a little error on a simple form – no big deal, right? Wrong. Mistakes on I-9s can subject restaurants to steep fines and penalties even if the restaurant never hired someone unauthorized to work in the country. For instance, fines for a single error on a single I-9 range from $216 to $2,156.
One real-world example of this is when a California restaurant unexpectedly received a notice of inspection from the Department of Homeland Security, Immigration and Customs Enforcement (ICE) requiring the restaurant to turn over its I-9 forms within days. The restaurant complied, and turned over 60 employee I-9 forms to ICE. However, ICE discovered that 32—more than half—contained errors. ICE also found that the restaurant entirely failed to prepare and/or present I-9s for four employees. After nearly three years of litigation, the Department of Justice issued a final order finding the restaurant liable for 36 violations of federal immigration laws. The restaurant was ordered to pay more than $18,350 in civil penalties—likely a drop in the bucket compared to the expense of litigating the case for three years.
So you do not end up like the California restaurant above, designate and provide training for a trustworthy and responsible person to fill out new employees’ I-9 forms for the restaurant. Also, keep all original completed I-9 forms and copies of documents presented by employees stored separately from other employee files in a secure location. Original I-9 forms must be retained for three years after an employee’s hire date, or one year after the date employment ends, whichever is later.
You might also consider signing up for E-Verify, an online system that allows employers to instantly validate an employee’s legal work status. Though restaurants are not generally required to use E-Verify, it is required in some states. Using E-Verify may help address common I-9 errors, but restaurants should discuss the pros and cons with an immigration attorney before signing up. Finally, conduct annual I-9 audits to ensure your restaurant has properly completed I-9 forms.
Dealing with employment law issues when opening and running a restaurant can be scary. To avoid these and other employment law nightmares, talk to your employment attorney as you develop your plan for opening your restaurant.