Overtime, Minimum Wage, and the Restaurant Biz: $100,000 Fines & Other Lessons Learned

Yesterday it was announced that a Clayton restaurant was ordered by the United States Department of Labor to pay over $100,000 in back wages for failure to pay workers a minimum wage and in many circumstances, overtime.  Since next week is the North Carolina Restaurant & Lodging Expo, now may be a good time to review employment law for restaurants and remind ourselves that this Clayton situation is not a new one. 

Minimum What?

Minimum wage is the lowest wage an Employer can pay its Employees on an hourly basis.  Currently, the feds have set the minimum wage at $7.25 per hour.  Thanks to President Obama's Executive Order, federal contractors must be paid a minimum wage of $10.10 per hour.  North Carolina is not so creative and also has a state minimum wage set at $7.25 per hour.  Many people argue, with some pretty solid support, that $7.25 an hour is simply too low and below the poverty line for most Americans.  This is why Congress is hearing things like "raise the wage" on the Senate and House floors.  

For restaurants and other tip/commission-based businesses, minimum wage is a bit more tricky.  For those of us who have worked in the restaurant industry, you probably were paid on an hourly rate of about $2.13 per hour.  This is legal... SO LONG AS YOUR TIPS AND/OR COMMISSIONS ADD UP TO $7.25 AN HOUR.  If you have a really bad night/day/week and your paycheck divided by the hours worked does not equal $7.25, then the employer is obligated under federal and state law to make up the difference. PERIOD. Keep in mind that wages are determined on a "workweek" basis, which is defined as any 7 consecutive days (i.e. Monday through Sunday).  

Also, as a side note, a "tipped employee" is defined by the Fair Labor Standards Act as an employee who "customarily and regularly" earns more than $30 of tips per month.  If your employees do not meet the $30+ threshold, then their hourly rate must be $7.25. 

Overtime & Tips

If you are unfamiliar with overtime, I recommend you check out my blog post from last week on overtime and proposed overtime reform.   

If an employee is non-exempt (which for purposes of this blog post would likely include all hourly employees) then you have to pay them time and one-half their regular rate of pay for every hour in excess of 40 worked in a workweek.  Lets break that one down:

Regular Rate of Pay:  For most people, its going to be the flat hourly rate you pay them for each hour worked. For tipped employees with a base hourly rate of less than minimum wage, the "regular rate of pay" for purposes of calculating overtime will be minimum wage or $7.25.

Time and One-Half the Regular Rate of Pay:  This takes the regular rate of pay and multiplies it by 1.5.  If the Regular Rate of Pay is minimum wage ($7.25) then Time and One-Half is $10.88.  If the employer functions with a "Tip Credit," the tip credit will be subtracted to the time and one-half calculation.  

Tip Credit:  For tipped employees, many employers practice what is called a "Tip Credit." A Tip Credit means that in exchange for allowing employees to keep all of their tips (except in cases of a legitimate tip pooling arrangement), the employer is permitted to count $7.25 minus the actual hourly wage ($2.13) towards minimum wage requirements.  For purposes of calculating overtime, the Tip Credit is subtracted from the Time and One-Half calculation to get the overtime rate of a tipped employee. This amount will then me multiplied by the number of hours in excess of 40 to determine the total amount of overtime owed to the employee. 

Just in case you are trying to be creative with numbers, the maximum tip credit is $5.12 ($7.25 minus $2.13).  There is also an obligation on the employer to tell its employees about the tip credit and show how minimum wage will be guaranteed (read: good record keeping skills). 

Now may be a good time for an example:

Sally works for the Greatest Restaurant on Earth as a server.  Her hourly wage is $2.13 an hour and she is permitted to accept tips from patrons.  The Greatest Restaurant of Earth has notified Sally that they use a Tip Credit towards their minimum wage obligation.  This past week, Sally was killin' it at work and clocked a total of 45 hours in a workweek.  Her total amount of tips for the week is $500.  (a) How much in overtime is Sally owed? (b) What is Sally's total paycheck for the week?

  • Sally's regular rate of pay must be at least minimum wage (even though she is paid $2.13 legally) so her regular rate of pay is $7.25.
  • Time and one-half Sally's regular rate of pay is $7.25 x 1.5 = $10.88
  • Sally's employer uses a tip credit to fulfill their minimum wage obligations.  The tip credit is equal to $7.25 minus $2.13 or $5.12.
  • The tip credit is then subtracted from the time and one-half amount to determine the overtime rate:  $10.88-$5.12 =$5.76 overtime rate.
  • Sally worked 5 hours more than 40.  5 x $5.76 = $28.80. Sally is therefore owed $28.80 in overtime. 
  • For the non-overtime hours, Sally is owed $2.13 x 40 = $85.20
  • The non-overtime amount AND overtime amount are added together to get the total paycheck:  $85.20 + $28.80 = $114.00

Hiring Youths

Hiring students and people under 18 years old creates a whole new set of employer obligations.  For a summary of youth employment laws in North Carolina, check out this blog post.  

Why do I care?

I get it.  You're not the Clayton restaurant and you've never known a business who actually got busted for sub-par wage and hour practices.  But if you want a reference for what its like to be forced to cough up hundreds of thousands of dollars in back wages and fines (and attorneys' fees), just ask these guys, these guys, these guys, this big guy, and this beloved NC restaurant

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