A multi-unit Houlihan's franchisee, A.C.E. Restaurant Group Inc., operating 17 restaurants across New York and New Jersey is accused of keeping tips and wages from servers and bartenders and failing to pay overtime to employees who worked more than 40 hours a week according to a lawsuit filed this month by the U.S. Department of Labor.

The lawsuit filed with the U.S. District Court alleges that the operators of the restaurant locations routinely violated the federal Fair Labor Standards Act (FLSA), which governs rules such as minimum wage and overtime pay. The illegal practices that the investigation by the Department of Labor's Wage and Hour Division allegedly found include:

  1. Requiring servers and bartenders to contribute a percentage of tips to a tip pool, but using the tips to pay employees for tasks, such as custodial and kitchen work. The lawsuit claims that Houlihan's regularly retained a portion of employee tips.
  2. Denying overtime pay to employees who worked at more than one restaurant, even when their combined hours totaled more than 40 hours in one workweek.
  3. Having employees work off-the-clock, earning tips for their labor.

The concept is not difficult or complicated yet time and time again restaurants and other businesses with large numbers of tipped employees are accused of violating the law. The FLSA requires that covered, nonexempt employees be paid at least the federal minimum wage of $7.25 per hour for all hours worked and that an employer of a tipped employee to pay no less than $2.13 an hour in direct wages, provided that amount plus the tips received equals at least the federal minimum wage of $7.25 an hour. If an employee's tips combined with the employer's direct wages do not equal at least the minimum wage, the employer must make up the difference.

Tips are the property of the employee, and the employer is prohibited from using an employee's tips for any reason other than as a credit against its minimum wage obligation to the employee (tip credit) or in furtherance of a valid tip pool among employees who customarily and regularly receive tips. A valid tip pool may not include employees who do not customarily and regularly receive tips (for example, dishwashers, cooks, chefs and janitors), and an employee cannot be required to turn over his tips to the employer.

The last rule is where businesses often get in trouble. A restaurant cannot help satisfy its payment obligations to kitchen staff ("back of the house" employees) by requiring the "front of the house" employees like servers and bartenders to share their tips.

Businesses open themselves up to huge financial exposure when they do not take the time to understand the law and make sure that it is being strictly complied with by management and staff. Often a tip-sharing arrangement may seem perfectly fair and acceptable to an owner but be a clear violation of the FLSA.  According to a Department of Labor press release the "the severity of these violations and the number of affected workers is such that restitution, we believe, could amount to millions of dollars" for the multi-unit owners.

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