Employment Law Daily Restaurant owners must pay unpaid overtime, but no liquidated damages warranted
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Wednesday, March 20, 2019

Restaurant owners must pay unpaid overtime, but no liquidated damages warranted

By Lorene D. Park, J.D.

Paying an agreed-on weekly wage—regardless of the number of hours that non-exempt restaurant employees worked—violated the FLSA’s requirement that overtime be paid at one and one-half times their “regular rate” for hours worked over 40 in a week.

Though there is nothing wrong with employers starting with a fixed salary and schedule, and then working backwards to compute hourly and overtime rates, restaurant owners in this case ran afoul of the FLSA by paying the agreed-on salary no matter how many hours an employee worked, thereby shorting their employees on overtime pay. The Sixth Circuit also affirmed the lower court’s finding that the owners violated the Act’s recordkeeping provisions. The Department of Labor’s cross-appeal with respect to liquidated damages also failed, though: Because the restaurant owners affirmatively tried to understand the FLSA’s requirements and consulted an accountant, the lower court did not abuse its discretion in refusing to impose liquidated damages (Acosta v. Min & Kim, Inc., March 18, 2019, Sutton, J.).

The owners of the Korean and Japanese restaurant did not have a time clock before August 2016, but employees customarily worked lunch and dinner shifts six days a week, and it was generally agreed by the parties that they worked a rounded average of 52 hours a week.

“Guaranteed wage?” The owners negotiated individualized wages with each employee, starting with a “guaranteed wage” for the week and then using this to derive an hourly rate (for 40 of the expected hours) and an overtime rate (for the 12 remaining hours). If someone missed a day of work, they lost one-sixth of their “guaranteed wage” that week. For unexplained reasons, some employees’ rates were too low to reach the guaranteed wage even when they worked a full week.

If an employee worked so many hours that straight-time and overtime pay exceeded the guaranteed wage, the owners applied a “negative bonus” to reduce pay to the guaranteed wage.

Recordkeeping. The owners claimed their pay practices have been consistent since they bought the restaurant, but they didn’t memorialize them in written contracts until 2017. For some years, they simply recorded the cash sum paid each period. Other years, they recorded more details, at least for a few employees.

Lawsuit. Filing an enforcement action, the DOL claimed their pay and recordkeeping practices violated the FLSA and that the owners owed employee’s overtime pay for September 2013 through March 2017. On cross-motions for summary judgment, the district court found the owners liable for $112,212 in back pay for 28 employees, enjoining them from future FLSA violations. However, it excused them from paying liquidated damages. The owners appealed the first part of this ruling, and the DOL appealed as to liquidated damages.

Affirming, the appeals court first noted that the FLSA requires that employees be paid overtime at one and one-half times their “regular rate” if they work over 40 hours per week, and “regular rate” is defined as the total weekly pay divided by weekly hours. All non-exempt employees are entitled to overtime pay, whether the employer pays them on an hourly basis or not.

Overtime violation. Here, the restaurant owners violated the FLSA because employees received the same amount—the “guaranteed wage”—no matter how many hours they worked. That wouldn’t have been a problem if the employees didn’t work more than 40 hours and received minimum wage, but that was not the case here. The parties agreed that restaurant employees normally work 52 hours a week, making the “guaranteed wage” unlawful if it didn’t include overtime pay.

Though the employees each worked a different schedule and received a different guaranteed wage, so each had a different regular rate, the result was the same. Multiplying that rate by 150% for all hours over 40 produced the same conclusion: they were each paid too little. While the owners argued that their hourly rates were “generous” by industry standards, that was neither here nor there because they failed to calculate overtime the way the FLSA requires.

The appeals court noted that an employer can lawfully do what the owners claimed they were trying to do, which is starting with a fixed salary and schedule, and then working backwards to compute hourly and overtime rates. The owners here went astray by paying the agreed-on salary no matter how many hours an employee worked. Intentional or not, they shorted employees.

Recordkeeping violation. The owners have time and payroll records for the years 2013 to 2014 and 2016 to 2017, but none for the two-year gap in between. In addition, some records for 2013 to 2014 contained only employees’ first names and biweekly pay—nothing more. Most glaringly, they did not track employees’ hours until August 2016. Though all of this violated the FLSA’s recordkeeping provisions, the owners argued that they didn’t do it on purpose; they simply didn’t know about the recordkeeping requirements. But the Act doesn’t have a knowledge requirement, so ignorance of the law was no excuse.

Actual damages. With respect to actual damages, the owners did not provide evidence rebutting the DOL investigator’s calculations, though they did lodge some legal arguments. Rejecting each, the court found that the calculation was not speculative, that all employees were listed in the complaint, and that records never produced by the owners on the record could not provide a cognizable ground for reversal.

No liquidated damages. In its cross-appeal, the DOL argued that the lower court abused its discretion by failing to grant liquidated damages (amounting to double the amount of unpaid overtime). Disagreeing, the appeals court pointed to the following facts: The restaurant owners adopted the prior owner’s practices, which had never been the subject of an investigation, and the owners testified that they regularly discussed payroll and the FLSA’s requirements with their late accountant, including the guaranteed wage.

“By affirmatively seeking to understand the Act’s requirements and consulting with and relying on an accountant about the guaranteed wage, as well as the minimum wage and overtime laws,” said the appeals court, the owners “acted in good faith and had reasonable grounds for believing they were in compliance with the Act,” so the lower court did not abuse its discretion in deciding not to impose liquidated damages.

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