Where Tips End and Wages Begin

One year ago, this blog featured a post that outlined various reasons why the restaurant industry’s use of tips in lieu of guaranteed wages had come to provoke, in the author’s words, “a firestorm of criticism”: that reliance on tips as a significant component of server take-home pay 1) destined many servers to earning a sub-minimum wage; 2) encouraged female servers to tolerate sexual harassment by their customers; and 3) resulted in pay discrimination unrelated to the quality of servers’ work, a consequence of customer biases and their impacts on the amounts tipped.

Since the post’s publication, this firestorm has continued unabated. In fact, Uber even pointed to customer bias as a reason not to add a tipping function to its ride-sharing app, as its competitor Lyft has done. Moreover, recent modeling by FiveThirtyEight illustrates the volatility of tip-based incomes in the restaurant industry, as well as divisions between different classes of restaurants vis-à-vis the tipped amounts that their servers typically earn, which further underscores the question whether tipping can serve as a reliable substitute for set pay.

In this vein, a recent opinion out of the U.S. Court of Appeals for the Tenth Circuit sheds new light on the shortcomings of tipping as a reliable form of compensation, highlighting the dangers posed to employees by the liminal space between “tips” and “wages” under the Fair Labor Standards Act (FLSA).

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The Current State of Overtime

The New Rule

In May 2016, the Department of Labor, under the direction of President Obama, issued a final rule updating the overtime provisions of the Fair Labor Standards Act.  The Department raised the minimum annual salary for employees exempt from overtime pay from $23,660 to $47,476.  The Department set December 1, 2016 as the effective date for the new rule, implementation of which would have affected over 4 million employees.

Underlying the new overtime rule is the desire to protect workers from being over-worked and under-paid.  As the United Food and Commercial Workers union stated in 2015, the previous threshold of $23,660 is below the poverty line, and reflects only one salary threshold increase since 1975.  As long as employers could classify their workers as “managers,” they could avoid paying them overtime.  The new rule would have required employers to either raise the salaries of low-level managers to meet the $47,476 threshold, or reclassify them as hourly employees entitled to overtime pay.  It was intended to encourage employers to spread employment, and hire multiple workers to perform a job rather than forcing a single worker to work 70 hours a week.  Critics argue the rule would hurt small businesses and reduce jobs.

As many employers were making changes to come into compliance with the new rule by the approaching December 1 deadline, a federal judge in Texas ordered a preliminary injunction barring nationwide enforcement of the rule.  A number of private business groups and 21 states had challenged the rule as an overreach of executive power.  The district judge agreed, claiming Congress, not the Department of Labor, should be responsible for making changes to the minimum salary requirement.

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Today’s News & Commentary — February 22, 2017

The influx of refugees into upstate New York has helped revitalize previously-suffering communities.  As the New York Times reports, “[t]he impact has been both low-budget and high-tech”: refugees have provided local businesses with inexpensive, willing labor; foreign-born students have enrolled — paying tuition and fees — at upstate schools; and street-level entrepreneurs have opened new shops.  Somewhat ironically, the cities’ struggles made them popular locations to settle refugees.  Because people left, housing prices dropped, and refugees came in and were willing “to put in the sweat equity that a lot of people weren’t anymore.”  That, in turn, “put properties back on the tax rolls.”

The Wall Street Journal also weighs in on the benefits that refugees bring to the economy. In addition to providing a key source of labor, many refugees “bring a resilience and level of expertise that makes them well-suited for learning on the job.”  According to a study from the Migration Policy Institute, roughly 28% of the refugees over the age of 25 who settle in the U.S. arrive with at least a bachelor’s degree.  The Wall Street Journal notes that skills from abroad may not always translate, and some employers have found that refugees need help with translation services, resume writing, American-style management techniques, and tips for navigating their new lives.  Despite potential training challenges, however, refugees can provide companies with  “a strong competitive advantage,” enabling them to better understand, for example, the needs of clients in key markets across Asia, Africa, and the Middle East.

Chief Judge Patricia Elaine Campbell-Smith of the U.S. Court of Federal Claims recently held that the government had violated the FLSA by failing to examine whether it was required to pay employees who continued to work during the partial government shutdown in 2013.  That those workers were later paid for their time was irrelevant. The Washington Post explains that the decision entitles workers to minimum wage pay for the hours they worked between October 1 and October 5, 2013.  Judge Campbell-Smith ordered the government and the plaintiffs to calculate amounts due and report back by April 7.

The New York Times editorial board posits that blaming robots for job loss, “while not as dangerous as protectionism and xenophobia, is also a distraction from real problems and real solutions.”  The Times points out that if automation were rapidly accelerating, labor productivity and capital investment would be increasing as well.  But the data shows the opposite: in the 2000s, labor productivity and capital investment decelerated.  The problem lies instead with “politicians, who have failed for decades to support policies that let workers share the wealth from technology-led growth.”

Today’s News & Commentary — November 7, 2016

The week-long strike by transit workers in Philadelphia, which shut down the city’s transit system and could have reduced voter turnout, has ended.  According to The Philadelphia Inquirer, the four-year contract between Transportation Workers Union Local 234 and the Southeastern Pennsylvania Transportation Authority covering 4,738 workers must still be formally approved, but SEPTA will resume some operations today and full operations tomorrow, Election Day.  Details of the agreement have yet to be released.  SEPTA had considered pursuing an injunction to enjoin the strike on Election Day, and eventually unsuccessfully sought a court order to enjoin the strike completely.

A federal court has ruled that the EEOC correctly interprets Title VII of the Civil Rights Act of 1964 to prohibit LGBT workplace discrimination, in one of the first cases brought by the agency under its interpretation of the law.  Buzzfeed notes that Judge Cathy Bissoon of the Western District of Pennsylvania found in denying a Motion to Dismiss in EEOC v. Scott Medical Health Center, P.C. that “there is no more obvious form of sex stereotyping than making a determination that a person should conform to heterosexuality.”  She further wrote that “forcing an employee to fit into a gendered expectation — whether that expectation involves physical traits, clothing, mannerisms or sexual attraction — constitutes sex stereotyping and, under Price Waterhouse, violates Title VII.”  The case will now move forward.

Chicago may be the “Second City,” but its federal court fielded the fifth-most wage-and-hour lawsuit filings in America last year.  Per Crain’s Chicago Business, in the Northern District of Illinois “542 lawsuits were filed in 2015 alleging an employer violated the Fair Labor Standards Act.”  The number of filings was exceeded only by courts in New York, Miami, Orlando and Tampa.  Furthermore, “wage and hour lawsuits rose 117 percent in Chicago between 2011 and 2015, mirroring a national uptick.”

In other news, NPR reports on how poverty-level wages for US child care workers may explain high industry worker turnover, while The New York Post features a program which assists autistic workers with job placements.

Gig News: October 28, 2016

In a major ruling with widespread implications for gig economy workers in the United Kingdom, an employment tribunal in London found that Uber drivers are not self-employed independent contractors, but rather Uber workers.  The Guardian reports that “the case could open up the technology firm to claims from all of its 40,000 drivers in the UK, and force other companies in the so-called gig economy to review the way that they are employing staff.”  Drivers will now be entitled to the national living wage, as well as paid holidays and paid rest breaks.  Uber is likely to appeal the ruling.

In the United States, Uber has again been sued by drivers in New York who accuse Uber of wage theft.  Bloomberg BNA notes that the drivers originally filed a class action alleging violations of the Fair Labor Standards Act and New York Labor Law, but now four of the drivers “who haven’t opted out of arbitration agreements with Uber, will contend the National Labor Relations Act bars arbitration pacts containing class action waivers” as well as the same substantive FLSA and NY Labor Law violations.  As a result, “the six drivers in the original lawsuit who opted out of arbitration can more quickly move for court consideration of their ‘wage theft’ claims.”  The drivers contend that “Uber’s pay practices mean many drivers working more than eight hours a shift earn less than minimum wage and receive no overtime pay.”

Meanwhile, Uber is moving ahead with the formation of company-funded quasi-unions which will purport to represent drivers and yet promise not to strike.  According to Josh Eidelson of Bloomberg Businessweek, the Uber-funded Independent Drivers Guild was launched in partnership with the International Association of Machinists and Aerospace Workers (IAM) and claims to represent all 40,000+ Uber divers in New York City in arbitration hearings challenging driver deactivation, and also offers “such perks as discounted legal assistance and chances to air grievances at monthly meetings with Uber officials.”  However, the IDG wasn’t voted for by drivers and has no collective bargaining agreement, and some argue it represents an effort by Uber to resist true unionization.

Today’s News & Commentary — July 5, 2016

A bill has been introduced to amend the Fair Labor Standards Act – to exclude poorly-paid minor league baseball players from its protections.  The “Save America’s Pastime Act” would clarify the FLSA to explicitly state that minimum wage and overtime provisions do not apply to “any employee who has entered into a contract to play baseball at the minor league level.”  According to Above The Law, the Act is a response to a federal lawsuit proposed as a class action that alleges minor league baseball salaries violate the FLSA.  Notably, “Starting pay for minor leaguers is between $1,100 and $2,150 a month, and only during the season” despite year-round conditioning and training requirements.

As the Trans-Pacific Partnership (TPP) becomes a sensitive campaign issue, Labor Secretary and potential Democratic vice-presidential candidate Tom  Perez continues to defend his role in creating it while not saying if he supports it.  The Hill reports that Secretary Perez defended his work on the TPP but “dodged pointed questions about whether or not he personally supports the TPP.”  Secretary Perez also defended the TPP’s enforcement provisions and putting American workers first, stating “If we’re going to succeed in protecting American workers, we’ve got to make sure we have tough, enforceable provisions.  And that’s what I’ve done.”

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Overtime Exemption for Auto Dealership Service Advisors

The Supreme Court on Monday issued a narrow decision in Encino Motorcars, LLC v. Navarro rejecting a U.S. Department of Labor interpretation of the scope of the overtime exemption for auto dealership sales employees.  But the Court left open the possibility that the DoL could issue a new rule determining service advisors to be entitled to the protections of the Fair Labor Standards Act.

Section 213(b)(10)(A) of the Fair Labor Standards Act exempts certain auto dealership employees from legally mandated premium pay for work in excess of 40 hours a week.  The exemption is for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles, trucks or farm implements.”  In 1970, DoL issued an interpretive regulation defining a “salesman” to be one who sells vehicles, and specifically said that service managers, service advisors or others whose job is to recommend necessary service and assign and supervise mechanics are not exempt from the overtime protection.  Some courts rejected the DoL regulation, and in 1978 DoL issued an opinion letter concluding that service advisors are exempt from the overtime requirement, acknowledging that the new interpretation departed from its 1970 regulation but noting that courts had rejected the DoL’s 1970 regulation.  At the end of the Bush Administration in 2008, DoL sought public comment on a proposed rule stating service advisors were exempt from overtime, again noting that courts had determined service advisors to be exempt.  But DoL did not promulgate the proposed rule, and in 2011 it issued a final rule stating that service advisors are not exempt, defining the exemption for “salesman” to include only employees who sell vehicles.

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