SCOTUS Misses Chance to Clarify Rule on Tip Credit for Prep and Cleanup Time

Earlier this week, the U.S. Supreme Court declined to hear an appeal filed by Applebee’s related to a lawsuit brought by 5500 former servers and bartenders.  The suit centers on whether Applebee’s improperly claimed the federal “tip credit” — which allows bars and restaurants to pay less than minimum wage to employees who traditionally make a substantial amount in tips — for hours those employees spent on non-tip generating, primarily prep, setup and cleanup.  The plaintiffs claim they should be paid the full minimum wage for those hours; Applebees claims those tasks are a necessary element of their tipped work.

This is an ambiguous area of the law for many reasons.  Not the least of these reasons, however, is how to figure out when the “non-tipped” work ends and when the “tipped” work begins.  If I work at a bar that does not get busy until 10 or 11, but my shift starts at 5 — what time does the tip credit kick in?  When my first customer comes in?  When I’m done setting up?  What if I like to take my time setting up, knowing I’m not going to really start having customers until much later in the evening?  How long can I prolong the time during which I earn the minimum wage?  And what about the end of my shift — can my employer require me to get started on my cleanup duties while I still have customers, thus reducing the time I earn full minimum wage for that work?  It does not take much imagination to see the problems this attempted split between “tipped” and “non-tipped” work creates, or to understand why some clarification and guidance from the Court on this issue would have been helpful

I can of course understand that the courts and regulators don’t want to allow a situation where bar and restaurant owners can have servers and bartenders scrubbing toilets and washing windows before or after their shift and claiming the tip credit for that time, but it would seem if the work is reasonably related to the work at which the employees earn their tips, the tip credit should be permitted.  To have it otherwise just creates too much ambiguity and uncertainty for restaurant owners and, considering the penalties for improperly claiming the tip credit, I would not blame any of them for concluding the tip credit is more trouble than its worth.

Protect Your Liability Protection

This post is not specific to bar or restaurants, but because most operate as an LLC or some other corporate entity (or at least they should; if you’re not, call me today) it is of high importance to bar and restaurant owners.  The topic is liability protection, and protecting that protection.  Bars and restaurants open themselves to liability every time they open their doors — premises liability, food safety liability, employment-related liability, and the list goes on and on.  Many think that registering an LLC (and for simplicity’s sake, I’m going to use this as shorthand for all such entities) protects the owner-operator from any personal liability.  That is not necessarily so.  If you don’t use your LLC  properly, you may unwittingly undo its protection and open yourself up to personal liability for any damages suffered by your employees or patrons.

To illustrate, think of your LLC as an umbrella.  You purchase it with the intention that it will protect you from rain.  But if you venture into uncertain weather and don’t bring it with you, the umbrella will not do you any good if that weather turns stormy.  And if you end up all wet, you can’t blame the umbrella for not working properly.  It’s your own fault for not letting it do its job.

So it is with an LLC.  As set forth below, there are many things you can do that are the equivalent of going out on a grey, threatening day without an umbrella.  And if you make any of these mistakes, you can’t blame the LLC for not protecting you from liability.

Signing a contract without reading it thoroughly.  Many people think that, as long as they sign a contract on behalf of an LLC, they are protected from any personal liability under the contract.  Again, that is not necessarily so.  Many contracts contain language that makes the individual signer personally liable if the LLC cannot meet its obligations under the contract.  If a contract you are signing contains one of these personal guarantees — and it may be buried somewhere in the fine print — you can, and almost certainly will, be on the hook personally if the LLC fails to comply with the contract.

Failing to Sign a Contract in the Name of the LLC.  When assuming a contractual obligation to another party, you must make it clear to the other party that the entity assuming the obligation is the LLC and not you personally.  The simplest and best way to do this is to make sure the contractual language, and your signature line, clearly state that it is the LLC, and not you, that is making the promise to perform.  If there is a dispute later, and it is clear that the other party at all times knew that they were dealing with the LLC and not you, they will have a much more difficult time trying to hold you personally liable.  That you had an LLC, and yourself thought you were acting as the LLC, will not help if you did not make it clear to the other party — this is true just as it is true that an umbrella won’t protect you from the rain if you fail to open it.

Commingling Personal and LLC Funds.  Just because you control the bank account of your LLC to the same degree you control your own personal account does not mean you can treat them the same, or move funds between them freely.  You should assume that every dollar you transfer into your LLC account will be considered a capital investment in the LLC and therefore available to pay the debts and obligations of the LLC.  And it will not necessarily fix things if you move the funds out of the LLC account and back to your personal account later.  In fact, it could make it worse if you are deemed to have favored yourself, individually, over other creditors of the LLC, or if it appears you were treating the LLC as simply an extension of yourself.  This could permit a court to “pierce the corporate veil” and allow the LLC’s creditors to go after you personally.  The simple rule is this:  if you want the law to treat the LLC as an entity separate from yourself, you must do the same.

If you have an LLC or some other corporate entity and are concerned that you might have opened yourself to personal liability, or if you just want to make sure you don’t break any of these rules in the future, but are unsure how to go about it, contact an experienced small business lawyer and discuss your concerns.

Known Dangers: Your Duty to Protect Your Customers Extends to Harm Caused by Other Customers

Citing an “environment of disorder” the Maryland Court of Appeals this week reversed a lower court ruling and allowed a negligence case to proceed against a Baltimore City nightspot at which a young man was severely beaten by other bar patrons.

The trial court had dismissed the case against the Iguana Cantina, which has since closed, on the grounds that the bar’s owners could not have reasonably foreseen — or taken steps to prevent — the fight the caused the plaintiff’s injuries, and therefore they cannot be held liable for the damages caused to him.  The court accepted the bar owner’s argument that the plaintiff was essentially trying to impose upon the owners “dram shop” liability, which permits purveyors of alcohol to be held responsible when an intoxicated patron injures some third party.  As written elsewhere on this blog (see here and here), Maryland does not currently permit causes of action based on a “dram shop” theory of liability.

The Court of Special Appeals’ opinion in Troxel v. Iguana Cantina rejected the trial court’s interpretation of the case as one of dram shop liability and rather saw it as a premises liability case.  As such, the Court of Appeals concluded that, regardless of whether the injuring parties were drunk or the injuries were in fact a result of those parties’ intoxication (a hallmark of dram shop cases), the issue was whether the plaintiff was “subjected to dangerous conditions on [the] establishment’s premises.”   Essentially, the Court of Special Appeals found that a bar owner has the same responsibility to protect a customer from the violence of other customers that he does to protect them from slippery floors or poorly lit stairwells.  The bottom line, according to the court, is that bars, restaurants and hotels have a duty to protect their patrons from dangerous conditions that they are aware of — or should be aware of — and this duty includes protecting against known dangers posed by other patrons.

This dram shop v. premises liability distinction may be lost on many readers, and I’ll admit that, even to lawyers, it is not an easy distinction to draw.  But if you are a bar or restaurant owner, the takeaway is this:  you must consider yourself responsible for the safety and protection of your customers from all but the most remote or unforeseeable dangers.  If you have reason to believe that your customers could be in danger due to the actions of another customer, or that violence is a reasonably foreseeable outcome given the environment at your establishment, you must take steps to prevent harm or injury to your customers.  If you do not, you risk being held liable for any harm that ultimately results.

Creating a Culture of Compliance

During the course of my career I have assisted numerous companies in government investigations of their business practices.  In each instance, one of the things the government has looked at, and considered when deciding whether to prosecute or levy a penalty, is whether the company had a culture of compliance.  That is to say, did this infraction or violation occur despite the best efforts of the company to prevent it, or could it have been the result of a more systemic failure by the company to ensure its officers, employees and agents complied with the law.  When the former has been the case, the government has spent more time focusing on the individual wrongdoer, rather than the company itself.  When the latter has been the case, however, my job as attorney for the company has been that much harder, and the penalties against the company that much stiffer.

For illustration, imagine you, as a restaurant owner, are being sued by a the federal government based on allegations of sexual harassment at your restaurant.  (This is a very real possibility, as the federal EEOC – Equal Employment Opportunity Commission – has targeted the restaurant industry as the “single largest” violator of sexual harassment laws.)  Imagine that the allegation is that a kitchen employee regularly made lewd and suggestive comments to a waitress when she came back to the kitchen and you did nothing to prevent it.  Further imagine that you are sitting in a deposition being questioned by a government attorney.  He asks you:  “What steps did you take, as the restaurant’s owner, to prevent the sexual harassment of your employees?”  What will your answer be?  Will it be closer to:

• Answer No 1:  “We have a written sexual harassment policy that we distribute to all of our employees.  This policy is posted prominently where the employees clock in and clock out.  We also have regular staff meetings where we go over the policy and make it clear that there will be zero tolerance for violations and where we encourage our employees to tell us if they are the victim of, or witness, any sexual harassment.  Finally, once a year, we bring in someone to hold a training for all our employees on sexual harassment.”

• Or Answer No 2:  “Well, you know, everyone knows they shouldn’t do it.”

I’ll tell you what, if your answer is anything like No. 2, you better be ready to write a check.  And maybe a big one.  You’ll also be wishing you had paid attention to this before the government came knocking.

This idea of creating a culture of compliance applies to civil suits as well, and translates to various other aspects of your business.  Do you have a written policy and regular trainings regarding preventing the sale of alcohol to minors?  What about the proper care and handling of food?  The cleanup of spills and other hazardous conditions?  These are just a few of the areas where you can be proactive and create a culture at your restaurant where people know the law, know the proper procedures to follow, and know what to do when something goes wrong.  In each instance – a sting by police with underaged volunteers attempting to buy alcohol; a sick customer; or a slip and fall injury to a patron – the question will be:  did you, as owner, take all the steps you could have to prevent this?  When the answer is “yes,” it is much easier to convince the government or the judge or the jury that you, as owner, should not be punished.

Establishing a culture of compliance thus serves two enormously important purposes:

• It prevents violations (and the inevitably resulting lawsuits or investigations); and

• Where such lawsuits or investigations result anyway, it makes defending your position much stronger.

You cannot control all of your employees all the time, and there will be times that, despite your best efforts, an employee does something he should not have done.  What you want to be able to say is that you did, in fact, make those best efforts.  So, does your restaurant have a culture of compliance?  If not, what are you waiting for?

Free legal advice of the day: If you’re serving alcohol, get a liquor license.

There are a lot of complicated laws and regulations you must comply with if you want to open and operate a restaurant.  One basic rule that is not complicated, however, is this:   If you are planning to serve alcohol at your establishment, you need a liquor license.

This rule applies even if you haven’t officially opened for business and are not actually selling the alcoholic beverages to actual customers.   The owners of one restaurant in Washington, D.C., learned this lesson the hard way.  Shaw’s Tavern, whose much anticipated opening in an area of the city in need of just such a place, was short-circuited by the fact its owners served alcohol at two pre-opening events.  The problem:  it did so without first obtaining its liquor license.  D.C.’s booze regulators caught wind of this fact and put the brakes on its application, thus delaying indefinitely the tavern’s ability to serve booze.  Ultimately, the tavern closed and it is unclear when, if ever, it will open.   The owners, as well as the neighborhood, are left wondering “What happened?”

Let’s face it, for most restaurants — and I dare say all “taverns” — a liquor license is not a mere detail; it is an essential element of the business.   One could more likely operate without electricity than without the ability to serve alcohol.  As one of the owners of Shaw’s Tavern said himself in the Facebook posting announcing the restaurant’s closure:  “We could not survive without a liquor license.”

So, again, some free advice:  If you intend to serve booze in any place other than your home, get a liquor license.  No exceptions.  The powers that be don’t care that you were not actually open, that you were not actually selling the drinks, or even that you are not actually a bar (ask the owners of Bethesda’s now-closed Denim Bar).  None of that matters — you need a liquor license to serve alcohol.

And the corollary to that piece of advice is this:  if you intend to serve booze, and you are not sure what type of liquor license you need, call an experienced lawyer who can advise you and shepherd you through the process.  Maryland, like D.C., has several types of licenses which are designed for a variety of situations and establishments.  Do not try to figure it out yourself and, by all means, don’t think “it’s just this one little time; no one will find out.”  In 2011, someone will find out.

Your ability to serve alcohol is too important — follow the rules and get them right.

Does Your Restaurant Need a Wage and Hour Audit?

There was a very interesting story on the HotelNewsNow.com website last week relating to the federal government’s ongoing crackdown on the hotel industry for violations of wage and hour laws.  The article advocates for hoteliers to enlist the assistance of outside counsel to ensure their current practices are in compliance with federal and state labor laws, and to stay up to date as those laws change — which they often do.  As one lawyer quoted in the article states:

“These are very difficult laws and regulations with which to comply.  They’re complex and they’re evolving.”

As with hotels, 2011 has seen a marked increase in enforcement in the restaurant industry, with the Department of Labor obtaining huge penalties against restaurants (see here, here, and here, for examples of six figure fines and penalties from the last few months).  As the article on the hotel industry notes, these government regulators are following the lead of private practice lawyers, who have found that hotel and restaurant owners are a prime (and profitable) target for wage and hour lawsuits.  A defeat in one such case here in Maryland forced the bar owner targeted with the lawsuit by former employees to close one of his popular bars.

If this is a bit scary for restaurant owners, I can only say that it should be.  Plaintiff’s lawyers and government regulators can be a tough lot, and they are just waiting for you to screw up.  The good news, however, is that you don’t have to wait until you are the target of a government enforcement action or a private lawsuit to take action yourself.  Here are some steps you can take right now to protect yourself from being sued:

• Hire outside counsel to review your employee classifications, your wage rates, your overtime policies, and your tip pooling practices to ensure you are paying everyone what they are owed;
• Engage someone knowledgeable in the field to conduct seminars for your managers to prevent them from doing anything that might cause you, as restaurant owner, to be liable (i.e. not allowing employees to clock in for training or pre-shift meetings, or keeping employees late on weekends without properly recording overtime hours);
• Educate yourself on the law by reading trade articles and attending information sessions sponsored by your local restaurant association (a link to the Restaurant Association of Maryland’s website can be found here).

Most importantly, however, do not try to figure this all out yourself.  These are complex laws and even big companies with their own in-house legal teams can get them wrong (see here.)  You need to engage the services of someone who knows the law, who can explain it to you and your employees, and can help make sure you are in compliance.  This is most surely one of those instances where a ounce of prevention can save you a pound of cure — an attractive thought when that “cure” can take the form of a six-figure fine or court judgment.

Maryland Restaurant Owners Warned Over Expiration Dates on Credit Card Receipts

The Restaurant Association of Maryland (RAM), of which I am an allied member, today issued the following warning to its members:

RAM recently learned of several Maryland restaurants facing legal action for allegedly printing card expiration dates on credit card payment receipts.  Restaurants in New York City and around the country have also been sued for violating related provisions of the federal credit card fraud prevention law that prohibits such information from appearing on receipts.  These types of lawsuits are generally filed by unscrupulous attorneys who target smaller independent businesses in an effort to make easy money by settling out of court.
   As of December 1, 2006, card-accepting merchants are required by law to restrict the information that appears on electronically-printed sales receipts provided to the customer.  The law prohibits the CARD EXPIRATION DATE and restricts all but the last five digits of the credit card number from appearing on receipts.  New data security standards adopted by payment card networks, banks and processors go a step beyond by restricting ALL BUT THE LAST FOUR DIGITS from appearing on receipts.    
   Non-compliance could result in fines and/or legal action.  NOW is a good time to make sure you are in compliance.  For more information about updating your system to comply with these card security measures, contact your point-of-sale (POS) system vendor or your credit card processing representative.

I will add to this warning that if you are targeted with one of these lawsuits, contact a lawyer immediately to defend you.