It’s getting hot in the kitchen. And expensive. While the boom in wage-and-hour litigation certainly has not confined itself to any particular industry, restaurants have increasingly found themselves well-represented on the defendant side of the caption. The U.S. Department of Labor and private litigants continued to target the industry in 2012, and the trend appears to be gaining momentum. The Labor Department has taken the position that low-wage employees, like many in the restaurant industry, are particularly vulnerable to unlawful wage-and-hour practices and has classified restaurants as a "high-risk industry" for violations of the Fair Labor Standards Act (FLSA). The Labor Department is not all talk, either. Targeted enforcement initiatives to investigate whether restaurants are complying with the FLSA’s overtime and minimum-wage provisions have been implemented across the country — e.g., Massachusetts restaurants, Release No. 12-445-BOS/BOS 2012-051; Georgia restaurants, Release No. 11-1357-ATL (506); Illinois restaurants, Release No. 11-24-CHI; Utah restaurants, Release No. 10-209-DEN; Los Angeles-area restaurants, Release No. 12-407-SAN (SF-73), etc.

These enforcement initiatives have borne fruit. The Labor Department’s Wage-and-Hour Division reported having collected more than $225 million in back pay for FLSA violations in all industries for fiscal year 2011, restaurants representing about 10 percent of that total. Restaurants can expect more of the same attention in 2013: The division requested an additional $10 million in funding for fiscal year 2013 to pursue "a continued shift to greater directed and complaint activity in priority industries." Think a "high-risk industry" might also find itself a "priority industry" in the department’s enforcement scheme? So do we.

The trend, of course, has not gone unnoticed by the plaintiffs bar. Nationwide chains with local franchise operations have been targeted by class and collective actions for allegedly failing to pay mandated minimum wages and off-the-clock work. In fact, according to statistics published by NERA Economic Consulting, nearly 10 percent of all private wage-and-hour settlements in 2012 involved defendants in the food or food services industry, and the average settlement amount clocked in just north of $2 million.

The trend hit close to home recently when Philadelphia staple Chickie’s and Pete’s found itself the latest defendant in a series of class and collective action lawsuits targeting the wage-and-hour practices of bars and restaurants. Chickie’s and Pete’s, which has multiple locations and approximately 1,000 employees, was once named the nation’s top sports bar by ESPN, but now faces litigation joined by more than 60 former and current employees alleging unlawful tip pooling, gratuity-skimming and compensation practices.

Andrew Laplante, the lead plaintiff in one of three cases filed against Chickie’s and Pete’s in the U.S. District Court for the Eastern District of Pennsylvania, worked as a bartender for nearly three years at Chickie’s and Pete’s Philadelphia airport location. Laplante contends that he and other employees were obligated to fork over "Pete’s tax" — a cash payment amounting to somewhere between 2 and 4 percent of gross sales for the night — at the conclusion of their shifts. According to Laplante, a portion of this "tax" revenue was earmarked to cover credit-card fees and additional compensation for nontipped employees such as bus staff, although a sizable portion also allegedly lined the pockets of the owners. Lou Pechman, Laplante’s attorney, runs the website waiterpay.com, which is focused solely on alleged violations of wage-and-hour laws by the restaurant industry.

In response to the allegations in the lawsuits, Chickie’s and Pete’s has refunded a portion of "Pete’s tax" revenue collected in 2012 directly to its current or former employees. The suits also allege, however, that some staff were compensated on a flat rate basis of $15 per shift, which failed to take into account legal obligations with regard to minimum wage or overtime pay. Postings appeared at Chickie’s and Pete’s shortly after the lawsuits were filed, indicating that tipped employees would be paid a minimum hourly wage as opposed to a flat rate of $15 per eight-hour shift worked.

The Labor Department joined the fray shortly after the lawsuit was filed, announcing that it would investigate the alleged pay violations. While one investigation does not a trend make, the department’s interest in Chickie’s and Pete’s further supports the now widely-accepted notion that restaurants are clearly a targeted industry for wage-and-hour compliance enforcement initiatives. Even amongst local establishments, Chickie’s and Pete’s hardly finds itself the only belle at the ball. Restaurant company 681 Complex Inc., d/b/a na’Brasa Brazilian Steakhouse and Iron Abbey Gastro Pub in Horsham, Pa., agreed just last October to pay $110,369 in back wages to workers resulting from a Labor Department investigation of alleged federal minimum wage, overtime and record-keeping violations.

Why restaurants? Because low-wage employees, razor-thin margin cash businesses and complex legal issues combine to make fertile ground for alleged wage-and-hour violations. Unlike larger corporate entities, restaurants rarely, if ever, maintain HR professionals or legal counsel on site, and in the case of smaller establishments may forego these functions entirely. Additionally, plaintiffs attorneys often contend that wage-and-hour issues germane to the restaurant industry can be litigated on a collective basis, through representative proofs, rendering these lawsuits more amenable to class or collective action treatment. To make matters even worse, wage-and-hour claims typically are excluded from general liability insurance policies and even the vast majority of employment practices liability (EPL) policies contain exclusions for wage-and-hour exposure. In fact, even those EPL policies offering coverage for wage-and-hour violations generally limit the scope of coverage to defense costs.

The FLSA and the Pennsylvania Minimum Wage Act require that covered, non-exempt employees be paid at least a minimum wage of $7.25 per hour for all hours worked, plus time and one-half their regular rates of pay for hours worked beyond 40 in a work week. Deductions or other employee charges that reduce an employee’s wages below the minimum wage are prohibited. An employer of a tipped employee is required to pay no less than $2.13 an hour ($2.83 an hour in Pennsylvania) in direct wages provided total compensation inclusive of tips received constitutes at least minimum wage. Otherwise, the employer must make up the difference. Additionally, tip pool arrangements may not include employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs, etc. Employers also are required to provide notice of tip credit provisions to employees, maintain accurate time and payroll records, and comply with certain restrictions applicable to workers under 18 years of age.

Common allegations of wage-and-hour violations in the restaurant industry include the following:

• Required preliminary (e.g., kitchen preparatory work) or postliminary (e.g., cleanup) work that is performed off-the-clock.

• Failure to ensure that tipped employees earn at least minimum hourly wages, inclusive of tips received during the shift.

• Tip-sharing pools benefiting either management or nonservice staff who do not customarily and regularly receive tips.

• Failure appropriately to pay the "dual" employee who sometimes works as service staff, but also works in a nontipped capacity on other occasions, for example, as a host or hostess.

• Fixed compensation per shift (or per pay period) for non-exempt employees, which does not take into account the exact number of hours worked or premium pay obligations for overtime worked.

• Mandatory training, which is either unpaid, or for which tipped employees make less than minimum wage on account of having not received tips during the training activities.

• Misclassification of employees as exempt or independent contractors.

• Deductions from employees’ pay for customer walk-outs, breakage of plates or glassware and/or uniforms that result in employees being paid below the required minimum wage.

Of course, local laws may also come into play. For example, Philadelphia has its own gratuity-protection bill, which precludes owners and managers from recouping employees’ gratuities on credit-card sales to cover processing fees charged by the card issuer.

Restaurants seeking to reduce exposure to wage-and-hour claims should consider monitoring their payroll and work-time practices in order to ensure compliance with applicable wage-and-hour laws. Specific initiatives might include the following:

• Reviewing timekeeping practices to ensure that non-exempt employees are recording all time worked, including potentially compensable activities performed before or after a scheduled shift, or during mandatory training activities.

• Analyzing employee compensation, tip credit and tip-sharing practices.

• Auditing payroll practices to eliminate improper deductions and verify the regular rate of pay that employees are paid (i.e., ensure that bonuses, shift differentials and other remuneration required to be considered for overtime calculation purposes is included).

• Auditing job classifications to ensure that employees have been properly classified as exempt or independent contractors.

• Posting required information regarding wage-and-hour laws, and training supervisors and employees on legal requirements and compliance.

• Investigating and taking appropriate action where necessary to correct any unlawful practice(s) identified.

In the wage-and-hour arena, an ounce of prevention often is worth a pound of cure, particularly if litigation and/or enforcement initiatives already in progress are just an appetizer for what may be a very distasteful main course. Owners and operators of restaurants should consider proactively assessing their current wage-and-hour practices as a means of attempting to avoid a large (and potentially uninsured) financial risk in the form of a Labor Department investigation or class/collective action litigation. •

Andrea M. Kirshenbaum is a principal in the Philadelphia office of Post & Schell and is part of the firm’s employment and employee relations law practice group. She litigates and provides compliance counseling on wage-and-hour issues for employers. She can be contacted at akirshenbaum@postschell.com.

Darren M. Creasy is an associate in the firm’s Philadelphia office and is part of the firm’s employment and employee relations law practice group. He litigates and counsels employers on best practices, litigation avoidance, and defense strategies in the wage-and-hour context. He can be contacted at dcreasy@postschell.com.