How Restaurants Get Away With Stealing Millions From Workers Every Year

In 2016, McDonald’s coughed up $3.75 million to settle a wage theft lawsuit filed by workers at several Bay Area locations. But while the phrase “wage theft” might conjure images of employers withholding checks or skimming hours from their workers’ time sheets, the most-used methods are far less obvious — and often hard to detect. In the McDonald’s case, the workers claimed they were denied overtime and weren’t paid for time spent cleaning their uniforms, among other work-related activities. And several high-profile restaurants — from TGI Friday’s to Blue Hill at Stone Barns and Per Se — have paid out millions of dollars to settle lawsuits over unpaid wages, often centering around overtime and tips.

Wage theft permeates the restaurant industry, from fast food to fine dining. Though some cities and states have taken steps to protect workers, the problem is rampant: According to a recent New York Times editorial, the Department of Labor’s wage and hour division reported almost “84 percent of full-service restaurants it investigated between 2010 and 2012 had violated labor standards,” and those included wage and tip violations.

“The poorest workers in America are being stolen from the most,” says Saru Jayaraman, co-founder and co-director of the Restaurant Opportunities Center United. Though some tipped employees in high-end restaurants may take home salaries in the six figures (e.g. fine dining restaurant servers), the Bureau of Labor Statistics estimated the average restaurant server earned approximately $25,000 in 2017, with a nationwide range of about $17,000 for non-metropolitan areas to around $50,000 in metropolitan areas. In other words, the restaurant industry experiences one of the highest incidences of wage theft — and its low-wage workers are the most vulnerable.

Here now, an explanation on what exactly wage theft is and why it happens so frequently, and an overview of the ongoing legal battles that could affect tipping, wages, and overtime payment for restaurant workers across the country.

What is wage theft?

In broad terms, wage theft is the non-payment or underpayment of employees for hours worked, whether intentional or not. It can include any of the following:

• Employers paying out less than the minimum wage
• Paying employees the tipped minimum wage for non-tipped work (e.g. paying a server $2.13 per hour for doing side work like polishing silverware or cleaning glasses)
• Refusing to provide overtime pay
• Failing to give workers meal breaks
• Requiring employees to do off-the-clock work

Minimum wage, overtime, and appropriate record keeping are all regulated under the Fair Labor Standards Act, which was first passed in 1938, and has been amended with further detail several times in the years since.

Why are tipped workers so susceptible to wage theft?

Regular minimum wage laws often don’t apply to restaurant workers, such as servers, who earn a significant part of their income via tips. Federal law stipulates that employers can pay tipped workers as little as $2.13 an hour (an amount unchanged since 1991), so long as their tips bring them up to at least the federal minimum wage of $7.25. This complication means tipped workers are especially at risk for wage theft.

Allowing employers to manage differential payments leaves plenty of room for error, and a rampant disregard for follow-through on paying out earned wages. Miscalculation, whether intentional or not, sometimes means employees aren’t paid for their work. In some cases, tip pooling and strict overtime laws can set employees up to work more hours than they will get paid for. In others, management may pay workers a tipped wage for non-tipped work, like rolling silverware or polishing glassware. Or, in the most obvious and egregious example, they could skim workers’ tips and keep a portion for themselves or the restaurant.

The two-tiered hourly wage system in American restaurants requires a deep understanding of the rules and regulations, for both the employer and the employee. “We have the highest rates of wage theft because we have the most complicated system of any industry,” Jayaraman says. “Now you layer on top of that all these rules around a two-tiered wage system and all the regulations around paying people a sub-minimum wage and making sure tips make up the difference, and you’ve got the Wild West.”

According to Jayaraman, employers are required to tell workers exactly how they will be paid when they’re hired, but issues frequently arise when workers don’t know their rights.

Why is wage theft so common?

“Wage theft is rampant across the country, across industries, and across demographics,” says Laura Huizar, a staff attorney with the National Employment Law Project who specializes in minimum wage, wage theft, and enforcement. “It’s something that I think employers in many industries have realized they can do.” Put bluntly, restaurants fail to compensate workers fairly simply because they can, and because so many get away with it.

This occurs, in part, because there are so few resources devoted to enforcing laws already in place to combat wage theft. “The question is not what’s the incentive to steal, the question is what’s the incentive not to steal when the enforcement is so little,” Jayaraman says.

Employees who are paid incorrectly may be discouraged from challenging their employers, for fear of having their hours cut or retaliatory termination. And because “we don’t necessarily have the resources to hold employers accountable,” as Huizar says, “it’s crucial to think about more and more ambitious strategies to enforce the laws that are on the books.”

For some, part of the solution is abandoning the two-tier wage system. Tip pooling was recently addressed in legislation passed at the federal level: New rules prohibit employers, managers, or supervisors from collecting or retaining tips made by employees, while allowing tip sharing between tipped and non-tipped employees (for example, between servers and cooks) only if employees receive the full minimum wage.

Seven states have eliminated the two-tiered payment structure, providing a flat minimum wage for both tipped and non-tipped workers. In those states, research indicates workers experience higher median wages and, in some cities, higher tips. Meanwhile, several other states including Massachusetts are currently advancing bills to adjust or amend wage practices and overtime regulations.

What else can be done to combat wage theft?

Employees should educate themselves about their rights, and seek legal action if they are not paid according to the schedule they were told when hired; not paid the amount agreed upon; or if their paychecks seem off and their employer is unable to explain the discrepancy.

Typically, wage theft issues are handled at local or state levels, but proposed federal legislation could reinforce current protections and increase transparency — by requiring employers to clearly disclose terms of employment and payment. If passed, the bill would implement a monetary penalty for wage and overtime violations, while enabling employees to recover full compensation they were denied.

Because America’s tipping structure makes restaurants an environment particularly conducive to wage theft, NELP supports “one fair wage,” or the elimination of tip credits. “It is a complex system and there’s a very simple way to make it less complex, which is to actually just have every state follow the seven states that just require everybody to pay the full minimum wage,” Jayaraman says. “It’s a much simpler, easier, cleaner system with a lot less liability with far less onus on the employer to figure it out.”

Despite attempts to simplify wage structures and enact further legislation to protect workers, wage theft is an ongoing issue. And restaurant owners should step up to ensure they’re compensating workers fairly. “At the end of the day, the employer is responsible for making sure the business is complying with all basic labor standards,” Huizar says. “The employer should have systems and supervision in place to ensure the laws are complied with all the way down.”