IN-HOUSE COUNSEL 56 PROFITABLE RESTAURATEURS ARE ALWAYS LEARNING

IN-HOUSE COUNSEL 56 PROFITABLE RESTAURATEURS ARE ALWAYS LEARNING

IN-HOUSE COUNSEL One of These Is Not Like the Other Avoiding Classification Liability of Restaurant Managers and Assistant Managers Classifying as exempt employees who do not meet certain criteria can be costly. By Alisa P. Cleek and Sean M. Libby If your restaurant is like most, your workforce is divided between nonexempt hourly employees and exempt salaried managers. But where do you draw the line? Most restaurants classify the general managers as exempt employees, but can assistant managers truly be classified as exempt? Are bar managers and kitchen managers properly classified as exempt salaried managers? More importantly, do you understand why some employees are considered exempt and not subject to the overtime requirements and others are not? When employers talk about salaried employees, they generally mean employees who are exempt from the Fair Labor Standards Act s (FLSA) overtime and minimum wage requirements. The FLSA generally obligates employers to pay employees at least the federal minimum wage for all hours worked as well as oneand-one-half times the employee s hourly wage for all hours over 40 worked in a workweek. The FLSA creates exemptions from these basic minimum wage and overtime requirements, however, for employees who meet certain criteria related to salary and duties. Classifying as exempt employees who do not meet these criteria can be costly. Misclassification often leads to time-consuming lawsuits by individual employees, or even large groups of employees, and the number of FLSA lawsuits filed continues to rise each year. Employees may be able to recover up to three years of unpaid wages and up to two times the amount of the unpaid wages. So, six-figure or million-dollar verdicts and settlements are fairly common when groups of employees are involved. Employers should ensure that they understand and fulfill their obligations and responsibilities under the FLSA to protect themselves and avoid putting their business in jeopardy. Common Classification Mistakes For those without experience in the FLSA and even for some who do the FLSA s exemption criteria can seem both vague and overly technical. It is therefore easy to run afoul of the law. Here are some of the common classification pitfalls that cause employers problems: Relying on employee preference. Employees may take pride in receiving a salary and view their salary as a sign that they are a valued part of a restaurant s management. Unfortunately, compliance with the FLSA s overtime and minimum wage requirements isn t voluntary. Even if an employee would prefer to be exempt, employers have an obligation to pay employees according to the FLSA. Failure to do so can result in a lawsuit and legal liability. Relying on employee titles. Just because an employee has a supervisor or manager title does not mean that the employee is exempt. The FLSA requires employers to consider a number of factors related to job duties and pay to determine if an employee is exempt. Managers and supervisors do not always meet the FLSA s exemption criteria. Whether an employee is titled manager, or even general manager, the actual worked performed by the employee will determine how the employee should be classified. Relying on job descriptions. While job descriptions can be very useful in determining the proper classification of employees, as with titles, they do not necessarily provide an accurate picture of an employee s duties, and the employee s actual duties will determine the employ- MARCH 2014 www.restaurantowner.com 57

ee s exemption status. Job descriptions, therefore, are only useful to the extent they are accurate. Relying on an employee s pay. Even if an employee currently receives a salary, the employee may still be nonexempt. In fact, an employee s salary can actually be harmful in showing that the employee is exempt. The FLSA generally requires that exempt employees receive $455 a week or more in salary. Employees receiving less are likely nonexempt. But, even if the employee is paid more than $455 a week, the employee may still be nonexempt if his or her job duties do not meet the remaining exemption criteria. Ignoring an employee s nonexempt work. An employee who performs many duties that would be considered typical of exempt employees may still be nonexempt if the employee spends a significant amount of time performing the duties of a nonexempt employee. Ignoring exemption status because an employee doesn t work overtime. Just because an employee does not regularly work overtime does not mean an employer can simply ignore its FLSA obligations. Indeed, even if the employer does not have to pay the nonexempt employee overtime, the employer may still have certain recordkeeping or meal break obligations. State law may add other obligations. As a result, proper classification is important even if an employee does not work overtime. Making Classification Decisions With these pitfalls in mind, how should an employer go about classifying its employees? The short answer is err on the side of classifying employees as nonexempt an employer can t incur liability for paying overtime to an employee that should be considered exempt. This may be impractical for a number of reasons, however, particularly for higher-level or general managers; management positions often require long hours and irregular schedules that would be hindered by the need to track time and pay overtime. Instead, a good first step in properly classifying employees is gaining an understanding of the exemptions available to restaurant employees. While the FLSA creates a number of categories of exemptions, two are particularly relevant to the restaurant industry: the executive exemption and administrative exemption. As mentioned earlier, to qualify for either exemption, an employee must be paid at least $455 a week in salary. But salary is just the first criteria. An employee must also meet certain job-duty requirements as outlined here: Executive exemption. To qualify for the executive exemption: The employee s primary duty must be management of the restaurant or some subdivision thereof. The employee must regularly direct the work of at least two or more full-time employees or the equivalent thereof. The employee must have the authority to hire or fire, or provide hiring and firing recommendations. Administrative exemption. To qualify for the administrative exemption: The employee s primary duty must be performing office or other nonmanual work that is related to management or general business operations. The employee must have the ability to evaluate and make some decisions on significant matters without direct supervision and oversight. Under both exemptions, an employee must be involved in the management of the restaurant. This is a broad term, but luckily the FLSA regulations provide some examples of activities that would be considered management, including, in relevant part: Interviewing. Selecting, and training of employees. Setting and adjusting rates of pay and hours of work. Directing the work of employees. Maintaining production or sales records for use in supervision or control. Appraising employees productivity and efficiency for the purpose of recommending promotions or other changes in status. Handling employee complaints and grievances. Disciplining employees. Planning employees work. Overseeing the safety and security of the employees or restaurant property. Planning and controlling the budget. In addition, whether a particular manager or assistant manager meets the requirements for either the executive or administrative exemption is based on a determination of the employee s primary duties. An employee s primary duty can be, but is not necessarily, the duty on which the employee spends the most time. According to the FLSA regulations, primary duty is the principal, main, major or most important duty that the employee performs. To determine an employee s primary duty, an employer should consider: The importance of the employee s exempt duties versus other types of duties performed by the employee. The amount of time spent on exempt work. The employee s relative freedom from direct supervision. The relationship between the employee s salary and the wages paid to other employees for performing similar nonexempt work. One common complication in the restaurant industry is that restaurant managers and assistant managers often spend some portion of their time helping out with tasks that are normally performed by hourly employees like running food, expediting, waiting on customers, cleaning and cooking. Performing this sort of nonexempt work does not necessarily disqualify a manager from being classified as exempt. The FLSA regulations suggest that an employee who spends more than 50 percent of his or her time on nonexempt tasks should usually be considered nonexempt. But, courts generally do not consider the 50 percent mark to be a firm rule. For example, in one prominent case, an assistant manager who spent 75-80 percent of her time on basic line-worker tasks and other nonexempt work was found to be exempt because her managerial tasks were important to the restaurant and were considered her primary duty. 58 PROFITABLE RESTAURATEURS ARE ALWAYS LEARNING

Another consideration is the employee s ability to control his or her work. The FLSA regulations suggest that exempt employees generally have the ability to decide if they will perform nonexempt tasks, and will usually be supervising hourly employees while performing this work. So, if a manager helps servers in the front of the house but continues to monitor the operation and efficiency of the restaurant and the performance of other servers, the manager may still be performing exempt work. In contrast, nonexempt employees are generally instructed to perform nonexempt tasks by a manager or supervisor, and have no supervisory obligations while doing so. Applying the Exemptions to Restaurant Managers Because an employee s exemption status is so dependent on the employee s specific duties, management employees with different levels of oversight and discretion may require different exemption classifications, even if they have the same job title. There are generally some notable differences, however, between general or store managers and assistant and kitchen managers. The first group is often considered exempt; though major limitations on a general manager s ability to oversee the restaurant and make decisions regarding its operation could even make a general manager nonexempt. The proper classification for assistant managers is more difficult and varies greatly depending on how duties are apportioned at a particular restaurant. General managers. General managers have been found exempt under both the executive and administrative exemption. Restaurant general managers often have the authority to interview prospective employees, make hiring/firing decisions, schedule employees and apportion work, train, evaluate and discipline employees, make product-ordering decisions, oversee their stores financial performance, take steps to control costs, and ensure compliance with company policies. General managers are also often responsible for overseeing the staff of the restaurant while on duty. Such tasks would likely be considered management tasks, and if they are the general manager s primary duty, the manager would likely be exempt under the executive exemption. General managers who perform such duties have even been found exempt if they spend time performing tasks like cleaning, unloading supplies, cooking and serving food, or where they performed some tasks according to set procedures and checklists. Close oversight by an owner or regional manager would also not necessarily prevent a general manager from being exempt. In one instance, a general manager at a quick-service food and coffee shop was exempt even though his regional manager visited three or four times a week and called throughout the day. Because general managers often have the authority to make significant decisions regarding the management of their restaurants, they may also be exempt under the administrative exemption. To fall under this exemption, the general manager would likely need to work with relatively little oversight. But, if the manager has enough authority to make important business decisions, that may be sufficient to establish the administrative exemption. For example, a restaurant manager in New York was found to qualify for the administrative exemption because her primary duty was managing the restaurant as well as negotiating contracts and hiring and firing employees. Assistant and kitchen managers. Assistant or kitchen managers, in contrast, often have much less authority, especially in smaller restaurants, and may well be nonexempt. The authority provided to such managers varies wildly by company and even within companies. An individual s actual level of oversight and authority will generally determine whether an assistant or kitchen manager is properly considered exempt. To the extent assistant/kitchen managers are found exempt, they usually qualify for the executive exemption. Often, assistant/kitchen managers will spend some portion of their time performing nonexempt tasks like cooking food and preparing orders, operating the cash register, cleaning the store, serving customers and routing delivery drivers. An assistant/kitchen manager who performs such tasks may nevertheless be exempt if those tasks are not the manager s primary duty. One factor often highlighted by courts is the level of autonomy the manager has while on duty, even while performing nonexempt work. Assistant managers have been found exempt on a number of occasions where they routinely worked as the manager on duty and were responsible for the oversight of operations during their shift. As an example, an assistant manager in Maryland was found exempt under the executive exemption, despite spending a significant amount of time performing nonexempt work, because the assistant manager had sole responsibility for the restaurant during certain shifts and performed various training and oversight functions related to the management of the restaurant. Courts may also consider the extent to which an assistant manager has the authority to discipline employees, whether the manager has keys to the restaurant, and the extent to which the manager is more highly paid than his or her subordinates. While rarer, an assistant manager could also qualify for the administrative exemption. In such a case, the assistant manager would need to be tasked with important duties related to management and have the ability to exercise judgment and discretion in handling those management duties. For example, a night manager in New York was found exempt under both the executive and administrative exemption where he was the only manager on duty during his shifts, and he was solely responsible for overseeing restaurant operations and employees while working. MARCH 2014 www.restaurantowner.com 59

While some assistant and kitchen managers qualify for the executive or administrative exemption, many others do not. Managers who have little control over restaurant operations or spend their time simply completing tasks at the direction of the general manager would likely not meet the exemption criteria. For example, an associate manager undergoing training in Massachusetts who generally performed the work of the nonexempt employees and was not given oversight of restaurant operations was found to be nonexempt. Even if an assistant or kitchen manager is not ultimately able to show that he or she is nonexempt, the process of trying such a case can be incredibly time-consuming and costly. It is important to note that courts often allow such cases to proceed to trial based on the manager s description of his or her job duties. For example, an assistant manager who claimed he spent 90 percent of his time on nonmanagerial duties and that he had little involvement in hiring and firing and supervising the kitchen was allowed to proceed to trial on his claims. To avoid these issues, employers should take action now to correct misclassifications and to create evidence of proper classifications. Checklist: Tips for Reviewing Employee Classifications Once you decide to undertake a review of your employees classifications, it is still easy to reach an incorrect classification. Below are tips for helping in the classificationreview process. Consider surveying or interviewing employees about their job duties. As mentioned, job descriptions can be useful in reaching correct classification decisions, but an inaccurate job description is of little help. By interviewing or surveying employees, you can get a better sense of what duties employees are actually performing and what percentage of their time is spent on nonexempt tasks. Update job descriptions based on surveys/interviews. After obtaining up-to-date information about employees job duties, revising job descriptions to reflect this information is a great way to memorialize an employee s actual duties. Once an accurate job description is created, it can be easily updated periodically by reviewing the description with the employee. Creating accurate job descriptions can also show an employer whether restaurants are being run similarly and policies are being applied uniformly. If positions have changed, it may be appropriate to give employees different titles or to hire new staff. Consider having employees acknowledge that their job description is accurate. If an employee, or class of employees, were to bring a lawsuit alleging they were misclassified, signed job descriptions may prove to be a powerful defense. Employees will be constrained in their ability to claim that they were not performing exempt work if they signed a job description indicating that they were performing such work. Periodically review your employees classifications. Unfortunately, FLSA compliance is a continuous process. As business realities change, so do employees duties. For instance, if cutbacks cause supervisory employees to spend more of their time performing the work of their subordinates, they may no longer qualify as exempt. Consider an arbitration agreement. Requiring employees to sign an agreement to arbitrate future employment disputes can be helpful when an employer is facing a lawsuit. If an employee is able to find others to join in the suit, an employer may quickly find itself facing a collective class action that could end in a large judgment. If employees have previously agreed to arbitrate claims, the employer may be able to avoid the federal court system and may even be able to avoid having additional employees added to the suit. When All Else Fails, Ask for Help! Employers who are struggling with the classification process or are daunted by the thought of conducting an audit may consider bringing in an outside law firm to aid in the process. A firm with strong experience handling FLSA matters should be able to provide guidance through the review process as well as classification advice. RS&G A Cautionary Tale As a restaurant owner or manager, among your key labor issues is to determine which of your employees, if any, are exempt from the Fair Labor Standards Act (FLSA) regulations that guarantee most workers the right to overtime pay i.e., time and a half for every hour worked beyond the normal 40-hour workweek. This is not a new concern; however, recent changes in these regulations make this a crucial time to review your compensation practices to make sure you don t step outside of legal boundaries. What s the big deal? Well, it isn t at least until someone blows the whistle on your operation and brings violations to the attention of the Department of Labor, as disgruntled employees have been known to do. You don t have to go outside the restaurant industry for a cautionary tale. A number of years ago, Treetop Enterprises Inc., the second-largest franchisee of Waffle House, a popular restaurant in the Southeast, was ordered by a federal judge to pay about $2.9 million in overtime pay owed to its managers. The court rejected Treetop s claims that the managers were executives who were exempt from FLSA overtime requirements, because the Waffle House managers performed nonmanagerial tasks as their primary jobs, with management roles being secondary. It didn t help that the company s training manual defined their managerial duties as subordinate to cooking. 60 PROFITABLE RESTAURATEURS ARE ALWAYS LEARNING