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10 legal issues for restaurant operators to watch

From minimum wage legislation to predictive scheduling, here’s what to expect on the legal front in 2017

Jordan Bernstein is a partner at the law firm of Michelman & Robinson LLP in Los Angeles, focusing on the restaurant industry. Taylor Burras is an associate with the law firm. This article does not necessarily reflect the opinions of the editors or management of Nation’s Restaurant News.

With the election of Donald Trump as president, labor-related stress that restaurant operators have experienced in recent months may soon relax. However, new federal, state and municipal regulations will impact operators in 2017. Regardless of federal policy, restaurants will face uncertainty when it comes to employment and regulations.

Here are 10 legal developments that should be front and center for operators this year:

1. Overtime

In early 2016, the U.S. Department of Labor published a final rule updating regulations governing the exemption of executive, administrative and professional employees from the minimum wage and overtime pay protections of the Fair Labor Standards Act. This rule doubles the annual salary threshold that generally determines who qualifies for overtime pay under federal law, from $23,660 to $47,476.

The rule dramatically impacts restaurants with mid-management employees. It was scheduled to go into effect on Dec. 1, 2016, but in late November, a federal judge in Texas blocked the rule nationwide, after 21 states joined to file a lawsuit alleging that the new overtime regulations were an unconstitutional exercise of power.

Additionally, Trump has nominated Andy Puzder as secretary of labor. Puzder, formerly CEO of CKE Restaurants Holdings Inc., parent to Carl’s Jr. and Hardee’s, is an outspoken critic of worker protections enacted by the Obama administration. A labor department under Puzder is unlikely to take a favorable view of the new overtime rule, and it is likely to be scrapped or significantly revised.

2. Minimum wage

Wages are always a pressure point for restaurants. While some states and municipalities have recently increased the minimum wage, the federal minimum wage remains at $7.25 per hour. Early in his campaign, Trump suggested that he would support a federal minimum wage increase to $10 per hour. But it is more likely that the Trump administration will leave the issue to state and local legislatures, rather than push Congress to act at the federal level.

Many states are acting on their own to boost the minimum wage, which has a significant impact on the restaurant industry. For example, effective Jan. 1, 2017, the California minimum wage increased to $10.50 per hour for employers with more than 25 employees. Employers with 25 or fewer employees are not subject to the increase until 2018. The statute provides for annual increases until the minimum wage reaches $15 per hour for large employers in 2022, and for small employers in 2023.

3. Marijuana and the workplace

In November, California voters approved Proposition 64, legalizing the recreational sale, possession and use of marijuana. This has raised several immediate questions about what, if anything, employers should do, and whether Prop. 64 created any new employee rights.

Ultimately, Prop. 64 does not generate new concerns for California employers that did not already exist when the medical use of marijuana became legal (Prop. 215). Following the passage of Prop. 215 in 1996, employers were faced with issues concerning drug testing, possession or use of marijuana at the jobsite or during working hours, dealing with employees possibly under the influence, and what the employer legally could or could not do upon discovering that an employee was using marijuana for medical purposes while working. Generally, Prop. 64 does not change the current legal landscape in the employment area.

Many employers have a mandatory drug testing policy, and legalization complicates this process somewhat, as the presence of a legal drug in someone’s system prior to starting employment is not necessarily an indicator of their propensity to abuse illegal narcotics or to be intoxicated on the job. Similarly, such a common pre-work screening could violate an individual's privacy regarding a medical condition.

But this is nothing new, as the same concerns existed after the passage of Prop. 215. However, employers may wish to re-communicate workplace policies to employees, as they specifically relate to marijuana use in light of Prop. 64, so that employees do not mistakenly assume that workplace policies changed with the passage of the proposition. Violations of marijuana use policies should be documented, and, like all employee information, considered as a whole when determining an employee’s current and future status with the company. Employees who feel aggrieved are apt to seek recourse, and while an employer may have a sound basis for a termination, it is best to avoid giving a former, or even a current, employee, a pretext for seeking representation.

4. Joint-employer liability

The National Labor Relations Board decision in the Browning-Ferris Industries case, which is currently on appeal, has created a wave of issues in the restaurant industry, including conflict between franchisors and franchisees over which is liable when lawsuits arise, as well as increased liability when working with contractors.

In its highly controversial BFI decision, the NLRB revised its test for the joint-employer doctrine, dramatically easing the criteria for a company to be considered a joint-employer. For many decades, the traditional joint-employer test focused on governance, wage and supervision decisions, and “direct and immediate” control. The test excluded “limited and routine” oversight and supervision, because “hiring, firing, discipline, supervision and direction” were not considered essential or meaningful to the employment relationship. Under the new standard, a finding of joint-employment is much broader, and only requires that a business exercise “indirect” (or potential) control over workers. Hence, under the new test, a company may not only be held liable for its own labor violations, but also for those of the other entity.

The BFI case is relevant not only to franchisor/franchisee relationships, but all relationships in which tasks and responsibilities are outsourced. The recent joint-employer rulings affect all companies that outsource any aspect of their business. This includes contractors, suppliers or even outsourced cleaning or IT work. All of these business relationships can now be subject to review under the new joint-employer standard.

Unfortunately for restaurant owners, the appellate court is unlikely to adjudicate the matter until later in 2017, thereby ensuring that joint employment will remain a critical labor issue in the interim. It remains to be seen how the appeal will play out in the courts, and to what extent the Republican administration will relax this joint-employer standard.

5. Predictive scheduling

In November 2014, San Francisco became the first U.S. jurisdiction to pass predictive scheduling legislation. Seattle and New York introduced similar laws in 2016. Another bill has been drafted, but delayed, in Washington D.C., and a California statewide bill was advanced early in 2016, only to be tabled by the state senate. It is safe to say that this is becoming a trend, and one that restaurateurs must watch closely.

A recently introduced New York bill, for example, requires quick-service employers to schedule a majority of expected shifts and publicly post a workplace schedule two weeks in advance. It also forces employers to provide additional compensation when workers are required to accommodate last-minute changes to their schedules for reasons within employers’ ability to plan or control. The bill purports to address problems created by the practice of “clopenings,” or shifts that require employees to consecutively work closing and opening shifts with fewer than 10 hours between.

Although the New York legislation would only affect quick-service restaurants, we may see efforts to extend the reach of the law to other restaurants in New York City. As operators work to stay competitive, regulations like the one proposed by New York City Mayor Bill de Blasio place further strain on the industry. Such bills dramatically limit management’s flexibility in an industry that already must be creative with scheduling in order to meet demand and control labor costs.

6. Health grades

Health grades can make or break a restaurant. This is nothing new. However, operators must pay close attention when counties and municipalities revise grading standards and processes. For example, on Jan. 1, 2017, Los Angeles County will begin hard enforcement of a new point deduction system. Points will be subtracted from the inspection score when two or more major critical risk violations are found during a routine inspection (three points), and when a restaurant’s or market’s permit is suspended for no water available, sewage or vermin infestation (seven points each). Not only can poor health grades affect customer perception, but in some cases they can cause the restaurant to default on some of its most important contracts. Many restaurants have covenants in their leases, and possibly their loan documents, that require them to maintain an “A” grade (or operate a first-class establishment).

Until now, Los Angeles’ widely emulated letter-grading system had gone largely unchanged since 1998. Other cities and counties are expected to follow suit and create stricter point deductions for restaurants closed for a cockroach, rodent or fly infestation; sewage problems; or for not having any water running through the facility.

7. Tip pooling

The U.S. Department of Labor’s tip-pooling rule, which bars restaurants from requiring their waitstaff to share tips with employees in the back of the house, has affected the bottom line for restaurants throughout the country. It has also caused a depression in the wages of mostly minority, male kitchen workers by eliminating their share of a tip pool, and, in some cases, caused the burden to be passed on to consumers via a cost increase in menu items to offset the cost to restaurants. Some restaurants, for example, have chosen to pay higher wages to back-of-house employees, accomplished by adding a line to bills allowing customers to tip the back of the house directly, or through the replacement of tips with mandatory “service fees” to be split among the service staff.

The rule was upheld by the Ninth Circuit Court of Appeals, and a petition is now pending before the Supreme Court. The Trump administration is likely to oppose the rule as being anti-business, because it is seen as economically advantageous for restaurant employers to have back-of-house employees participate in tip pools. In the meantime, restaurants throughout the country have begun to rethink their approaches to tipping, while others have opted to keep tip pools as is while the issue is pending, despite running the risk of facing a federal investigation or private lawsuit.

8. Wage disparity and the pay gap

Gender- and race-based wage disparity has become a pronounced issue in recent years, and promises to continue to be a topic of concern moving forward. A recent report released by the Restaurant Opportunities Center (ROC) found evidence of both race- and gender-based wage disparities across the restaurant industry in California’s San Francisco Bay Area. This disparity was found to be particularly acute in fine-dining restaurants. A similar study looking at restaurants throughout California found that women have been steered toward lower-paying positions in casual-dining restaurants, while Latinos and African Americans were more often employed as lower paid bussers, food runners or kitchen staff in restaurants. Operators should be cognizant of this issue, develop strategies to address it and implement protocols for responding to wage disparity complaints from staff.

At the federal level, the Lilly Ledbetter Fair Pay Act, passed in 2009, enables an employee to file a complaint for unfair pay within 180 days of an employer’s pay decision. Moreover, in a move meant to ferret out pay disparity, the Equal Employment Opportunity Commission (EEOC) has signaled its intent to require employers with more than 100 employees to submit compensation data to the EEOC starting Sept. 30, 2017.

Furthermore, states including California, New York, Massachusetts and New Jersey have significantly revised their current laws on gender pay equity. For example, California’s Fair Pay Act (FPA), which went into effect on Jan. 1, 2016, is the strictest of these new state-level laws. Under the new law, employees can be compared with other employees even if they do not work in the same establishment and do not hold the “same” or “substantially equal” job; the work must merely be similar. The FPA also requires employers to justify pay differentials, and expressly limits the factors that can be used to justify the differential.

Under Title VII, a showing of discriminatory intent or a specific practice or policy with a discriminatory impact was required in order to prevail on a claim, but no such showing is required under California’s FPA. And on Sept. 30, 2016, California Governor Jerry Brown signed into law Senate Bill 1063 (amending Labor Code §1197.5 and §199.5), which extends the Fair Pay Act's requirements to race and ethnicity in a manner nearly verbatim to those related to gender. In light of the above, employers not only in California, but across the country, should review their policies and pay structures and correct disparities.

9. LGBTQ workplace rights

LGTBQ rights have gone under the microscope in 2016, and bathroom access has become the lightning rod issue at the national level. Most significantly, on Oct. 28, 2016, the Supreme Court granted certiorari in a case involving Gavin Grimm, a transgender student in Virginia, and his attempt to use men’s restrooms and locker-room facilities in his school district. The critical issue in the case involves the U.S. Department of Education’s interpretation of a federal prohibition on sex discrimination in schools. The Supreme Court’s decision in this case will likely have a significant impact on federal workplace discrimination laws even though the case does not directly involve employment law. The EEOC has recently made efforts to expand the meaning of “sex” under Title VII, actively pursuing an enforcement agenda interpreting the term “sex” as inclusive of the LGBTQ community. If the Supreme Court finds that the LGBTQ community is protected by statutes prohibiting “sex” discrimination, it would have significant ramifications for restaurant employers, not only around bathroom access issues, but potentially a host of workplace discrimination, harassment and retaliation claims.

10. Criminal history disclosure

On Dec. 9, 2016, Los Angeles Mayor Eric Garcetti signed the “Fair Chance Initiative,” prohibiting employers from considering a job applicant’s criminal history, except in limited circumstances. Private employers in Los Angeles may no longer ask job applicants about their criminal histories prior to making conditional job offers. Los Angeles now joins over 150 cities and counties in 24 states nationwide that have adopted similar “Ban the Box” ordinances. Restaurants should review their HR policies and application and hiring documents to ensure full compliance with local laws. Restaurant back-of-house jobs are often “transition” jobs for formerly incarcerated applicants, and these “Ban the Box” ordinances are designed to eliminate the negative stigma surrounding such workers.

Inset photos: David McNew/Getty Images; Rawpixel Ltd/istock/Thinkstock; Mario Tama/Getty Images

Jordan Bernstein is a partner with the law firm Michelman & Robinson LLP in Los Angeles. His niche practice includes counseling established chefs, restaurateurs, food and beverage businesses, and working with entrepreneurs seeking to start their own enterprises. Taylor Burras is an associate with the law firm Michelman & Robinson LLP in Los Angeles. She focuses her practice on the hospitality and insurance industries.

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