Tipping point: Myrtle Beach area restaurants face lawsuits over alleged illegal tip pools

Sept. 28--One of the latest trends in the restaurant industry -- class-action lawsuits over allegedly illegal tip pools that enrich owners while cheating employees out of their wages -- has hit the Myrtle Beach area.

The tip pools, critics say, are used by some employers to cut personnel and other costs by taking gratuities from the waitresses, busboys and others who directly serve customers and using the money to supplement other workers' wages, pay for broken or stolen dishware and even awarding managers for hitting sales goals -- all of it in violation of the Fair Labor Standards Act.

It's an issue that has spurred dozens of lawsuits nationwide over the past two years and is a big reason the U.S. Department of Labor is asking for an extra $41 million in its upcoming budget to hire 300 additional inspectors to police wage and hour laws, including tip regulations.

However, some lawyers and those in the restaurant industry say the issue has been manufactured by plaintiff lawyers driven more by the lure of easy litigation -- and money -- than a concern for employees' rights.

"We don't see tip pooling as a problem," said David McMillan, chairman of the South Carolina Restaurant and Lodging Association, adding that most restaurants strictly follow the law. McMillan said the association has education programs to teach employers the nuances of wage laws, but tip pooling "has never been a big issue."

Charleston lawyer Bruce Miller disagrees.

Miller is suing the owners of this area's Mellow Mushroom and King Kong Sushi Bar & Grill restaurants for allegedly violating federal wage laws by forcing waiters and other front-line employees to share their tips with dishwashers, cooks and other "back-of-the-house" workers who typically never receive tips.

Such a set-up is illegal, Miller said, because restaurant owners who take the federal tip credit aren't allowed to take employees' tips to help pay other workers who have no interaction with the public. The tip credit lets employers pay front-line workers as little as $2.13 an hour as long as that pay, combined with those workers' tips, equals at least the $7.25 federal minimum wage.

Miller -- a certified specialist in employment and labor law -- also has sued The Kickin' Chicken and Hyman's Seafood restaurants in Charleston and said he is in the process of filing lawsuits against as many as eight more eateries, including an unnamed business in Murrells Inlet.

"The Hyman's case generated some attention," Miller said, adding that since that case was filed in July the allegations against new restaurants "has been like a snowball going down the hill, picking up more snow and speed."

King Kong Sushi has denied any wrongdoing in its answer to Miller's lawsuit, which was filed on behalf of former waiter Bret Herspold.

"His [Herspold's] claims have no validity," said Henrietta Golding, a Myrtle Beach lawyer who represents the sushi restaurant. "He was paid in full."

Mellow Mushroom has not responded to the lawsuit in its case but has hired the same defense lawyer -- Alice Paylor of Charleston -- that is representing Hyman's Seafood to fight Miller's allegations. The Mellow Mushroom lawsuit was filed on behalf of former waiter Christopher Elmquist.

"I can tell you that there is no evidence that anyone was not paid minimum wage," Paylor said. "The FLSA [Fair Labor Standards Act] does allow tip pools under certain circumstances, and we hope to prove that the pool used by Mellow Mushroom was valid."

Miller is seeking class-action status for all of the lawsuits, including those in Charleston, and all of the cases are pending.

Tip policies 'a legal minefield'

The local proliferation of such lawsuits matches a nationwide trend in which plaintiff lawyers are seizing on tipping policies that Restaurant Business magazine terms "a legal minefield."

While specific numbers are not available, a Nexis search turns up dozens of class-action, tip-pool lawsuits filed over the past two years. Among the highest-profile cases: Starbucks was ordered to pay back wages totaling $23.5 million for sharing tips with supervisors and Philadelphia sports bar chain Chickie's and Pete's paid $6.8 million in back wages over a tip pool the U.S. Department of Labor deemed illegal.

Last year, the labor department received 25,628 complaints of wage violations, including illegal tip pools, and forced employers to pay nearly $250 million in back wages to 269,250 employees. The amount of back wages was the second-highest in 15 years, eclipsed only by the $280.7 million figure in 2012.

Along the Grand Strand, the labor department has forced 33 restaurants to pay back wages totaling $166,680 to 345 workers over the past dozen years, according to the department's online database. Those totals only include completed investigations and it typically can take a year or more to close the book on a case once a complaint is filed.

The labor department's actions are just the tip of the iceberg, according to Miller.

"From our investigation, this practice is much more prevalent than not," Miller said, adding that many restaurant owners are getting tripped up simply because they don't understand -- or even read -- the law.

"I think that they just never have checked it out," he said. "They spend lots of money on marketing but not on their employment policies."

McMillan, who is the managing partner of Drunken Jack's restaurant in Murrells Inlet, said the number of lawsuits could be increasing because more restaurant owners -- wary of discrimination, worker's compensation and other claims -- are purchasing employment practices insurance than in the past.

"A lot of these could be an attempt to settle with an insurance company," he said.

Golding, the King Kong Sushi lawyer, said most of the restaurant owners she has represented don't have insurance against illegal tip pools and would have to foot the bill themselves for any judgment.

Carolyn Richmond, a New York hospitality law expert, told Restaurant Business magazine this year that "lawyers started realizing that class-action wage-and-hour lawsuits are more lucrative and less labor intensive than traditional discrimination suits.

"Restaurants have opened a Pandora's box for plaintiff lawyers," Richmond told the magazine.

Enforcement a challenge

The Myrtle Beach area cases include similar allegations.

Miller said King Kong Sushi's owners required Herspold to put 4 percent of his total sales during each shift into a pool with that shift's other tips that was then divided among ineligible kitchen staff and other workers. In the Mellow Mushroom case, Miller said the restaurant created a mandatory tip pool that was shared with ineligible staff.

Miller wants the restaurants to pay his clients unspecified back wages, refund the tips that were taken from them with interest and cover all court costs and attorney's fees.

Among the defenses cited in answers to Miller's lawsuits: the restaurants acted in good faith and thought they were following the law; the workers never reported any of the allegations to the owner or management during their employment; and any unpaid wages are offset by paid meal periods or some other paid break time the workers were given.

The South Carolina office of the federal labor department has long focused on this state's restaurant industry as one of the most frequent violators of wage laws.

"The restaurant industry employs some of the country's lowest-paid workers who, due to a lack of knowledge of the law or unwillingness to exercise their rights, are vulnerable to disparate treatment and labor violations," the department said in an October 2012 news release announcing an ongoing crackdown on wage law violations in the industry.

A spokesman for the labor department's office in South Carolina could not be reached for comment.

The labor department is far outnumbered, with just 1,000 inspectors nationwide to police 7 million workplaces. That's one of the reasons the department is asking for enough money in its 2015 budget to boost its wage-and-hour inspector pool by nearly one-third.

The department "has a gravely difficult time trying to figure out who's gotten what and how much and whether it's from the right tip pool and who's been included," former labor department Director Seth Harris said during a 2013 Senate hearing focusing on restaurant industry pay. "It's actually quite complicated. It's very, very difficult to enforce."

Miller said his lawsuits have had an almost immediate impact in bringing some restaurants into compliance. After the Hyman's Seafood lawsuit was filed, Miller said he noticed several eateries changed their tip-pooling policies for fear of being the next defendant named in a legal action, which suits him fine.

"One of our goals is to have them change their policies," Miller said.

Contact DAVID WREN at 626-0281 or via twitter at @David_Wren_

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