United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
M. DURKIN, UNITED STATES DISTRICT JUDGE
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.
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).
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.
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.
representatives Jessica Berger and Timothy Rendak are former
servers at Perry's Oak Brook and represent a Rule 23
class of 107 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.
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.
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
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,  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).
FLSA and IMWL require employers to pay their employees a
minimum wage for each hour of work. 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.
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.
Credit Card Offset Fee Claim
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.
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. ¶
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
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.
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 ¶
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.
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.
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.
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”). 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.
of partial payment.
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,  costs, or liquidated damages, and
nor did it address the injunctive relief
requested. 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)).
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.
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)).
even if issue preclusion were not applicable, the Court
agrees with the Fifth Circuit that, consistent with a 2006
DOL opinion letter,  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