Del. case over restaurant wages could go national

In their jobs at Texas Roadhouse in Middletown, the hosts welcomed diners, steered guests past a steak display and distributed bread-and-butter baskets to tables. For that they were paid $4 an hour plus a share of a tip pool.

The Delaware Department of Labor has a beef with the arrangement. It is seeking to recover wages for three workers in a minimum wage case that could reverberate nationally as activists and politicians take up the banner against the dual wage system that allows for two hourly minimums.

The case, which started as a complaint in Justice of the Peace Court in Wilmington, will now play out in Superior Court after Texas Roadhouse sued the labor department seeking to have the court rule that hosts are tipped workers. When workers are classified as “tipped employees,” restaurants can set an hourly base wage lower than the regular minimum wage with customers’ gratuities credited toward achieving full minimum wage.

Sylvia A. Allegretto, a research economist and co-director of the Center on Wage & Employment Dynamics at the University of California, Berkeley, said the Superior Court decision will be an important ruling, sending a signal nationwide.

“I think it’s a big deal,” she said. “I don’t think we’ve heard the last of this.”

“Cases like this serve as ways of revealing the absurdity of the restaurant industry’s primary business model,” said Maria Myotte, a national communications coordinator for Restaurant Opportunities Centers United, a restaurant workers advocacy organization that is campaigning for a fair, livable wage. “We consider the culture of depending on tips to be an all-around super-flawed dysfunctional model.”

In June, the state Labor Department brought an action against the steakhouse chain to recover wages owed to three people employed as hosts at the Middletown restaurant from Dec. 17 through February 24, arguing that hosts must be paid the full hourly minimum wage. Texas Roadhouse Inc. of Louisville, Kentucky, filed its own lawsuit in Superior Court, disputing whether any additional wages are owed to the three individuals.

According to the Texas Roadhouse lawsuit, the wages paid to the three hosts when combined with the tips from the tip pool “at all times equaled or exceeded” the state minimum wage. When tips don’t equal the regular minimum wage, tipped workers are given “make up pay” to bring the hourly wage to the minimum, according to company spokesman Travis Doster. The minimum wage in Delaware became $8.25 an hour as of June 1.

“Nobody works for less than minimum wage at the restaurants. They either make it or exceed it,” Doster said.

Critics say the system legislates pay inequality and disproportionately harms women and people of color. It invites abuses by employers, including “wage theft” where owners keep a portion of the tips, Myotte said. Restaurant workers should make a fair hourly minimum wage paid for by the employer and receive customers’ tips, she said.

It’s become a campaign issue in the presidential election with Democratic candidate Hillary Clinton saying she wants to end the “disgrace” of the tipped minimum wage. Another Democratic candidate, Sen. Bernie Sanders from Vermont, introduced legislation in July that would phase out the federal provision that permits employers to pay tipped workers $2.13 an hour.

The legal outcome in Delaware could invite litigation in other states, said Hillary Schwab, a lawyer with Fair Work, a Boston employment law firm. Schwab brought a similar tip-sharing action against Texas Roadhouse in Massachusetts that resulted in a $5 million settlement for servers in 2012.

Delaware Secretary of Labor John McMahon said he’s aware of national initiatives to end the two-tier wage system, but in this case the department is just trying to enforce the existing laws.

“We’re not looking to be the poster child for a national movement,” he said. “We’re following the legislation that exists in the state. We’ll do what we do to make sure our laws are adhered to.”

But workers' rights advocates see it as part of a larger trend.

“Hopefully, the tide is turning to the point of holding companies accountable,” Myotte said. “We’re seeing more victories on behalf of restaurant workers.”

Two wage floors

The Delaware battle has turned the spotlight on a labor area that experts say has been ignored in policy debate – the legal employment of people whose employer-paid hourly rate is below the full minimum wage.

“People don’t understand the craziness of the system going on across the country,” Allegretto said.

John Cook of Middletown has worked in the restaurant industry. Cook, as he was leaving the Texas Roadhouse recently, said he was always puzzled that there are two wage tiers.

“I couldn’t figure out why,” he said.

The hourly minimum wage was first established in 1938 when President Franklin D. Roosevelt signed the Fair Labor Standards Act. It was a landmark law in the nation’s social and economic development, according to a history written by the U.S. Department of Labor.

In 1966, the Fair Labor Standards Act allowed employers in certain service industries, including hotels and restaurants, to use tips provided by customers as a credit toward a worker's full minimum hourly wage, according to Allegretto. The base wage paid by the employer combined with the tips must equal the federally mandated full minimum wage per hour, according to Allegretto.

At that time in 1966, the tip credit equaled 50 percent of the federally set full minimum wage per hour, Allegretto said. That proportional link was broken in 1996 when the Minimum Wage Increase Act of 1996 froze the federal so-called “subminimum wage” at $2.13 an hour “into perpetuity,” she said.

Today, the gap between what employers pay toward an employee's minimum wage per hour and what customers’ tips cover has widened, Allegretto said. Tips must now cover more than 70 percent of what it takes to make the base federal minimum wage per hour, Allegretto said.

The existence of two federal hourly wage minimums, with the lower hourly minimum unchanged since 1991, comes as surprise to people, Allegretto said.

State law involving subminimum hourly wage floors vary considerably, Allegretto said. A handful of states don’t allow for a tip credit, including Alaska, California, Oregon and Washington, according to the U.S. Department of Labor. Employers in those states are required to pay the full hourly minimum wage before tips.

The minimum rate in Delaware is just above the federal level at $2.23 per hour for workers in occupations where gratuities customarily make up part of the workers’ remuneration. The last time the hourly tipped wage was raised in Delaware was in 1987. When that tipped wage was set, the full minimum hourly rate was $3.35.

Until the late 1990s, the tipped wage in Delaware was required to equal about 50 percent of the full hourly minimum rate, according to economist George Sharpley, chief of the Office of Occupational and Labor Market Information at the Delaware Department of Labor. That was lifted in 1996.

“Now, they’re expected to make almost three times as much in tips as they are from employer pay,” Sharpley said.

Delaware battle

The fight between the state Labor Department and Texas Roadhouse began earlier this year when the Labor Department discovered, in the process of receiving work permits for the chain’s Middletown location, that minors employed as hosts were being paid $4 an hour with money from the tip pool used to bring them to at least the full hourly minimum wage.

Under Delaware law, gratuities may be considered wages if the workers regularly receive more than $30 a month in tips, according to the lawsuit filed in Superior Court. Workers in occupations where gratuities customarily make up part of the workers’ remuneration get a subminimum wage of $2.23 per hour.

The Labor Department says it does not consider hosts and bus workers to be occupations in which an individual would “customarily or regularly receive more than $30 per month in tips,” according to court documents.

“Therefore, any individual who is solely employed to clean tables or seat customers must be paid the full minimum wage,” the Labor Department said in a letter to the Middletown restaurant.

Delaware law says gratuities are the property of the “primary direct service employee” or the employee who performs the main direct service for a customer, according to court papers. In restaurants, that is usually the server waiting on tables or bartender. In cases where more than one worker provides direct service to a customer, employees can establish a system for pooling tips among employees. But the sharing system can’t exceed 15 percent of the primary server’s gratuities.

The way McMahon sees it, direct servers in the tip pool at Texas Roadhouse are hurt when customers’ tips are spread among a larger group of employees not classified as tipped workers.

“Someone has to be negatively affected in the process,” he said.

Doster, spokesman for Texas Roadhouse, said the problem in Delaware is the law is murky. The company wants to keep paying hosts as tipped workers at its four Delaware restaurants because hosts were hired under those terms. According to Doster, hosts make more money under that system.

“What if they go from $14 an hour to $8 an hour?” Doster said. “That’s not what they signed up for.”

The restaurant chain wants Superior Court to clarify the law and will abide by any decision, Doster said.

“We’re asking Superior Court to give some clarity on the law. Tell us what’s right. We’re interpreting the law one way. Our interpretation is hosts, like busers, should be included in the tip pool. The Department of Labor is interpreting it another way,” Doster said.

Pressing issue

The way workers’ rights advocates see it, restaurants would like to have as many workers as possible classified as tipped employees to keep down labor costs.

“The reason is to pay as little as possible to as many people as possible,” Myotte said.

Allegretto agrees and says the tipped wage issue has become more pressing as restaurant employment has become one of the fastest-growing sectors over the past two decades. In Delaware, the rate of employment growth in the bar and restaurant sector outpaced the state’s overall job growth rate by more than two and a half times, according to Sharpley.

Growth in Delaware in the sector was slightly greater than the national rate. In Delaware, the number of jobs in the bar and restaurant sector rose from 20,000 jobs at the end of 1990 to 39,600 jobs as of August.

“It’s a bigger portion of the economy in Delaware,” Sharpley said.

Allegretto said the restaurant industry’s assertions that tipped workers make far more than minimum hourly wage is flawed. A 2014 White House report examining the effect of the tipped minimum hourly wage on women found that people who work as servers are almost three times as likely to be in poverty.

“A server working Friday night might make more than the minimum hourly wage. But if you draw the Tuesday afternoon shift, you’re back to making minimum wage,” Allegretto said. “Somebody wins, and somebody loses.”

Myotte said a server’s compensation shouldn’t depend on “how attractive they are or how flirtatious they are.”

The practice of where restaurants “top up” a tipped worker’s pay to the minimum hourly wage is also flawed and difficult to enforce, critics charge. According to the White House report, about 10 percent of workers in predominantly tipped occupations report that their hourly wages fall below the full minimum hourly wage.

The failure by employers to make sure that workers earn minimum hourly wage is the most common violation of wage and hour requirements, the White House report says.

“One of the most prevalent violations is the failure to keep track of employee tips and therefore the failure to ‘top up’ employees if their tips fall short of the full minimum wage,” the report says.

Last year, Chickie’s & Pete’s, a Philadelphia sports bar and restaurant chain, agreed pay $6.84 million in back wages and damages to 1,159 former and current employees at nine of its restaurants for improperly taking tips from servers and other violations.

An investigation by the U.S. Department of Labor wage and hour division found that the company required servers at the end of each shift to contribute part of their tips in cash to an improper tip pool, the department says. In some instances, servers had to use their own money or borrow from other servers when they didn’t have enough cash on hand, the department alleges. The owner illegally retained approximately 60 percent of the tip pool, the department alleged.

Single mother Holly Preston of Elkton, Maryland, who worked in the restaurant industry for years, said under the two-tier wage system a family “doesn’t know what to live off of.”

“There were snow days when I spent more money on gas going to work than I made that day,” Preston said.

Randall Harris, 25, of Wilmington, who works as a server at Grotto Pizza on Concord Pike, agreed, saying it’s very difficult to plan and save when tips can vary substantially.

But Cristin Fernandez, spokeswoman for the National Restaurant Association, says “a strong majority” of Americans support the tipped model in restaurants.

“The practice of tipping is what draws millions of employees to the restaurant industry and diners nationwide are happy to promote this spirit of hospitality,” Fernandez said. “A strong majority of Americans support the current tipped model for restaurants. Furthermore, our research shows that tipped restaurant employees are among the highest-paid employees in the establishment, regularly earning between $16 and $22 an hour.”

Divided opinions

The lawsuit has provoked strong opinion from those working in the restaurant industry.

Selena Richardson, 17, who works as a host at the Texas Roadhouse in Middletown, said she thinks it’s to her financial advantage to be included in the tip pool because she can make more money.

Texas Roadhouse server Mariah Donovan, 23, said she doesn’t begrudge sharing her tips with the hosts because “it’s give-and-take.”

“They do their part. They set up our tables,” Donovan said.

But she did agree that if the hosts were paid a straight minimum hourly wage, it would benefit her financially.

“It would mean more money for me, especially if it’s a slow day,” Donovan said.

Carrie Leishman, chief executive of the Delaware Restaurant Association, which has 400 members, said the majority of restaurateurs she knows in the state pay the minimum hourly wage or more.

That’s the case with Carl Georigi, owner of Platinum Dining Group of Wilmington, whose restaurants include Eclipse Bistro in Wilmington, Capers & Lemons Italian Restaurant and Market near Greenville, Redfire Grill in Hockessin and Taverna in Newark.

“I pay all my hostesses more than minimum wage,” he said. “I’ve never heard hosts being paid less than minimum wage. It’s not a practice I’ve ever subscribed to.”

Mickey Donatello, who owns three restaurants in Talleyville – Corner Bistro, Lucky’s Coffee Shop and Bon Appetit – said he always pays hosts a little more than the full hourly minimum wage.

He believes it would be positive nationally for all workers to make more money.

“It may not work out the way the politicians think, but at least it’s doing something,” Donatello said. “It’ll probably put me out of business, but I believe it’s what needs to happen.”

Donatello said he sees the struggle of his workers. Many are forced to work two jobs and put in 50 to 70 hours a week, he said. Working parents can’t afford to stay home when their child is sick, he said.

“Very few of the people only work for me. They work for other people. They have to,” Donatello said.

But as an owner, he also knows that his costs keep rising. He said he can’t raise prices enough to cover the increased cost of doing business.

“I make no more money than I did 10 years ago,” he said.

One restaurant owner who asked not to be named said he believes the minimum hourly wage for servers should be zero because servers make the most money in an establishment. What’s more, workers know what they’re getting into when they take the jobs, he said.

Larry Tarabicos, a lawyer whose family has been in the restaurant business for more than 100 years, said he believes it would set a terrible precedent if Superior Court decides in favor of Texas Roadhouse. He believes hosts should make the minimum hourly wage and tips.

Still, he doesn’t want to jettison the dual wage system for servers because tips provide an incentive for workers to hustle and provide good service. If lawmakers were to pass legislation that sets one minimum wage it would lead to the European model of not having tips, he said.

“Nobody wants to work for $8.25 an hour. Tips are why people work in the industry,” Tarabicos said.

“People don’t go to work in restaurants because of the difficult and rude customers. It’s not because of the long hours on your feet and the physical demands on your body. It’s not because you’d like to have your clothes smell like food when you get home at night. It’s because of the expectation that you’re going to make better money.”

Contact Maureen Milford at (302) 324-2881 or mmilford@delawareonline.com .

