Overtime Advisor : New York Employment Lawyer & Attorney : Greenwald Doherty Law Firm : NY Wage & Hour & Discrimination : Overtime Advisor Law Blog

Disputes over unpaid tips and improper tip pooling have increased significantly in the past several years, and may become the next frontier in wage and hour litigation. Most notably, a series of lawsuits were filed last year against Starbucks alleging that the coffee giant improperly allowed shift supervisors to partake of tips meant for the baristas who serve the coffee. Not surprisingly, restaurants are another prime target in the tip lawsuit gambit. 

Even away from the courthouse, workers are fighting back against employers for allegedly failing to pay out tips amounting to millions of dollars. Just last week, hotel workers at the Jumeirah Essex House in New York staged an organized work stoppage that brought the hotel’s guest services to a halt. (The workers kept things quiet enough so as not to interrupt a movie with Oscar winner Sean Penn being filmed nearby.) The workers are demanding payment of $1.8 million in unpaid tips generated by hotel events, claiming that the Essex failed to heed a prior arbitrator’s ruling in their favor.

Tip pooling typically involves collecting all tips received by directly tipped employees so that they may then be redistributed among a larger group of employees.  The laws regarding tips and tip-pooling can be complex, which means that avoiding tip-related liability is no easy feat. The issue of tips may not even reach the top of the agenda for a restaurant or hotel that is trying to stay afloat in recessionary waters. Also, tip-related rules and obligations vary by state, so a national restaurant chain’s compliant tip policy in Massachusetts may not work in New York. 

One over-arching principle (as Starbucks learned to the tune of over $100 million in one California suit) is that supervisors, staff members with supervisory responsibilities and others who would not be expected to share in tips should not be included in any pool or sharing arrangement. It also behooves employers to avoid implementing mandatory policies regarding tip pooling and sharing, since participation in any such arrangement must be voluntarily chosen by employees. It is wise to provide employees with notice of the tip pooling/sharing arrangement to which workers have generally agreed, and have them sign a written statement acknowledging that their participation in the arrangement is voluntary. 

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From a legal standpoint, when does a company become a “joint employer” of its subcontractor’s workers? When can a company be held liable for the wage and hour law violations of its subcontractors: When it uses subcontracted workers alongside its own? When it employs a subcontractor’s entire workforce? How about when it merely subcontracts cleaning, landscaping, or other services peripheral to the company’s business?

On April 28, 2009 the New York State Department of Labor’s Apparel Industry Task Force raided the premises of Suburban Textiles, Inc. and confiscated the property of Suburban and one of its prime subcontractors, Technical Garment USA Co. The NYS DOL charged Suburban with breaking a number of labor laws, and Technical Garment with major wage and hour violations. It remains to be seen whether the NYS DOL will file wage and hour claims against Suburban as a “joint employer” of Technical Garment’s workforce. Joint employment liability is currently a major concern for employers who make significant use of subcontractors either to complete certain steps in a production process or to undertake work that lies outside of the company’s core competencies.

The fact pattern that gave rise to the Suburban bust bears a certain resemblance to circumstances that led to the 2nd Circuit’s seminal 2003 decision in Zheng v. Liberty Apparel, 556 F.Supp.2d 284, in which the Court set a new precedent by expanding the definition of “joint employer” under the FLSA. In Zheng, the Court found that to determine whether a joint employment relationship exists, it is necessary to consider “the circumstances of the whole activity” in light of “economic reality.” The Court identified six factors that should be evaluated in making the joint employer analysis:

•  Workplace and equipment belong to the client company – This suggests that the client company may be a joint employer because a legitimately “independent” subcontractor usually works off premises and uses its own equipment.
   
• Subcontractor can and does shift its entire staff from one client to another – This suggests that the client company may not be a joint employer, because a legitimately “independent” subcontractor can have its crew do a job for one client, followed by a job for another client, etc.
   
• Work performed is integral to the client company’s product – The more integral the subcontractor’s work is to the client company’s finished product, the more likely that the client company will be held to be a joint employer.
   
•  Employment contract permits work to be shifted from one subcontractor to another – If the same employees keep working for the same client company even though the name of subcontractor changes, the client company may be the “true” employer, and the subcontractor with revolving names may be a “sham.”
  
  
•  Client company supervises work – The more control the client company has over workers, the more likely that it is a joint employer. This is the most important factor to many courts and government agencies.
   
• Subcontractor works almost exclusively for client company – This suggests that the client company may be a joint employer, because a legitimately “independent” subcontractor has multiple clients.

In recent years, the U.S. Department of Labor has been cracking down on joint employers in FLSA cases. In subsequent action in Zheng, the U.S. District Court S.D.N.Y. permitted plaintiffs to introduce expert testimony by a US DOL investigator alleging that the principal reason garment manufacturers use subcontractors in the manufacturing process is to avoid liability for wage and hour violations. The government is looking to expose sham subcontracting arrangements that exist just to shield the client company from wage and hour, immigration and other employment laws.

Companies that rely heavily on subcontractors should never turn a blind eye to employment practices that could subject them to liability. They should also keep subcontractors at arms length, and refrain from giving explicit direction to subcontractors’ workers. The joint employment analysis is very similar to the consideration of which workers are “independent contractors” and which are “employees” – truly independent subcontractor management and operations are key.

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