                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-7-1994

Reich v. Chez Robert, Inc. et al.
Precedential or Non-Precedential:

Docket 93-5619




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                UNITED STATES COURT OF APPEALS
                    FOR THE THIRD CIRCUIT

                       _______________

                         No. 93-5619
                       _______________

              ROBERT REICH, Secretary of Labor,
              United States Department of Labor,

                                  Appellant

                             v.

            CHEZ ROBERT, INC., ROBERT SLIWOWSKI,
           individually and as Owner and President

                               Appellee
                       _______________

      On Appeal From the United States District Court
                for the District of New Jersey
                   (D.C. Civil No. 87-2219)
                        _______________

          Submitted Under Third Circuit LAR 34.1(a)
                         May 12, 1994

           Before: BECKER AND LEWIS, Circuit Judges
                 and POLLAK, District Judge1.

                    (Filed   July 7, 1994)

                       LAURISTON H. LONG
                       WILLIAM J. STONE
                       United States Department of Labor
                       200 Constitution Avenue, N.W.
                       Washington, DC 20210

                                  Attorneys for Appellant

                       ROBERT SLIWOWSKI
                       45 Covington Lane
                       Voorhees, NJ 08043


1
Honorable Louis H. Pollak, United States District Judge for the
   Eastern District of Pennsylvania, sitting by designation.

                               1
                                   Appellee


                            _______________

                         OPINION OF THE COURT
                            _______________



Pollak, District Judge.
          Secretary of Labor Robert Reich ("Secretary") here

appeals from a judgment of the United States District Court for

the District of New Jersey in an action brought under the Fair

Labor Standards Act, 29 U.S.C. § 201 et seq.     The Secretary

contends that the court erred in reducing the statutory liability

of defendants -- a restaurant and its owner -- for back wages by

improperly taking into account tips earned by employees during

the violation period.2    For the reasons set forth below, we agree

with the Secretary, and we remand for further proceedings

consistent with this opinion.

          Background:     The facts, insofar as relevant for this

appeal, are as follows.3    This suit to enforce the Fair Labor
Standards Act ("the Act") was commenced in 1987.     The defendants

are Chez Robert, Inc., an "upscale" restaurant in New Jersey, and

its owner Robert Sliwowski.     The complaint alleged violations of

the minimum wage, overtime, and record-keeping provisions of the


2
 Defendants-appellees have not filed a responsive brief in this
appeal. We therefore have before us only the brief of appellant,
Secretary Reich.
3
 The complete factual background and the many facets of the
underlying case are amply set forth in the district court's
comprehensive opinion, Reich v. Chez Robert, Inc., 821 F.Supp.
967 (D.N.J. 1993).


                                  2
Act.   After a bench trial that began in March, 1992, the district

court held that the defendants had willfully violated the wage,

overtime and record-keeping provisions of the Act.   The court

awarded both damages and injunctive relief, and found defendants

liable for two kinds of damages: (1) "actual damages" -- i.e.

unpaid hours, underpaid overtime, and uniform maintenance

expenses -- in the amount of $177,809.66, and (2) tip credit

remunerations -- i.e. the cumulative amount by which the wages of

Chez Robert's employees fell short of the minimum wage -- in the

amount of $229,794.19.   The total damages came to $407,603.85.

The court reduced the award to $305,702.88 to reflect tips earned

by employees during the relevant period.   The Secretary contends

that the district court's decision to discount defendants'

liability was erroneous.   As framed by the Secretary's brief, the

only issue before this court is "whether the district court erred

as a matter of law by sua sponte reducing, across the board, the

back wage awards to individual employees by 25% from the amounts

which the court found otherwise owed to them as a result of

defendants' violation of the [Act]."   Appellant's Br. at 2.

           Discussion:   The Secretary bases his appeal upon

Section 3(m) of the Fair Labor Standards Act, which provides that
           . . . In determining the wage of a tipped employee,
          the amount paid such employee by his employer shall be
          deemed to be increased on account of tips by an amount
          determined by the employer . . . except that the amount
          of the increase on account of tips determined by the
          employer may not exceed the value of tips actually
          received by the employee. The previous sentence shall
          not apply with respect to any tipped employee unless
          (1) such employee has been informed by the employer of
          the provisions of this subsection, and (2) all tips



                                 3
            received by such employee have been retained by the
            employee . . .

29 U.S.C. § 203 (m).

            Section 3(m) therefore allows an employer to reduce a

tipped employee's wage below the statutory minimum by an amount

to be made up in tips, but only if the employer informs the

tipped employee that her wage is being decreased under section

3(m)'s tip-credit provision.    If the employer cannot show that it

has informed employees that tips are being credited against their

wages, then no tip credit can be taken and the employer is liable

for the full minimum-wage ($3.35/hr in this case).   Martin v.
Tango's Restaurant, Inc., 969 F.2d 1319, 1322-23 (1st Cir. 1992).

            At trial, defendants argued, pursuant to section 3(m),

that their liability for back wages should be calculated at

$2.01/hour, the rate at which Chez Robert's employees were

apparently paid.    Defendants argued that they were entitled to a

tip credit of $1.34/hour for the balance of the $3.35 per hour

statutory minimum wage.4   The district court rejected defendants'

argument.    The court found that defendants had not notified

employees of the tip credit as required under the Act, and

therefore were not entitled to the offset.    Chez Robert, 821

F.Supp. at 977.    Using the statutory minimum wage of $3.35/hour,

the court calculated defendants' liability for back wages to be

$177,809.66 in unpaid wages, underpaid overtime and uniform


4
The minimum wage applicable until March 31, 1990, was $3.35 per
hour. The violations by Chez Robert and its owner occurred prior
to that date. The current statutory minimum wage, which became
effective on March 31, 1991, is $4.35 per-hour. 29 U.S.C. §
206(a)(1).


                                 4
maintenance, plus $229,794.19 in disallowed tip credit

deductions, for a total of $407,603.85.    Id. at 985.   The

Secretary does not challenge this initial determination.

            The Secretary takes issue with what the district court

did next.     Notwithstanding that the court found defendants not to

be entitled to the tip deduction under section 3(m), the court

made the following ruling:
          the Secretary has made no provisions . . . for tips
          actually received by employees. Certainly no precise
          amount can be determined. . . . Chez Robert is an
          expensive "upscale" restaurant and certainly capable of
          generating income that would have supplemented
          employees' incomes to a great degree. Since the
          Secretary did not account for tips actually received,
          the Court must apply a discount rate to the damages
          owed to each employee. . . . The Court has adjusted
          Defendants' liability to account for this inflating
          factor. The $177,809.66 in actual damages and the
          $229,794.19 in tip credit remunerations will be reduced
          by 25%. Therefore, after discounting, Defendants'
          [sic] are obligated to pay total damages, actual and
          tip credit, in the amount of $305,702.88.

Id. at 985.
            Appellant argues that the above ruling was erroneous

because it essentially gives defendants a tip credit which the
court had already determined they were statutorily barred from

claiming.     The pertinent cases support the Secretary's argument.

In Tango's Restaurant, the First Circuit held that "Congress

chose to allow employers a partial tip credit if, but only if,

certain conditions are met."    969 F.2d at 1322.   The notice

requirement is a firm one:
          It may at first seem odd to award back pay against an
          employer, doubled by liquidated damages, where the
          employee has actually received and retained base wages
          and tips that together amply satisfy the minimum wage
          requirements. Yet Congress has in section 3(m)


                                  5
           expressly required notice as a condition of the tip
           credit and the courts have enforced the requirement.
           . . . If the penalty for omitting notice appears harsh,
           it is also true that notice is not difficult for the
           employer to provide.

Id. at 1323 (internal citations omitted).

           In this case, the district court did exactly what

Tango's Restaurant instructs against doing: that is, alleviate

the harsh results of the notice requirement by reducing damages

out of an equitable sense that some offset for tips should be

allowed.   821 F.Supp. at 985.   If such a ruling were permissible,

the district courts would effectively have discretion to waive

the notice requirement in the interests of perceived fairness to

the employer.    While that is perhaps not in itself an undesirable

power for the district courts to have, it is not, as the First

Circuit tells us, what the statute permits.

           The First Circuit's view is shared by other courts that

have addressed the section 3(m) notice requirement.   In Richard

v. Marriott Corp., 549 F.2d 303 (4th Cir. 1977), the Fourth

Circuit held that the district court erred when it allowed a

partial tip credit for Marriott "out of a vague sense of fairness

and a feeling that $5.43 and up per hour is enough for a

wait[e]r[ess]", when it was established that "Marriott never

informed its employees of the provisions of Section 3(m) of the

[Act]."    Id. at 305.

           The Fifth Circuit has likewise held that where it was

agreed that a restaurant did not inform waiters that a tip-credit

was being deducted from their wages, "the district court properly

found that the employees were entitled to the full minimum wage


                                 6
for every hour" at issue.   Barcellona v. Tiffany English Pub, 597

F.2d 464, 467-68 (5th Cir. 1979); see also Marshall v. Gerwill,

inc., 495 F.Supp. 744, 753 (D.Md. 1980) (without section 3(m)

notice, "retaining of tips by the [employees] cannot offset the

failure to pay the applicable minimum wage."); Bonham v. Copper

Cellar Corp., 476 F.Supp. 98, 101-02 (E.D.Tenn. 1979) (barring

tip credit for employer who failed to explain provisions of

section 3(m) to employees, even though employer acted in good

faith).

          We have not previously had occasion to address whether

the notice requirement of section 3(m) may be waived by the

district court when there is evidence of actual tips received.

Now faced with that question, we agree with the interpretation of

the statute reached by the First Circuit in Tango's Restaurant.

When the employer has not notified employees that their wages are

being reduced pursuant to the Act's tip-credit provision, the

district court may not equitably reduce liability for back wages

to account for tips actually received.

          Accordingly, we find that the district court erred in

reducing defendants' liability from $407,603.85 to $305,702.88.

The judgment of the district court is vacated and the case is

remanded to the district court for proceedings consistent with

this opinion.




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