Kansas City Lawyers Representing Whistleblowers and Employees Nationwide

Playing with “Waffle House” Money Owed to Tipped Employees

So you are (or were, within the last two years) a server at a Waffle House. Waffle House, or one its franchisees, pays you about $3.00 an hour. You also receive tips. Your boss tells you to report when your wages plus tips, taken together, fall short of the federal minimum wage of $7.25 per hour for any shift or workweek. Your wages and tips typically exceed $7.25 per hour. You assume this is legal. Not so fast. Depending on your work duties, you could be entitled to thousands of dollars in unpaid minimum wages, even if your wages and tips always exceeded $7.25 per hour. Here’s why.


Under a federal statute known as the Fair Labor Standards Act (FLSA), the federal minimum wage is $7.25 an hour. Under certain circumstances, the FLSA allows an employer to take a “tip credit” of up to $5.12 an hour for a “tipped employee.” If the employer pays the tipped employee at least $2.13 an hour and the tipped employee receives at least $7.25 an hour in combined wages and tips during the pay period, the arrangement might comply with federal law.


If a tipped employee spends more than 20 percent of his or her work time in non-tip producing work (cooking, cleaning, food prep, rolling silverware, etc.), the employer must pay the tipped employee the full minimum wage of $7.25 per hour for all such non-tipped work. That is, no matter how much tip income the tipped employee receives, under Department of Labor guidelines, the FLSA doesn’t allow an employer to pay less than the full minimum wage for the employee performing extensive non-tip producing work. Look at it this way: An employer can’t take a “tip credit” for cooks, dishwashers, window washers, or other employees who don’t directly serve customers and who therefore don’t customarily receive tips—an employer is required by law to pay such employees at least $7.25 per hour. With that in mind, the law doesn’t allow an employer to abuse the tip credit by piling on non-tip producing duties to tipped employees who are paid wages less than $7.25 per hour.


Some Waffle House restaurants require there servers, especially those assigned to the slower evening/night shifts, to engage in extensive “non-tipped” cleaning duties—doing dishes, washing windows, washing tables, mopping floors, etc. In fact, the work duties at many Waffle Houses are purposefully structure for servers to spend more than 20 percent of their time doing dishes and other cleaning duties—there is no employee designated as a dishwasher, so the server must spend much of his or her time washing dishes! In some restaurants, a Waffle House server might spend more than 50 percent of his or her work time performing non-tipped duties, such as cooking and cleaning, resulting in substantial unpaid minimum wages. For example, if an employer pays a tipped employee $3.00 per hour (with a “tip credit” of $4.50 per hour) for 30 hours of work during a week, and the tipped employee spends 50 percent of his or her time in non-tip producing work, the employer could be liable to the employee for unpaid minimum wages in the amount of $67.50 for that week (i.e. the $4.50 per hour tip credit for 15 hours of non-tipped work). If an employee suffers such minimum wage violations for a few years, covering 100 weeks of work, the unpaid minimum wages would amount to $6,750. In most cases, the FLSA provides for “liquidated damages” (i.e. double damages) to the employee as a penalty for the employer violating the employee’s minimum wage rights. Thus, the employee in the example who was shorted minimum wages in the amount of $6,750 could have a total claim worth $13,500.


Waffle House has cleverly insulated itself from any “class action” claims by its employees, thereby creating an incentive for the company to violate literally thousands of employees’ FLSA rights, pay individual claims as they are brought and proven, and still come out ahead. Waffle House requires each employee to sign an “Arbitration Agreement” which provides that the employee will bring legal claims to an arbitrator, rather than in court. The Waffle House Arbitration Agreement also states that “[n]either party shall be entitled to . . . join or consolidate claims in arbitration by . . . other employees” or “arbitrate any claim against the other party as a representative or member of a class action or a collective action.” Thus, even if Waffle House is committing minimum wage violations against thousands of tipped employees, each employee must bring his or her claim individually to an arbitrator, leaving all other similarly situated employees out. Even if a few hundred of such individual arbitration claims are brought, Waffle House effectively comes out ahead by breaking the law; the Arbitration Agreement effectively ensures that Waffle House’s similar violations of thousands of other employees’ rights will go un-remedied, unless and until each one asserts his or her own claims. And let’s face it: The vast majority of employees don’t know their FLSA rights as tipped employees doing non-tip producing work. In that regard, ignorance isn’t bliss—it is increased profits for Waffle House obtained through lower standards of living for workers.


But as to those employees who do bring their individual claims before an arbitrator, arbitration is a double-edged sword for Waffle House. The Waffle House Arbitration Agreement designates the American Arbitration Association (AAA) as the arbitration administrator. Under the rules of AAA for employer-issued arbitration agreements, AAA requires the employer to pay the entire filing fee, which is in excess of ($1,000). (To file a lawsuit in court, by contrast, the “plaintiff” bringing the lawsuit [actually the plaintiff’s law firm] pays the court’s filing fee.) Moreover, both the rules of AAA and the Waffle House Arbitration Agreement require the employer to pay the arbitrator’s fees. Unlike a judge in a lawsuit, who is paid a salary by tax payers rather than by either party, an arbitrator is an experienced attorney who will perform the functions of both judge and jury in the arbitration. The arbitrator will then bill the employer for his or her services at an hourly attorneys’ rate for all of his or her time spent on pre-hearing issues, the hearing in the case, reviewing briefs on legal issues, and drafting decisions. Thus, if a case set for arbitration is not settled before a hearing and legal briefing, Waffle House will likely pay the arbitrator $15,000 or more, win, lose or draw.


Lastly, the FLSA includes a mandatory “fee shifting” provision in favor of employees. That is, if an employer is found liable for an FLSA violation, the employer will be required to pay the employee’s reasonable attorneys’ fees, on top of the FLSA damages. Moreover, the Waffle House Arbitration Agreement itself provides that the arbitrator can award attorneys’ fees “to the extent such relief is available under law.” Thus, even if the arbitrator awards the employee a relatively modest recovery from Waffle House, the employee’s attorney can then apply to the arbitrator for all reasonable attorneys’ fees. The arbitrator will then typically award reasonable attorney’s fees, on top of the award to the employee for unpaid minimum wages and/or liquidated damages. Those attorneys’ fees will typically be awarded on an hourly basis, at a lawyer’s reasonable hourly rate, for all hours reasonably expended on the case, by the employee’s attorney.


A company using a class action avoidance arbitration agreement with its employees, like the one Waffle House uses, recently found out the hard way how such an arbitration agreement can operate as to an individual employee’s FLSA claims. In Reynolds v. Cellular Sales, 2014 W.L. 5488525 (S.D. Ind., Oct. 29, 2014), the court upheld an arbitrator’s award of minimum wage damages under the FLSA to the employee in the amount of $17,672.07, along with the arbitrator’s award of the costs and attorneys’ fees to her legal counsel in the total amount of $58,623.43.


So, two questions: First, is the prospect of an arbitrator’s award of attorneys’ fees and costs north of $50,000 in each of many—even a few hundred—individual employee’s arbitrations sufficient incentive for Waffle House to comply with the FLSA as to its many thousands of tipped employees? –Hardly. Just do the math; in the aggregate, Waffle House still has every incentive to violate the FLSA by having tipped employees do substantial non-tipped work for below $7.25 per hour. But, second, is the prospect of an arbitrator’s award of attorneys’ fees and costs north of $50,000 incentive for Waffle House to settle an individual employee’s valid FLSA claim that is (typically) much less than that amount, and incentive for an attorney with extensive FLSA and arbitration experience, such as myself, to handle individual employee’s valid FLSA cases against Waffle House? –Absolutely. As to a valid FLSA claim of an individual employee, Waffle House would face the prospect of either paying early, or paying much more later.


If you have worked as a tipped employee at a Waffle House restaurant and you believe your FLSA rights have been violated, you should contact an attorney with extensive FLSA and arbitration experience. The law imposes a two-year or three-year time limit on asserting FLSA rights. If any of the work for which you want to assert an FLSA violation occurred at least two years ago, your claims could be diminished for each week you wait to assert your rights.

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