The Unspoken Reason That the Hospitality Industry is Moving Away From Tips

Joe's Crab Shack made headlines yesterday when it announced that it is doing away with "tipping," and raising its wages for all traditionally "tipped" employees. Joe's became the first chain restaurant company in the country to make this change. However, Joe's is not the first to do away with tipping.  In fact, there has been a movement quietly making a push across the country.  Last month, Danny Meyer's Union Square Hospitality Group in New York City did away with tipping.  In recent years, Thomas Keller’s Per Se in New York and French Laundry in Yountville, Calif., Alice Waters’ Chez Panisse in Berkeley, Calif., and Grant Achatz’s Alinea in Chicago all did away with tipping.


There are many reasons that restaurants and bars are moving away from the traditional tipping model. Any number of articles on the subject point out that there are arguable benefits for the employee, the employer, and the customer. For example, restaurants that shift the compensation model away from tipping, pay the employees a higher hourly wage.  This provides for a more stable, consistent, and meaningful living wage for employees - who do not have to be concerned with the risks of customers failing to tip.  For the restaurant itself, it increases menu prices 10-15%  to offset the higher labor costs. Additionally, the prevailing thought is that employee retention would increase, creating lower turnover rates that result in lower labor costs.  The customer also benefits as it would ultimately pay a lower total for the bill because standard tipping has become 18-20% of the total bill.  


However, noticeably absent from the news reports and press related to the shift away from the traditional tipping model, is that the shift may actually be driven in large part as a response to the aggressive focus on the restaurant industry by plaintiffs' attorneys and the United States Department of Labor.  This phenomenon is supported by statistics.  According to Department of Labor ("DOL") statistics, from 2009-2013  Fair Labor Standards Act ("FLSA") investigations into hotels and restaurants increased from approximately 4,500 investigations to approximately 7,300 investigations. In 2013, investigations into restaurants and hotels made up approximately 53% of all DOL investigations. In 2014, that percentage remained above 52%.   As part of the DOL's P3 initiative (Plan/Prevent/Protect), nearly 2,000 investigators have been added in the last three years. On top of DOL investigations, each state and many local municipalities regulate wage and hour violations.


So the question is, why is the industry shifting the whole model of compensation, as opposed to merely complying with the tip credit provisions and regulations?  The problem is three-fold.  First, compliance is not as easy as it sounds. The regulations associated with "tipping" and payment of employees are vague and unclear at best.  The FLSA and DOL fail to set forth regulations that provide a restaurateur with straightforward and easily comprehensible guidelines on how to comply with its regulations. For example, restaurants have been forced to defend the "dual job" regulation by proving that servers actually spend 80% of their time waiting tables or doing other tip producing work, and less than 20% of time doing other tasks like cleaning, making coffee, and rolling silverware. It is nearly impossible to prove, and impractical to try to regulate. Further, each state and local municipality also attempts to regulate minimum wage, tipping, and enforcement of wage and hour violations.  Navigating through these waters is truly a legal mine trap.


Second, the Fair Labor Standards Act provides for a plaintiffs' friendly way to get into court, to plead a violation, and to turn the case into a collective or class action.  The law has evolved in this area to include allowing for violations that arguably drop servers below minimum wage (knowing that the vast majority underreport tipped earnings) because of employees being charged for walkouts or breakage, improper employees sharing in the tip pool, improper service charges, employees working dual jobs (such as servers also acting as hosts, or food runners also preparing desserts), employees being charged for uniforms, and many other violations.  The Act provides for harsh penalties for employers, including liquidated damages in the amount of two times the backpay, and provides for recovery of attorneys' fees and costs. The law also provides for a mechanism to bring a quasi-class action, called a collective action, that allows notice to be sent to all employees no matter the size of the employer.


Third, many employment practices insurance liability policies  actually carve out coverage for wage and hour violations because of the high frequency that restaurants are hit with lawsuits. Most insurance carriers will offer wage and hour coverage, for a substantial additional cost, and with the limitations that the insurance coverage (1) would not apply to government investigations, (2) only provides for defense costs up to a certain point, and (3) would not cover any type of monetary settlement. It is not exactly bang for your buck.


The benefit of shifting away from the traditional tipping model is that by paying "tipped" employees above minimum wage and doing away with tips, tip sharing, and tip pooling, restaurants can avoid the costs of complying with the additional regulations that come with the tip credit.  There would be substantially less risk and less concern about investigation or litigation involving improper employees sharing in the tip pool, employees working dual jobs employees' wages falling under the minimum wage, the reporting requirements associated with taking the tip credit, documenting and reporting amount of tips received, and calculating the proper amount of overtime wages.


It is clear that the trend has been increased litigation, regulation, and governmental oversight in tipped occupations - with a focus on the restaurant industry.  Many in the industry actually call the tip credit - a tip penalty.  It is clear that the trend of switching away from tipping is, at least in part, a well-thought out reaction to these trends.  The costs and risks associated with taking the tip credit  outweigh the benefit of taking the tip credit for many. For this reason, without significant clarification and amendments to the Fair Labor Standards Act and its enforcement for the restaurant industry, it is likely that the industry will continue its shift away from tips.

New Happy Hour Law - Are your servers trained?

It has been widely publicized that the Illinois Liquor Control Act (235 ILCS 5/1-1, et seq) has been amended in Illinois by way of the Culinary and Hospitality Modernization Act.  The Act allows, among other things, for the return of happy hour to Illinois.  However, what has been lost in the celebration is that the law added the requirement of additional training for those employees that serve alcohol.

For those in Cook County, all employees serving alcohol must pass a certified Beverage Alcohol Sellers and Servers Education and Training (BASSET) course by July 1, 2015, or within 120 days of hire.  For those in other counties with population over 200,000 people, the employee serving alcohol must take the course by July 1, 2016, or within 120 days of beginning employment.  Smaller counties with population of 30,000 to 200,000 must have employees serving alcohol take the course by July 1, 2017, or within 120 days of hire, and the same provisions apply for under 30,000 but the time is extended to July 1, 2018.

For owners, managers, investors, and license holders, this requirement is extremely important. The liquor license holder can be cited, fined, and sanctioned by the Illinois Liquor Control Commission and the local municipality for failing to produce records.  Further, failure to comply could be grounds for liquor license suspension. Additionally, the failure to comply with the law can be prima facie evidence of negligence in a dram shop type proceeding, which could be enormously costly.

Best practices are to require all new employees to complete the training and produce evidence of the certification, and to maintain such records in the personnel file. The Illinois Restaurant Association offers a comprehensive, and affordable course here.  While celebrating the return of happy hour, please also heed this warning and double check compliance.

The End of the Saga - What's Michael Jordan's Likeness Worth? 8.9 million

One of my very first blog posts - from June 2013..... 
http://lawforfoodies.blogspot.com/2013/06/jordan-and-dominicks-beef-cautionary_21.html


Finally - the story has come to an end... and the final price tag for Dominick's?  8.9 million dollars!  A federal jury awarded Michael Jordan that amount of money after a protracted battle about Dominick's use of Jordan's likeness in a congratulatory ad in a commemorative edition of Sports Illustrated.  The ad offered a discount for the purchase of Rancher's Reserve Steaks.  Dominick's used his name, trademark number 23, and Air Jordan emblem and admitted that they did not receive Jordan's permission.  It was a clear violation of the Act.

The question came down to damages - that is what was Jordan's likeness worth? Safeway argued it was worth $126,900, and emphasized that only two coupons were redeemed.  Jordan put forth an expert witness that set his damages around $10 million dollars, citing his net worth, and contracts with other advertisers.  The jury returned a verdict much closer to Jordan's value - $8.9 million.   It should be noted that Jordan is donating the entire award to charity.  Further, the award was less than 1% of his 1.1 billion dollar net worth.

Many are asking the question - why did Jordan prosecute this so vigorously if it wasn't about the money?  Well, legally - he may have had to.  His name is worth A LOT of money, and allowing Dominick's to use it without compensating him sets precedent around the world.  

The law has built several doctrines that punish the failure to police likeness or marks, or failure to assert rights.  The doctrine of laches states that if a party waits too long to enforce a right, that party might be prevented from asserting the right at a later time because the delay was prejudicial to the defendant. Additionally, courts have held that the failure to police the use of a mark by unauthorized users can result in a court ruling of abandonment. If Jordan did not act, he could have lost his right to compensation down the line.  Not only did he act, but he set a monetary value on his liking. Count it as another victory for Jordan. 

Breaking Down Illinois' Proposed "Happy Hour" Amendment

As news sources have been reporting the last twenty-four hours, it appears that Happy Hour is coming back to Illinois. Yesterday, the Illinois Senate overwhelmingly passed The Culinary Hospitality and Modernization Act. If Governor Rauner signs the bill, the new law will go into effect.

While the majority of the public is rejoicing Happy Hour's re-emergence (especially through social media blasts), it is important to understand that this bill goes much further than allowing your after-work half-price beer. Not only does the law allow for discounted drinks (beer, wine, spirits) for up to 4 hours per day and capped at 15 hours per week, but it has many other provisions that bring the Illinois Liquor Control Act into the 21st Century. Some of those provisions include:

* While "happy hour," as we all know it will be allowed, the State has placed some restrictions that bars/restaurants must be aware of, including: No discounted drinks after 10pm, no changes in pricing during the discount time, and that notice of the discount must be made public at least 7 days in advance of the discounted period.

* The Act defines and permits, with requirements, meal/entertainment/and party packages that were previously restricted except for private events.

* The Act allows for liquor license holders to create "infusions," or spirits are infused with fruits, spices, or nuts. The "infusion" must be stored on premises, have a lid, and destroyed within 21 days.

* The Act redefines a hotel, which allows for the streamlining of licenses for hoteliers that operate more than one alcohol serving establishment on its premises.

* The Act requires mandatory Beverage Alcohol Sellers and Servers Education Training ("BASSET") for all bartenders and servers in the State of Illinois.  Cook County already requires it, but, under this proposed legislation - all servers will require to complete training, and maintain compliance.

* The Act would maintain a ban on 2 for 1 drinks, or giving away any alcohol for free. It further maintains the prohibition on increasing the volume of alcohol in a drink without proportionately increasing the price such as in a "double."

*  Maintains the home rule jurisdiction, allowing for local municipalities to regulate alcohol service and provide for alcohol related ordinances.

* Prohibits the issuance of a liquor license within 100 feet of a church, school, institution of higher learning, hospital, or military or naval station - with exceptions.

* Allows for product sampling (1/4 oz spirit, 1 oz wine, and 2 oz beer to one consumer/day)  - including by retailers, distributors, and importers at licensed retail locations. Only 3 samples are permitted. On-premises retail licensees may also offer sampling, with certain restrictions.

If you have any questions regarding the intricacies of the proposed Amendment, please contact Jonathan Boulahanis of Clark Hill PLC's Food and Beverage Team.

The full proposed amendment can be found at this link: http://www.ilga.gov/legislation/fulltext.asp?DocName=09900SB0398ham002&GA=99&SessionId=88&DocTypeId=SB&LegID=84359&DocNum=0398&GAID=13&Session=

Money and the Law Podcast - Affordable Care Act

Jonathan Boulahanis provides some insight and topics regarding the Affordable Care Act and how it affects small employers.

Clark Hill Chicago health care attorney Jayme Matchinski and David Kleifield from The Horton Group will join us to discuss some of the practical things your clients should be doing. 

April 20, 2015: Jonathan Boulahanis & Jayme Matchinski Speak on the Affordable Care Act for Small Business

http://www.starworldwidenetworks.com/index.php/Audio/darra_speaks#73

State of Illinois Passes Law Requiring BASSETT Training in Cook County Starting July 1, 2015

The State of Illinois has long had regulations in place recommending training for people both selling and serving alcohol.  The program, Beverage Alcohol Sellers and Servers Education ("BASSET") has been codified in the Illinois statutes, Title 77, Chapt. XVI, Part 3500.  Some of the goals of the program are to train and educate sellers and servers about responsible alcohol service, prevent DUI's, spot signs of intoxication, provide methods to cut off over-served patrons, and to educate owners and staff on the laws and ordinances in place.

While the Illinois Liquor Control Commission has always encouraged the voluntary participation in this program, it historically has been left to local ordinances to require such training.  However, the General Assembly in Illinois recently passed Public Act 098-0939, which is set to go into effect on July 1, 2015.  Pursuant to the Act,  all servers and bouncers in Cook County bars and restaurants will need to complete a four-hour BASSET class within 120 days of employment.  Those that are currently employed must have a BASSET training certificate dated on of after July 1, 2012 to be compliant.  The BASSET certification must be renewed every three years.  The Illinois Liquor Control Commission will be charged with enforcing the BASSET training requirements.  During the first six months, enforcement will be limited to education and notification.  Starting January 1, 2016, penalties for non-compliance include fines up to $500 per violation, license suspension, or revocation.

Cook County Institutes Law Providing Harsher Penalties for Failure to Comply with Wage and Hour Laws

On February 10, 2015, the Cook County Board of Commissioners passed an ordinance providing for stiff County penalties for "wage theft." The ordinance provides penalties for companies that either receive tax benefits from the County, or do business with the County. The ordinance also requires all companies that want to do business with the County to attest under oath that they have not violated any wage and hour laws within the last five years.

Specifically, the new ordinance provides for the County to remove any property tax incentive awarded to a business for up to five years if it has a conviction, entry of a plea, administrative finding or admission of guilt of violation of any state or federal wage laws. Additionally, if the Company was receiving a property tax incentive for the year, the County may demand repayment of incentive monies that the business received for the current tax year.

The ordinance also allows for the County to disqualify a business from entering into a contract with the County for up to five years if it has a conviction, entry of a plea, administrative finding or admission of guilt of violation of any wage laws. A finding of a violation of a wage law can also result in ineligibility for business licenses and automatic default under existing County contracts.

The ordinance contemplates any violation of the following statutes of the Illinois Wage Payment and Collection Act, 820 ILCS 115/1 et seq., the Illinois Minimum Wage Act, 820 ILCS 105/1 et seq., the Illinois Worker Adjustment and Retraining Notification Act, 820 ILCS 65/1 et seq., the Worker Adjustment and Retraining Notification Act, 29 U.S.C. 2101 et seq., the Employee Classification Act, 820 ILCS 185/1 et. seq., and the the Fair Labor Standards Act of 1938, 29 U.S.C. 201, et seq. as a basis for such penalties. It also broadly encompasses “violation of any state or federal” wage law as a basis for a penalty.

The County Ordinance comes just two years after the City of Chicago passed an ordinance, 2012-8533, that punishes businesses that have violated state or federal laws as they relate to payment of wages.  The City Ordinance gives the City the power to revoke or suspend a business license issued to a company that has violated wage and hour laws within the last five years.

The statutory language opens the door to heightened scrutiny for companies doing business with the County. With Cook County following the City of Chicago’s lead, the Chicago metropolitan area has some of the toughest wage and hour laws in the nation, and businesses face incredible risk if they fail to comply with existing wage and hour laws. 

Given the climate in the Chicago metropolitan area, as well as the increased risk of losing a license to do business, companies should audit their existing pay structure to ensure compliance with all state and federal laws.  Clark Hill attorneys are available to help with any questions or to perform such audits. Please contact Jonathan Boulahanis with questions related to compliance with the new County and City Ordinance.

The full text of the County Ordinance can be found here:
https://cook-county.legistar.com/LegislationDetail.aspx?ID=2129131&GUID=147181E9-9697-4894-97EA-76A413D5CE1F&Options=&Search=&FullText=1

The full text of the City of Chicago Ordinance can be found here:
https://chicago.legistar.com/LegislationDetail.aspx?ID=1255893&GUID=51F770CC-7694-4063-A62A-F4B0E9F553C2