USCA1 Opinion
July 31, 1992
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
_____
No. 91-2213.
LYNN MARTIN, SECRETARY OF LABOR,
UNITED STATES DEPARTMENT OF LABOR,
Plaintiff, Appellant,
v.
TANGO'S RESTAURANT, INC., ET AL.,
Defendants, Appellees.
___________
ERRATA SHEET
The opinion of this Court issued on July 20, 1992, is
amended as follows:
On page 10, section heading "II" should be changed to
"III".
On page 18, section heading "III" should be changed to
"IV".
July 20, 1992
____________________
No. 91-2213
LYNN MARTIN, SECRETARY OF LABOR,
UNITED STATES DEPARTMENT OF LABOR,
Plaintiff, Appellant,
v.
TANGO'S RESTAURANT, INC., ET AL.,
Defendants, Appellees.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jose Antonio Fuste, U.S. District Judge]
___________________
____________________
Before
Cyr, Circuit Judge,
_____________
Roney,* Senior Circuit Judge,
____________________
and Boudin, Circuit Judge.
_____________
____________________
Lauriston H. Long, Attorney, U.S. Department of Labor, with whom
_________________
Marshall J. Breger, Solicitor of Labor, Patricia M. Rodenhausen,
____________________ ________________________
Regional Solicitor, Monica Gallagher, Associate Solicitor, and William
________________ _______
J. Stone, Counsel for Appellate Litigation, U.S. Department of Labor,
________
were on brief for appellant.
Wallace Vazquez Sanabria for appellees.
________________________
____________________
____________________
_____________________
*Of the Eleventh Circuit, sitting by designation.
BOUDIN, Circuit Judge. The Secretary of Labor
______________
brought suit under the Fair Labor Standards Act of 1938
("FLSA" or "the Act"), 29 U.S.C. 201 et seq., against a
________
corporation and its owners ("the defendants") to enjoin and
redress violations of the statute. After a trial, the
district court awarded some but not all of the relief sought
by the Secretary. The Secretary seeks review on two issues.
On one of them, we agree with the Secretary and reverse the
district court; and on the other, we remand for further
proceedings.
-2-
I. BACKGROUND
Tango's Restaurant, Inc. ("Tango's"), is a corporation
conducting a restaurant business in Hato Rey, Puerto Rico.
Its president is Jorge Carcavallo, who manages the business
together with his wife, Vilma Carcavallo, the restaurant's
secretary, treasurer and office manager. Together, they own
the business. The Secretary, who is responsible for
enforcing the FLSA, conducted an investigation of Tango's
and concluded that Tango's was keeping inaccurate records
and failing to pay minimum wages and required overtime
compensation. On June 11, 1991, the Secretary brought suit
in the district court, naming the corporation and both
Carcavallos as defendants. Although the complaint charged a
number of violations, only two episodes are pertinent to
this appeal, and the facts set forth below are limited to
those episodes.
In the district court, the Secretary sought back pay
and liquidated damages for the waiters at Tango's, asserting
that they had not been paid the minimum wage (FLSA 6, 29
U.S.C. 206) or required overtime compensation. FLSA 7,
29 U.S.C. 207. After extensive discovery, a six-day trial
was held before the district judge. On July 31, 1991, the
district court entered judgment, together with findings of
fact and conclusions of law, granting extensive relief
-3-
3
against defendants but not all of the relief sought by the
Secretary. The relief granted included, as provided by the
Act, awards of back pay and liquidated damages for most of
the waiters. FLSA 16, 29 U.S.C. 216.
The district court ruled that 15 of the waiters
(together with seven other former or present employees) were
entitled to $51,880.68 in back pay, and a like amount in
statutory liquidated damages. The court found that Tango's
books reported these waiters as working a uniform 40 hour
week at an hourly rate of $2.95 per hour. Although the
waiters had been paid this amount by Tango's, they had
generally worked six days a week and had averaged 53 hours a
week. Further, under the Act the minimum wage in force at
the time of their employment was $3.35 per hour (FLSA
6(a)(1), (c)(1)(B), 29 U.S.C. 206(a)(1), (c)(1)(B)), with
"time and a half" the employee's regular rate for hours in
excess of 40. FLSA 7(a)(1), 29 U.S.C. 207(a)(1). The
waiters had also averaged about $66 per day each in tips
which they pooled, divided, and retained.
The district court held, over the Secretary's
objection, that the defendants were entitled to treat a
portion of the tips received by the waiters as a credit
against the defendants' minimum wage and overtime
compensation obligations. The Act permits such a "tip
credit" under certain conditions, including a requirement
-4-
4
(described more fully below) of notice to the employees.
FLSA 3(m), 29 U.S.C. 203(m). The district court found
that the notice requirement had been met in this case and
allowed the defendants to take a tip credit of 40 cents per
hour for both the minimum wage and overtime compensation.
This credit eliminated any underpayment for the first 40
hours ($2.95 + 40 cents = $3.35) and reduced the defendants'
liability for overtime hours and liquidated damages.
The district court declined to order any back pay award
for Manuel Santiago, who acted both as a waiter and as the
manager of other waiters. Santiago was also carried on
Tango's books as working a 40 hour week at $2.95 per hour.
In fact he was paid not only the book figure of $118 per
week (40 x $2.95) but an additional off-book payment of $200
per week, regardless of hours actually worked. The trial
judge found that Santiago's hours of work varied from week
to week but averaged 58 hours a week. Santiago shared tips
on the same basis as the other waiters. The district court
ruled that Santiago's wages of $318 per week adequately
compensated him for his 58 hours of work, and it added that
he was in any event an involuntary plaintiff and responsible
for the illegal practices that led to the case.
This appeal followed. In this court, the Secretary
contends that no tip credit should have been allowed in
-5-
5
computing liability to the waiters and that Santiago was
entitled to an award for uncompensated overtime.
II. THE TIP CREDIT
A stranger to the FLSA might suppose that, in
determining an employer's minimum wage obligations, the tips
regularly received and retained by an employee either would
be treated as wages paid by the employer or, in the
alternative, would be wholly ignored. Instead, in a
legislative compromise, Congress chose to allow employers a
partial tip credit if, but only if, certain conditions are
met. At the time of the employment in this case, section
3(m) of the Act provided that in computing minimum wages the
employer could treat as wages paid by the employer tips
actually received by the employee up to "an amount
determined by the employer but not . . . in excess of 40 per
centum of the applicable minimum wage." See 29 U.S.C.
___
203(m) (1982). Section 3(m) also provided, however, that
this tip credit provision would not apply unless
"(1) such employee has been informed by the
employer of the provisions of this subsection, and
(2) all tips received by such employee have been
retained by the employee [except that pooling of
tips among tipped employees is permitted]."
In this case, the Secretary called at trial eight
waiters who testified uniformly that defendants had told
them nothing about either the minimum wage or Tango's
intention to treat tips as wages under the Act. Jorge and
-6-
6
Vilma Carcavallo each testified at trial, as did the waiter-
manager Santiago, but none of the three testified that the
waiters had been notified of either the minimum wage or the
tip credit. The Secretary's compliance officer allowed a 40
cent tip credit in his investigative report, but the
Secretary tells us that this was a tentative allowance made
prior to the waiters' trial testimony and that the
compliance officer relied in part on an affidavit of Vilma
Carcavallo, asserting that at the outset of employment each
waiter was told that Tango's utilized a tip credit against
its minimum wage obligations. We are further told that the
affidavit was not offered at trial nor did Vilma Carcavallo
repeat this assertion in her testimony.
The trial judge nevertheless found that "the waiters
were told that the restaurant would utilize a tip credit
against its obligations to pay minimum wages" to the
waiters. The court said that it did not find the waiters'
denial of notice credible because employees would not be
likely to accept employment at $2.95 an hour when San Juan
offered many jobs at the minimum wage of $3.35. The court
stressed that the waiters had received and retained
substantial tips and that the compliance officer had allowed
the tip credit on the first 40 hours of work. The Secretary
contends that the trial court erred in ruling that notice
had been given. We agree with the Secretary.
-7-
7
Section 3(m) requires as a condition of the tip credit
that the employee be informed by the employer "of the
provisions of this subsection . . . ." The core provisions
of section 3(m) allow an employer to take a tip credit
against the employer's minimum wage obligations, in an
amount to be determined by the employer, subject to certain
limitations. We read section 3(m) to require at the very
least notice to employees of the employer's intention to
treat tips as satisfying part of the employer's minimum wage
obligations. It could easily be read to require more--for
example, notice of "the amount . . . determined by the
employer" to constitute wages--but how much more need not be
decided in this case.
As the finder of fact, the district judge may be
reversed only where a finding is "clearly erroneous." Fed.
R. Civ. P. 52(a); Anderson v. Bessemer City, 470 U.S. 564,
________ ______________
573 (1985). As the record stands, we are pointed to
substantial, uniform testimony that the minimum wage or tip
credit was never mentioned to the waiters but cited to no
evidence that Tango's gave its waiters any notice of either.
The inference that notice was given, drawn by the trial
judge, seems to us to be faulty. The waiters' willingness
to work for wages of $2.95, where $3.35 might be earned in
other available jobs, might be some proof that the waiters
expected to earn and retain their tips, but it does not
-8-
8
suggest even mildly that the waiters knew anything of the
minimum wage laws or defendants' intention to claim a tip
credit against their obligations.
As for the investigating officer, he testified at trial
that no notice of the tip credit was given to the waiters
and "no one [among the waiters] even knew what a tip credit
meant"; that in making his calculations he nevertheless
allowed a 40 cent tip credit for each waiter's first 40
hours a week; and that he did so not because the law
warranted it but because the tips were actually paid and the
officer thought a tip credit "would be more fair." This
testimony plainly undercuts, rather than supports, a claim
that notice was given. Cases are ordinarily decided in
accordance with the evidence presented at trial. Defendants
have provided no reason or precedent to bind the government
by its agent's generous impulse to be "fair" in making his
computations.
We have considered whether defendants were misled to
their prejudice by the Secretary's change of position.
Prior to trial the Secretary said that she did not challenge
the tip credit as applied to the waiters' first 40 hours but
only as applied to their overtime compensation. When the
Secretary altered her position after trial, in light of the
evidence, defendants made no claim that they had proof of
notice which they had not offered at trial, nor do they make
-9-
9
such a claim now. Further, notice of the tip credit was at
issue in the trial (because of the Secretary's overtime
claim), so defendants had ample reason to offer what proof
they had, and they apparently offered none.
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) expressly required notice as a
condition of the tip credit and the courts have enforced
that requirement. See Richard v. Marriott Corp., 549 F.2d
___ _______ ______________
303, 305 (4th Cir.), cert. denied, 433 U.S. 915 (1977);
____________
Bonham v. Copper Cellar Corp., 476 F. Supp. 98, 101-02 (E.D.
______ ___________________
Tenn. 1979); Donovan v. 75 Truck Stop Inc., 92 Lab. Cas.
_______ ___________________
(CCH) 34,071, at 44,091 (M.D. Fla. 1981). It does not
matter in this case (although it might were the adequacy of
a specific notice in issue) whether Congress deemed notice a
matter of fairness to the employee, a device for enforcing
minimum wage payments, or both. If the penalty for
omitting notice appears harsh, it is also true that notice
is not difficult for the employer to provide.
Accordingly, on this issue we reverse the district
court and remand so that the court can recompute defendants'
liability to the waiters with no tip credit allowed.
III. SANTIAGO
-10-
10
In the district court, the Secretary also sought back
pay for Santiago to reflect his overtime work, which the
trial judge found to vary widely but to average 18 hours a
week. The Secretary concedes that Santiago's fixed wage of
$318 per week fully covered the minimum wage for a work week
of 40 hours, as it clearly does (40 x $3.35 = $134). Yet
the Secretary's brief asserts that Santiago has "received no
compensation for approximately 18 hours of overtime per
week." The Act not only requires payment for overtime but
provides that compensation for hours in excess of 40 per
week shall be paid "at a rate not less than one and one-half
times the regular rate at which [the employee] is employed."
FLSA 7(a)(1), 29 U.S.C. 207(a)(1).
Although it deemed Santiago subject to the Act, the
district court denied any award to Santiago. The court
first noted that Santiago had received $318 per week and it
ruled that "[t]his amount adequately compensated him for his
forty (40) hours of regular work and his overtime hours up
to fifty-eight (58) hours a week." The court then observed
that Santiago appeared to be "an involuntary plaintiff," who
supported Tango's management at the trial. Finally,
Santiago was, in the court's opinion, himself "responsible
for the implementation of the illegal practices which led to
the filing of this case."
-11-
11
Starting with the district court's first reason, the
Secretary argues to us that the district court has no
warrant under the statute to decide "subjectively" that $318
is adequate compensation, for the Act plainly provides its
own objective formula for minimum wages and overtime
compensation. It is not clear that the trial judge intended
a subjective judgment. Rather, he might well have meant
that the $318 per week not only compensated Santiago at the
minimum wage for the first 40 hours ($134) but left $184 to
cover Santiago's remaining 18 hours of overtime at an hourly
rate ($184 divided by 18 hours = $10.22 per hour) that is
amply more than one and one-half times the minimum wage
(1.5 x $3.35 = $5.03).
Had the defendants and Santiago agreed to such a wage
structure in advance--$134 for the first 40 hours and $184
for all required overtime--it is possible that this
structure would have satisfied the Act, at least under
certain conditions. See FLSA 7(f), 29 U.S.C. 207(f).
___
Absent an advance agreement, the language of the Act, as
construed by the Supreme Court and implemented in the
Secretary's regulations, dictates a different and less
favorable result. In Overnight Motor Transp. Co. v. Missel,
___________________________ ______
316 U.S. 572 (1942), the Supreme Court glossed the governing
language of section 7(a)(1)--"one and one-half times the
[employee's] regular rate"--in the case of "an employee
-12-
12
working irregular hours for a fixed weekly wage" where the
hours regularly exceeded 40 hours a week. Id. at 573-74.
__
The Court held, for reasons explained in its opinion and
best left to connoisseurs of the FLSA, that where no
"regular rate" has been set by the employer for the first 40
hours, the Act treats the regular rate for that week as the
fixed weekly wage divided by the number of hours actually
worked in that week, including overtime hours. Id. at 580.
__
Overnight's outcome is binding upon us and the district
_________
judge and its formula is in fact reflected in the
Secretary's regulations for computing overtime compensation
in the case of employees paid a "fixed salary for
fluctuating hours." 29 C.F.R. 778.114. Under the
Overnight formula, Santiago's "regular rate" varied each
_________
week depending on the number of overtime hours he worked
(e.g., for a 58 hour week, his regular rate per hour would
____
be $318 divided by 58). In effect such an employee is
treated as having been paid 100% (instead of the required
150%) of the regular rate for each overtime hour, leaving
50% to be collected in the lawsuit. The Secretary's
computation of back pay due Santiago in the district court,
despite her present claim that Santiago received no
overtime, appears to have followed the Overnight formula
_________
although we do not vouch for the actual computation. T h e
district court's judgment as to Santiago cannot be sustained
-13-
13
for either of the other two reasons offered by the trial
judge, even assuming that they were intended as independent
grounds. Santiago may be an "involuntary plaintiff," as the
district court said, but the Secretary can still sue on his
behalf. FLSA 16(c), 17; 29 U.S.C. 216(c), 217. See
___
International Ladies' Garment Workers' Union v. Donovan, 722
____________________________________________ _______
F.2d 795, 808-09 (D.C. Cir. 1983), cert. denied, 469 U.S.
_____ ______
820 (1984); Donovan v. University of Texas, 643 F.2d 1201,
_______ ___________________
1205-06 (5th Cir. 1981). Indeed, payment of back wages, if
proved due, is intended to protect complying competitors of
the defendants, in addition to making the employee whole.
FLSA 2(a)(3), 29 U.S.C. 202(a)(3); International Ladies'
_____________________
Garment Workers' Union v. Donovan, 722 F.2d at 807-08. What
______________________ _______
would happen if an employee awarded back pay declined to
accept the award is a matter for another day.
Similarly, the district court's bare statement that
Santiago was "responsible" for the "illegal practices" seems
to us an insufficient basis to deny recovery. The question
whether an employee might ever be debarred from recovery
under the Act because of his own role in a violation is not
necessarily answered by cases, cited to us by the Secretary,
that the duty to obey the Act may not be "delegated" to
others by the employer. In this case, however, the district
court has provided nothing to support or explain its cryptic
reference to Santiago's "responsibility": we do not know
-14-
14
whether Santiago was aware of the Act, his role in the false
bookkeeping or in the fixing of waiters' wages, or his own
culpability in contrast to that of defendants. Given the
policy of the Act to protect employees, more detailed
findings and specific justification would be needed to
support an in pari delicto defense, assuming that such a
________________
defense would ever be allowed. The defendants, it appears,
never offered such a defense in this case.
A final issue posed by the denial of an award to
Santiago is his alleged status as an executive employee.
Defendants asserted in the trial court that Santiago was
exempt from coverage under the Act because he was employed
in an "executive . . . capacity" (FLSA 13(a)(1), 29 U.S.C.
213(a)(1)) as the supervisor of other waiters. The
district court rejected that claim, finding that Santiago
was at best a "working foreman" under the Secretary's
regulations. 29 C.F.R. 541.115. Without cross-appealing,
defendants remain free to defend the judgment below on
grounds not accepted by the lower court. United States v.
______________
American Ry. Express, 265 U.S. 425, 435-36 (1924). Here,
_____________________
defendants' brief offers a lengthy footnote again urging
that Santiago was an executive employee under the statute
and the Secretary's general criteria for making this
determination. 29 C.F.R. 541.1.
-15-
15
The regulations have special importance here because
section 13(a)(1) does not define "executive . . . capacity"
but leaves it to the Secretary to "define[] and delimit[]"
the terms. The "working foreman" regulation, closely read,
does not say that a working foreman invariably falls outside
the statutory category of executive. Rather, the regulation
offers a description of types of working foremen to
illustrate persons whose non-executive work will usually
exceed the low percentage of such hours allowed to an
individual under the Act and regulations before executive
status is lost. See FLSA 13(a)(1), 29 U.S.C. 213(a)(1);
___
29 C.F.R. 541.1(e) (40% for retail and service workers;
20% for others).
Santiago, however, was not subject to the percentage
limitation on hours because, as a worker in Puerto Rico
earning over $200 a week, he is classified under the
regulations as a high salaried employee. 29 C.F.R.
541.119(a)-(b). A high salaried employee is an executive
employee under the regulations so long as his "primary duty
consists of the management of the enterprise . . . and
includes the customary and regular direction of the work of
two or more other employees . . . ." 29 C.F.R. 541.1(f).
Such a high salaried employee also does not have to meet
certain of the other criteria of section 541.1 that
defendants claim to satisfy, i.e., 29 C.F.R. 541.1(c)-(d).
____
-16-
16
See generally Donovan v. Burger King Corp., 672 F.2d 221,
_____________ _______ _________________
223-24 (1st Cir. 1982).
Santiago testified at trial that 80 percent of his time
was spent supervising other waiters and the balance spent as
a waiter. He said that the extra $200 he received each week
was for his manager duties which he described in some
detail. Under the Secretary's regulation, "primary duty" is
judged on all the facts. 29 C.F.R. 541.103. On its face,
Santiago's testimony portrays him as a high salaried
employee who spent most of his time engaged in, and was paid
most of his wages for, the supervision of other waiters.
Unless these supervisory duties are not "management," for
some unspecified reason, the defendants' claim appears to
have some force. See generally Donovan v. Burger King
______________ _______ ___________
Corp., 672 F.2d at 226. ("The supervision of other employees
_____
is clearly a management duty.").
If there is an easy answer to defendants' claim, that
answer was not obvious from our review of the Secretary's
more elaborate arguments on this issue in the district
court. There, the Secretary argued that the payment to
Santiago of $2.95 per hour for 40 hours and his sharing of
tips showed that he must have worked 40 hours as a waiter, a
non sequitur that requires little discussion; even assuming
____________
doubtfully that the books attributed all of Santiago's first
40 hours to his service as a waiter, those books are
_____________
-17-
17
admittedly false; and the inference that Santiago spent 40
hours as a waiter (and only 18 in supervision) is flatly
contradicted by Santiago's direct testimony. The Secretary
also said that Santiago's supervisory role did not include
certain powers (importantly, to hire and fire employees)
pertinent under the criteria of section 541.1, but these
criteria need not be met by high salaried employees under
section 541.119.
We believe that the district court may have been misled
in its treatment of the executive exemption issue, first by
the Secretary's inexact portrayal of the working foreman
regulation as precluding executive status and, second, by
the Secretary's resort to section 541.1 criteria that
Santiago did not have to meet. In all events, the governing
questions, not squarely addressed by the district court, are
whether Santiago's "primary duty" consisted of supervisory
work or service as a waiter and, if the former, whether that
work involved "management of the enterprise or a customarily
recognized department or subdivision thereof . . . ." 29
C.F.R. 541.1(f). See also 29 C.F.R. 541.102 (describing
________
management tasks as including "directing [the] work" of
other employees). Because this court cannot know the record
as well as the parties and the district court, we conclude
that a remand for a further determination of the exemption
-18-
18
issue is needed in light of the evidence already in that
record.
-19-
19
IV. CONCLUSION
To summarize, the defendants failed to give notice as
required by section 3(m). The award to the 15 waiters must
therefore be recomputed to reflect the elimination of the
tip credit. The Secretary's claim on behalf of Santiago is
remanded to permit the district court to re-examine his
status as an executive employee vel non under FLSA
________
13(a)(1) in light of this court's opinion. If the district
court concludes that Santiago does not qualify as an
executive employee, then the formula set forth in Overnight
_________
and the regulations must be applied in determining overtime
compensation due to him. Of course, the formula does not
preclude averaging or estimating the number of hours worked
per week where more specific information is lacking.
Before more court time is devoted to this case, we
encourage the parties, as the district judge wisely did, to
discuss an amicable resolution.
The judgment of the district court is reversed as to
_______________________________________________________
the waiters other than Santiago for whom defendants were
____________________________________________________________
allowed a tip credit. As to Santiago, the judgment of the
____________________________________________________________
district court is vacated. The case is remanded for further
____________________________________________________________
proceedings consistent with this opinion.
_________________________________________
-20-
20