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Berger v. Perry's Steakhouse of Illinois, LLC

United States District Court, N.D. Illinois, Eastern Division

December 23, 2019

Jessica Berger and Timothy Rendak, et al., Plaintiffs,
v.
Perry's Steakhouse of Illinois, LLC, Howard Cortes, and Jeffrey Pagnotta, Defendants.

          MEMORANDUM OPINION AND ORDER

          THOMAS M. DURKIN, UNITED STATES DISTRICT JUDGE

         In this partial class and collective action, Plaintiffs, who worked as table servers at Perry's Steakhouse and Grille in Oak Brook, Illinois (“Perry's Oak Brook”), allege that Perry's Steakhouse of Illinois, LLC (“PSI”), which operates Perry's Oak Brook, and managers Howard Cortes and Jeffery Pagnotta (PSI, Cortes and Pagnotta collectively, “Defendants”) failed to pay them all tips and other compensation owed, required them to perform non-table-service-related work at less than minimum wage, and failed to give them adequate notice of their intent to take a “tip credit” and use a “tip pool” in violation of the Fair Labor Standards Act and the Illinois Minimum Wage Law. Plaintiffs also seek relief under the Illinois Wage Payment and Collection Act, and under breach of contract and unjust enrichment theories. The parties filed cross motions for partial summary judgment. For the following reasons, both motions are granted in part and denied in part. R. 306; R. 312.

         Standard

         Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). The Court considers the entire evidentiary record and must view all of the evidence and draw all reasonable inferences from that evidence in the light most favorable to the nonmovant. Horton v. Pobjecky, 883 F.3d 941, 948 (7th Cir. 2018). To defeat summary judgment, a nonmovant must produce more than a “mere scintilla of evidence” and come forward with “specific facts showing that there is a genuine issue for trial.” Johnson v. Advocate Health and Hosps. Corp., 892 F.3d 887, 894, 896 (7th Cir. 2018). Ultimately, summary judgment is warranted only if a reasonable jury could not return a verdict for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).

         Background

         PSI is a wholly-owned subsidiary of Texas-based Perry's Restaurants Limited (“PRL”). R. 313 ¶ 2; R. 329 ¶ 2. PRL-formerly known as Leasing Enterprises, Ltd.- is the parent company for all Perry's Steakhouse and Grille Restaurants located in Texas, Illinois, Colorado and Alabama. Id. PSI operates Perry's Oak Brook, which opened for business in mid-November 2013 and is the first Perry's restaurant in Illinois. R. 313 ¶¶ 1, 12; R. 329 ¶¶ 1, 12. PSI and PRL share a corporate office in Houston, Texas. R. 313 ¶ 3; R. 329 ¶ 3. PSI's headquarters is staffed solely by PRL employees, and all corporate PSI management is conducted through PRL employees from PRL's Texas headquarters. Id. Perry's Oak Brook is operated by PSI in the same manner as all other Perry's restaurants, and many of its administrative functions are done by or run through PRL. R. 313 ¶¶ 4, 7; R. 329 ¶¶ 4, 7.

         Howard Cortes served as Perry's Oak Brook's general manager from its inception until October 2014. Before that, Cortes worked for PRL at various Perry's locations in Texas. R. 313 ¶ 6; R. 329 ¶ 6. While general manager, Cortes was responsible for hiring, training and supervising employees; employee wage and hour classifications; employee compensation; timekeeping; and tip pool policies and procedures. R. 313 ¶¶ 6, 14; R. 329 ¶¶ 6, 14. Cortes did not receive any training on Illinois wage laws prior to Perry's Oak Brook's opening, he does not recall any FLSA training, and he did not know for certain during the relevant time period what the FLSA was. R. 313 ¶¶ 12-13; R. 329 ¶¶ 12-13. In October 2014, Cortes was promoted to PRL Regional Manager, and ultimately returned to Texas to oversee the Perry's locations there. R. 313 ¶ 6; R. 329 ¶ 6. Thereafter, Jeffrey Pagnotta, who had worked as a floor manager at Perry's Oak Brook from the fall of 2013 until October 2014, assumed Cortes's responsibilities as general manager. R. 313 ¶ 8; R. 329 ¶ 8.

         Class representatives Jessica Berger and Timothy Rendak are former servers at Perry's Oak Brook and represent a Rule 23 class of 107[1] and opt-in FLSA collective of 29. R. 313 ¶ 9; R. 329 ¶ 9. Each Perry's Oak Brook server is a “tipped employee” as defined by the FLSA and is paid at the Illinois tip credit rate of $4.95 per hour (which is higher than the federal rate of $2.13 per hour). R. 313 ¶ 11; R. 329 ¶ 11.

         Perry's Oak Brook uses an electronic Point of Sale (“POS”) system to record its servers' hours, credit card transactions, tips, gratuities, and sales (among other things). R. 313 ¶ 16; R. 329 ¶ 16. At the end of each shift, the POS system generates a “checkout report” for each server, which the server reviews before taking it to a manager or bartender for their review. Id.

         From opening in November 2013 until mid-October 2014, Perry's Oak Brook's servers were paid nightly in cash for all tips received during a shift, including those paid by credit or debit card. R. 313 ¶ 17; R. 329 ¶ 17. Servers' hourly wages were paid separately by check every two weeks. Id. During that same time period, two deductions were taken from servers' cash tips and reflected on servers' POS checkout reports: (1) a deduction representing 4.5% of the server's total sales, to be pooled and redistributed to hostesses, bussers, bartenders and food runners (the “tip pool”), and indicated on the checkout report as the server's “tip share”; and (2) a credit card offset fee in the amount of 3.25% of servers' credit and debit card tips (or 3.5% in the case of a private event or large party of eight or more), used to recoup the expense involved with the nightly cashing out of those tips, and referred to on the checkout report as the server's “tip refund.” R. 313 ¶¶ 18-20, 51; R. 329 ¶¶ 18-20, 51. Defendants continue to operate a tip pool, and to employ the same tip pool deduction, but, for reasons explained below, PSI stopped deducting the credit card offset fee in mid-October 2014, and started paying credit card tips through its weekly payroll system. R. 313 ¶¶ 54-55; R. 329 ¶¶ 54-55.

         In addition to claims related to Defendants' tip pool and credit card offset fee deductions and of relevance here, Plaintiffs also bring claims related to the notice (or lack thereof) Defendants gave regarding the tip credit it took and the tip pool it operated, and the untipped “sidework” that Defendants require servers to perform at less than minimum wage. Plaintiffs also seek to recover additional compensation they claim they were owed but did not receive in the form of mandatory service charges for private or larger events. Both Plaintiffs and Defendants seek summary judgment on two of the claims the Court certified under the FLSA and the IMWL: (1) the credit card offset fee claim (Plaintiffs only as to PSI, not the individual defendants, [2] and Defendants only as to liquidated damages, not liability); and (2) the sidework claim against each Defendant. R. 315. Defendants also seek summary judgment on Plaintiffs' claims concerning: (1) the notice Plaintiffs received pertaining to Defendants' use of a tip credit and tip pool (certified); (2) the allegation that Defendants impermissibly retained some of the tips in the tip pool to pay business and other expenses (not certified); and (3) breach of contract and unjust enrichment (not certified).

         Analysis

         The FLSA and IMWL require employers to pay their employees a minimum wage for each hour of work.[3] 29 U.S.C. § 206; 820 ILCS 105/4(a)(1). But an employer may offset its minimum wage obligations as to a tipped employee by the tips the employee actually receives. 29 U.S.C. § 203(m); 820 ILCS 105/4(a)(1), (c). This offset is known as a “tip credit.” While generally an employer may only take a tip credit if each tipped employee retains all of his tips, 29 U.S.C. § 203(m); 820 ILCS § 105/4(c), this restriction does not apply if the employer operates a valid “tip pool.” Id. In a tip pool, a portion of an employee's tips are redistributed to other employees who perform customer service functions, such as bussers, bartenders and food runners. Id. A tip pool is “valid” if it includes only employees who “customarily and regularly receive tips, ” and the employer does not “retain any of the employees' tips for any other purpose.” 29 C.F.R. § 531.54; Williams-Green v. J. Alexander's Restaurants, Inc., 277 F.R.D. 374, 380-81 (N.D. Ill. 2011); Morgan v. SpeakEasy, LLC, 625 F.Supp.2d 632, 652-53 (N.D. Ill. 2007). If the tip pool is invalid-either because it includes employees who do not “customarily and regularly receive tips, ” or because the employer retains a portion of the tips for some other purpose-the employer may not take the tip credit, and must instead pay minimum wage. 29 U.S.C. § 203(m); Williams-Green, 277 F.R.D. at 379.

         The FLSA also requires employers seeking to use a tip credit and/or tip pool to provide certain notice to affected employees. 29 U.S.C. § 203(m)(2)(A). The Department of Labor (“DOL”) has promulgated regulations regarding that notice. One such regulation identifies information an employer must disclose to its tipped employees before using a tip credit, id. § 531.59(b), and another governs notice concerning tip pools, id. § 531.54. Yet another regulation addresses the type and amount of untipped work (so-called “sidework”) for which an employer may utilize a tip credit. 29 C.F.R. § 531.56(e). Each such regulation is discussed in more detail below in the context of Plaintiffs' claims. The Court begins with the claims upon which both Plaintiffs and Defendants have moved for summary judgment.

         I. Credit Card Offset Fee Claim

         In their credit card offset fee claim, Plaintiffs contend that Defendants must be divested of the statutory tip credit because they improperly deducted more from their tips than was required to cover the costs of converting the tips to cash on a nightly basis while the policy was in place. See R. 121 ¶¶ 51, 56, 77-78, 135, 166. PRL had employed the same policy at its Texas restaurants since approximately 2003, deducting 3.25% from all credit card tips in an effort to recoup some of the costs associated with paying servers' tips out nightly as they had requested, including the actual fees charged directly by the credit card companies and cash delivery services, among other costs (such fee, the “offset fee, ” and such policy, the “offset fee policy”). R. 307 ¶¶ 4-5, 7-8; R. 334 ¶¶ 4-5, 7-8.

         In 2004 and 2006, the Department of Labor investigated PRL for reasons unrelated to the offset fee policy. R. 307 ¶¶ 9-10; R. 334 ¶¶ 9-10. After the 2004 investigation, Mark Collins, PRL's then Chief Operating Officer, asked the DOL investigator, Chad Frazier, to examine its other policies. R. 307 ¶¶ 2, 11; R. 334 ¶¶ 2, 11. The parties dispute what transpired thereafter. According to Collins, Frazier told him that “everything about [PRL]'s handling of the tip pool and tip offsets was in order, ” and he was thus “under the impression that [PRL] was legitimately charging this [offset fee].” R. 313, Ex. 17 at 3. At this time, Richard Henderson, who ultimately became Collins' successor as COO, reported to Collins. R. 313, Ex. 16 at 1; R. 334 ¶ 3. According to Henderson, after Collins' meeting with Frazier, there was a “feeling that [PRL] wanted to go forward [with the offset fee policy] knowing that [it] was in compliance” with the FLSA. R. 334 ¶ 14. Yet in an April 2013 declaration, Frazier stated that he did “not remember the details of my conversation with [PRL] ownership, management, and/or legal counsel, ” but that “we probably discussed the credit card liquidation issue because it was such a rampant problem among Texas restaurants.” R. 313, Ex. 17 ¶ 3. Frazier continued that at that time the “DoL Field Manual stated restaurants could charge their tipped employees no more than what the credit card companies charged the restaurant for liquidating credit card tips, ” and “[a]ny advice . . . I gave [PRL] . . . would have been consistent with the . . . Manual.” Id. ¶ 4.

         Ultimately, the offset fee policy gave rise to three lawsuits against Perry's related entities: Steele v. Leasing Enterprises, Ltd., No. H-09-2789 (S.D. Tex.) in 2009 (the “Houston lawsuit”); Hoenninger v. Leasing Enterprise, Ltd., No. 1:14-CV-798-LY (W.D. Tex.) in 2014 (the “Austin lawsuit”); and Shaffer v. Perry's Restaurants, Ltd., No. SA-16-CV-01193-FB (W.D. Tex.) in 2016 (the “San Antonio lawsuit”).[4]

         The district court in the first-filed Houston lawsuit held in an August 2010 interlocutory order that the offset fee exceeded PRL's costs directly related to dealing in credit, pointing out that “[w]hile Perry's can use an average of discount rates to approximate the costs it incurs in converting credit-card tips, that amount cannot be a quarter to a half of a percent higher than the credit card with the highest discount rate.” Steele v. Leasing Enterprises, Ltd., 2010 WL 4027717, at *1-3 (S.D. Tex. Aug. 31, 2010). Nevertheless, PRL continued to employ its offset fee policy in Texas, and PSI implemented the policy at Perry's Oak Brook when it opened in November 2013. R. 307 ¶¶ 21, 24; R. 334 ¶¶ 21, 24. The parties dispute whether the policy was implemented at the request of PSI servers. R. 307 ¶ 24; R. 334 ¶ 24.

         In the meantime, a bench trial was held in the Houston case in 2013. On August 19, 2014, the Houston court issued findings of fact and conclusions of law determining that the 3.25% offset fee policy violated the FLSA, but that the violation was not willful. R. 307, Ex. E at 3-4. Thereafter, PRL and PSI began to reorganize the payroll systems to eliminate the offset fee policy, including the nightly cashing out of credit card tips. R. 307 ¶ 25; R. 334 ¶ 25. The process was complete in mid- October 2014. After that, no server's credit card tips were cashed out nightly, or subjected to a credit card offset deduction. R. 307 ¶ 28; R. 334 ¶ 28.

         Amended findings and conclusions issued by the Houston court in February 2015 reaffirmed that PRL's violation was not willful, and applied the good faith exception, precluding the recovery of liquidated damages. Steele v. Perry's Restaurant, LLC, 2015 WL 10438848, at *2-3 (S.D. Tex. Feb. 24, 2015). The Houston court stated that PRL was not barred from asserting the good faith defense simply because it had issued an interlocutory order indicating an FLSA violation and PRL had continued its policy thereafter. Rather, it was reasonable for PRL to “wait[ ] for a final judgment on an unsettled area of law before changing its practice.” Id. at 3. The court found it compelling that PRL had consulted the DOL investigator, Frazier, about the policy in 2004, who found no issues. Id. The Fifth Circuit affirmed in June 2016, holding that the district court had not abused its discretion in denying liquidated damages, because the amount of the deduction exceeded the total credit issuer fees by less than 1%, and PRL “attempt[ed] to discover its compliance” through the 2004 DOL investigation. Steele v. Leasing Enterprises, Ltd., 826 F.3d 237, 247 (5th Cir. 2016). The Fifth Circuit also concluded that the district court's finding that the violation was not willful was not clear error, because the only evidence plaintiffs submitted was the continuation of the policy following the August 31, 2010 interlocutory order. Id. at 248.

         Thereafter, in the later-filed Austin lawsuit, PRL stipulated that its offset fee policy violated the FLSA, but argued at the bench trial that its violation was in good faith and not willful. The Austin court agreed, concluding that: (1) the only evidence suggesting willfulness was the Houston court's August 2010 interlocutory order; and (2) that PRL had established its good faith by seeking the DOL's advice in 2004. Hoenninger v. Leasing Enterprises, Ltd., 2018 WL 6843709, at *3-5 (W.D. Tex. May 30, 2018). The Austin court held that it was reasonable for PRL to wait for a final judgment in the Houston lawsuit before making changes to its policy. Id. at *4-5.

         Finally, the court in the San Antonio lawsuit granted PRL's motion for summary judgment on the offset fee policy as time-barred because it was filed outside the 2-year statute of limitations and there was no willful violation to extend that time. The court, in adopting the magistrate judge's report and recommendation, applied the same reasoning as the courts in the Houston and Austin lawsuits to conclude that the violation was not willful, holding that it was reasonable for PRL to await final judgment on the validity of its policy. Shaffer v. Perry's Restaurants, Ltd., 2019 WL 2098115, at *1-2 (W.D. Tex. Feb. 12, 2019). The San Antonio court noted that the only new evidence suggesting that PRL knew that its offset fee policy was illegal was Frazier's declaration. Id. at *1. But the court found its contents “exceedingly vague and speculative” and therefore “not competent summary judgment evidence” because Frazier admitted that he did “not remember the details” of any conversation with a PRL representative, but that they “probably” discussed the offset fee. Id. at *1-2.

         Here, Defendants all but concede that the offset fee policy violated the FLSA and IMWL, but argue that the viability of Plaintiffs' claim was affected by Defendants' tender-and Plaintiffs' rejection of-a check purported to represent the difference between Plaintiffs' base hourly wage and minimum wage for all hours worked, as well as the 2% monthly penalty imposed by the IMWL (“offset fee tender”).[5] Defendants also argue that any violation was not willful or in bad faith, as evidenced by the decisions in the Texas lawsuits. Accordingly, Defendants contend that the claim should be disposed of by agreement, and that liquidated damages should not apply. The Court first addresses the impact of the offset fee tender, before discussing the validity of the offset fee policy itself, and the issue of damages.

         Tender of partial payment.

         Defendants, citing Chapman v. First Index, Inc., 796 F.3d 783 (7th Cir. 2015), contend that Plaintiffs' refusal of the offset fee tender should “preclude Plaintiffs from continuing to sue on amounts not in dispute” and that Plaintiffs should suffer consequences for “rejecting a fully compensatory offer” because the offset fee tender resolved the base wages and IMWL 2% penalty interest due without the need for judicial assistance. R. 330 at 3. But nothing about Chapman suggests that Plaintiffs' claim was “mooted” or otherwise affected by Defendants' tender. In Chapman, the Court expressly held that a defendant's offer of full compensation does not render a case moot. 796 F.3d at 786-87. And there can be no doubt that Defendants' “offer” falls short of being fully compensatory. As Defendants acknowledge, the offset fee tender did not include attorneys' fees, [6] costs, or liquidated damages, and nor did it address the injunctive relief requested.[7] As such, the offset fee claim remains unaffected and properly before the Court. See Chapman, 796 F.3d at 786 (“A case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party.”) (quoting Knox v. Serv. Employees Int'l Union, 567 U.S. 298, 307 (2012) (internal citations and quotations omitted)); see also Chafin v. Chafin, 568 U.S. 165, 172 (2013) (“As long as the parties have a concrete interest, however small, in the outcome of the litigation, the case is not moot.”) (quoting Knox, 567 U.S. at 307-08 (internal citations and quotations omitted)).

         Further, even if Defendants' tender had been fully compensatory, it still must be accompanied by an offer of judgment or settlement, and any such offer must be accepted, and, in the case of an FLSA collection action, approved by the Court. See Campbell-Ewald Co. v. Gomez, 136 S.Ct. 663, 670 (2016) (“Under basic principles of contract law, [defendant's] settlement bid and Rule 68 offer of judgment, once rejected, had no continuing efficacy”); see also In re AT&T Mobility Wireless Data Svcs. Sales Litig., 270 F.R.D. 330, 346 (N.D. Ill. 2010) (“Rule 23(e) ‘requires court approval of any settlement that effects the dismissal of a class action' ”) (quoting Reynolds v. Beneficial Nat'l Bank, 288 F.3d 277, 279 (7th Cir. 2002)). But Defendants do not expressly acknowledge their violation, and have not extended such an offer, and nor has any settlement been submitted for approval. Accordingly, Plaintiffs' offset fee claim was not impacted by Defendants' tender. See Campbell-Ewald Co., 136 S.Ct. at 670-71 (“Having rejected Campbell's settlement bid, and given Campbell's continuing denial of liability, ” and “with no settlement offer still operative, ” the parties “retained the same stake in the litigation they had at the outset.”). Defendants' argument fails.

         Liability.

         Defendants do not dispute their liability because of their offset fee policy. But even if Defendants had, such an argument was doomed as to PSI under the doctrine of issue preclusion. Generally, issue preclusion applies to prevent parties from relitigating an issue where: “(1) the issue sought to be precluded is the same as an issue in the prior litigation; (2) the issue must have been actually litigated in the prior litigation; (3) the determination of the issue must have been essential to the final judgment; and (4) the party against whom estoppel is invoked must have been fully represented in the prior action.” Adams v. City of Indianapolis, 742 F.3d 720, 736 (7th Cir. 2014). Here, the Houston lawsuit meets all the elements of issue preclusion. The validity of the offset fee policy was the “central subject” of the Houston lawsuit, was actually litigated, and was essential to the final judgment in that case. Id. And PSI, as a wholly-owned subsidiary of PRL, was fully represented in the Houston lawsuit, by the same attorneys who represent Defendants here. See TRW, Inc. v. Ellipse Corp., 495 F.2d 314, 318 (7th Cir. 1974) (a wholly-owned subsidiary is in privity with its parent corporation for purposes of issue preclusion) (citing Hart Steel Co. v. Railroad Supply Co., 244 U.S. 294 (1917)).

         Further, even if issue preclusion were not applicable, the Court agrees with the Fifth Circuit that, consistent with a 2006 DOL opinion letter, [8] the offset fee policy violated the FLSA as a matter of law because it took into account the costs of “internal business decisions that were not required to collect credit card tips.” Steele, 826 F.3d at 245. PSI's average overall cost of converting credit card tips to cash on a nightly basis was 2.4% of the credit card sales-less than the 3.25% deducted (3.5% in the case of a private event or larger party). R. 315 at 7; R. 329 ¶ 34. Accordingly, and Defendants offering no argument to the contrary, the Court concludes that PSI violated Section 203(m), because the offset fee exceeded the actual cost to PSI of converting Plaintiffs' credit card tips to cash. The Court thus grants Plaintiffs summary judgment on the issue of liability, divesting PSI of its statutory tip credit for the relevant time period. Defendants must also pay Plaintiffs the 2 percent penalty under the IMWL. 820 ILCS 105/12(a).

         Liquidated ...


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