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October 27, 2016
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Employers in the food and beverage industry face countless and ever increasing regulatory challenges, including food safety and handling, labeling, distribution requirements, and on and on.  Regulatory compliance often has an immediate impact on the bottom line, and nowhere is that more true than in the area of labor and employment law compliance.  While compliance generally costs time and money in an industry facing thin margins, it seems that the pace of required workplace changes is on the rise.  In addition, the cost of compliance continues to climb.

As 2017 approaches, employers in the food and beverage industry must take note of three significant workplace changes that will impact the bottom line and plan accordingly.

Overtime and Minimum Wage Changes
Major changes are coming to wage and hour compliance, i.e. how you pay your employees and what employees are entitled to in terms of compensation.

Without a doubt, the most significant wage and hour change facing nearly every employer is the proposed changes to the overtime exemptions under the federal Fair Labor Standards Act (“FLSA”). The FLSA applies to the vast majority of employers in the United States.  The Department of Labor has proposed a major change to the “white collar” exemptions under the FLSA, which are exemptions that permit an employer to pay an employee a pre-determined salary and avoid paying overtime. Under the FLSA, the default rule is to pay employees on an hourly basis and to pay employees time and one half of the regular rate for all hours worked over 40 in a week.  However, employees eligible for one or more of the “white collar” exemptions are not entitled to overtime pay if (1) they are paid a guaranteed weekly salary of at least $455 and (2) their job duties meet the requirements of one of the exemptions duties’ tests.  Under the new regulations released by the DOL, the eligibility criteria has changed significantly.

Effective December 1, 2016, the FLSA regulations will more than double the minimum salary that must be paid to an exempt employee.  Specifically, the minimum amount required to be paid on a weekly basis will increase from $455 per week to $913 per week.  That means an employee who currently earns $23,000 a year will have to earn over $47,400 a year (and still meet one of the duties’ tests) in order to continue to be exempt from the overtime requirements.  In the alternative, an employer could convert the salaried employee to an overtime eligible employee and begin paying the overtime rate for all hours worked over 40 in a week.  Either way, the majority of employers in the food and beverage industry will see an almost immediate impact on the bottom line as a result of these changes.

The changes to the FLSA regulations are effective as of December 1, 2016, which means you will need to act now to develop and implement a strategy to ensure compliance.

Another emerging trend in the wage and hour area that may have an impact on the bottom line is increases to the minimum wage.  The FLSA requires that employers pay a minimum wage for all hours worked.  Currently that minimum wage is $7.25 an hour. There are some exceptions, including an exception for tipped employees, which we discuss in detail below.

The FLSA also allows states, cities and other municipalities to set a higher minimum wage.  For example, several states including California and New York, require payment of a much higher minimum wage. In addition, cities and local municipalities have gotten in on the act.  Employers in the food and beverage industry must be aware that the minimum wage requirement may vary by jurisdiction, and if the minimum wage has not increased in your city or state, be on the lookout for increases in 2017.

Employee Tip Pooling Arrangements Scrutinized
To the extent that your employees share tips, you should take the opportunity to review the details of that arrangement to make sure your practice passes legal muster.  As it turns out, tip pools can be tricky and problematic, particularly when deciding which employees will be permitted to participate in the sharing of tips.

As noted, the FLSA provides an exception from the minimum wage requirement for tipped employees.  This exception allows employers to take a “tip credit” and pay tipped employees less than the required minimum wage.  The idea is that between tips and the lower hourly rate, employees earn at least the minimum wage and probably more.  That is about all that is easy about tip pool compliance.

The FLSA and its regulations place restrictions on the use of the tip credit, including among other things, the requirement that tipped employees retain all of the tips collected. That means the employer, and its managers, cannot take a share of the tips.  The FLSA does allow for the sharing of tips, but it restricts sharing to only those employees who customarily and regularly receive tips.  In addition, employees must be properly compensated when not performing tip-related duties.

Compliance with the FLSA tip sharing rules can be difficult. Recently, employee/plaintiffs have been cooking up some significant class action lawsuits alleging illegal tip sharing practices.  The potential judgments facing the employers will be tough to swallow.

If you allow employees to share tips, now would be the time to review that practice, and specifically, who participates in the tip pool.  Employees who are not eligible should not be permitted to participate, and must be paid at least the minimum wage appropriate for the jurisdiction.

Non-Competition and Non-Solicitation Agreements 
As the economy continues its slow and unsteady recovery, it seems that many employers have begun to hire new employees again.  However, that may or may not be good news. It is good news for companies that are growing and adding headcount, but it could be bad news if a competitor is trying to lure away a quality employee.  As hiring catches steam, disputes regarding post-employment restrictive covenants, such as non-competition, non-solicitation and non-disclosure agreements are also heating up.

Historically, post-employment restrictive covenants have been looked at harshly by courts and often not enforced.  Increasingly, however, courts are enforcing non-competition, non-solicitation and confidentiality agreements that are appropriately tailored to protect the company’s legitimate business interests.  Restrictive covenants can prohibit a former employee from competing unfairly and soliciting customers, clients, suppliers, vendors and employees, and, perhaps most importantly, protect confidential information and trade secrets. For some companies in the food and beverage industry, the business’ most valuable asset may be a trademark, copyright, or patent. Intellectual property is what makes a business unique and connects it to the marketplace and customers.  The last thing any business wants is a former employee using its intellectual property to unfairly compete.

Employers in the food and beverage industry should act now to prepare for and help prevent disputes as the battle for talent continues.  The laws of each state will govern the enforceability of post-employment restrictive covenants, so, employers in the food and beverage industry will need to work with counsel to ensure compliance.

Employers should consider which employees would be in a position to compete unfairly following a departure.  For those employees, employers should take steps to obtain post-employment restrictive covenants if such agreements are not already in place.  In addition, as part of the hiring process, particularly with respect to sales employees and executives, employers should determine if the candidate is subject to any restrictive covenants with a prior employer. If so, a further evaluation must be undertaken.

It is important to note that in many states, including Pennsylvania, courts will not enforce a non-compete or non-solicitation agreement if the employee signed the agreement after his or her hire and did not receive additional consideration (such as a raise, bonus, additional paid time off, severance, etc.) in exchange for agreeing to the restrictions.  If you ask existing employees to sign non-compete and/or non-solicitation agreements, you will need to provide additional consideration to make the restrictions enforceable.

These preventative steps will help food and beverage industry employers avoid costly legal disputes, and protect the business from unfair competition from departing employees.

Conclusion
Workplace compliance is an ever changing landscape, and often keeping up with the changes is costly.  There is no doubt, however, that non-compliance will be more costly in the long run.  As we move into 2017, addressing the three key workplace compliance trends detailed above will have your organization well positioned to rest easy and focus on growing the business and revenues.

Please contact the McNees Food and Beverage Industry Group or the McNees Labor and Employment Group for assistance with questions regarding these significant emerging workplace legal trends.

© 2016 McNees Wallace & Nurick LLC
Food & Beverage Client Alert is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.