New York Federal Court Clarifies Issues Concerning Employee Uniforms and Internet Delivery Service Fees

February 2013 NYC Hospitality Alliance Alert

On February 1, 2013, a federal court in Manhattan issued a decision that will impact all New York City restaurants. The decision clarified two important – but unsettled – areas of law. Specifically, in Allende, et al v. PS Brothers Gourmet, Inc., et al, Civil Action No.: 1:11-cv-05427 (S.D.N.Y.), United States District Court Judge Alison J. Nathan held that employers do not have to reimburse employees for the cost of “uniforms” if the “uniform” consists of nothing more than regular street clothes and does not contain the employer’s logo. In addition, Judge Nathan held that employers may not deduct fees charged by internet delivery service providers such as SeamlessWeb from employee tips even when the customer pays for the tip through the internet delivery service provider.

In Allende, Plaintiffs were former dishwashers and delivery persons for an Indian restaurant, Indus Valley, on the Upper West Side of Manhattan owned by PS Brothers Gourmet, Inc. Plaintiffs alleged, among other things, that Indus Valley required its delivery persons to wear black shirts, black pants, black shoes and cap, which they contended constituted a “uniform.” Plaintiffs claimed that Indus Valley violated the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”) by failing to reimburse Plaintiffs for the cost of the “uniforms” and by failing to give Plaintiff additional monies to maintain (i.e., launder) the uniforms (the “Uniform Claim”). Plaintiffs also alleged that Indus Valley violated the FLSA and NYLL when it deducted the service fee charged by internet delivery service providers such as SeamlessWeb and GrubHub from employee tips when customers added tips to their internet delivery service orders (the “Tip Claim”). After discovery closed, Indus Valley moved for partial summary judgment on both Plaintiffs’ Uniform Claim and their Tip Claim.

With respect to the Uniform Claim, the 2011 Hospitality Wage Order is quite clear that under the NYLL, an employer must reimburse employees for the cost of required uniforms and must pay employees a maintenance allowance if the employer does not launder the uniforms. However, the 2011 Hospitality Wage Order excludes from the definition of “uniform” clothing “that may be worn as part of an employee’s ordinary wardrobe.” Because the only requirement with respect to the clothing worn by Indus Valley delivery persons was that it be black and the clothing did not contain Indus Valley’s logo or insignia, the Court found that the required clothing was not a “uniform” under the NYLL. As such, the Court dismissed that portion of Plaintiffs’ Uniform Claim that arose under the NYLL.

Although the NYLL aspect of the Uniform Claim was straightforward, the FLSA portion of this claim was less clear because unlike the NYLL and the 2011 Hospitality Wage Order, the FLSA does not define the term “uniform.” As a result, there was conflicting legal authority on the issue. A handful of federal courts had implied that as long as the employer required the employees to wear specific clothing, whether it be a specific color or style, the required clothing was a “uniform” and the employer must reimburse employees for the cost to purchase and lauder the uniforms if the employees were minimum wage employees (as was the case in Allende). Other federal courts and the United States Department of Labor had held that if the required clothing was “basic street wear” then such clothing does not constitute a uniform. The Allende Court clarified this issue by holding that basic street clothing that did not contain the employer’s logo was not a uniform under the FLSA and there was no requirement by Indus Valley to reimburse employees for the cost to purchase and launder the required clothing. The Allende Court also noted that the handful of other cases that reached the opposite conclusion were not persuasive after an examination of the facts of those cases. Indeed, the Court noted that in each of the cases relied upon by Plaintiffs, despite their broad language, the required clothing either contained the employer’s logo or required special maintenance and thus the employees at issue in those cases did not wear ordinary street clothes. Therefore, the Court dismissed Plaintiffs’ Uniform Claim in its entirety.

Plaintiffs’ Tips Claim is more problematic for employers. As is becoming increasingly popular for New York City restaurants – and indeed restaurants around the country – Indus Valley contracted with internet delivery service providers, which allowed customers to log onto their websites and order food from Indus Valley for delivery. For this service, the internet delivery providers charged Indus Valley a fee which was equal to a percentage of the value of each order (usually between 10%-12%). When a customer added a gratuity to the order, the internet service provider charged Indus Valley the same fee as it did with the customer’s main order.

Under New York law, it is permissible for a restaurant to deduct from a gratuity the percentage charged by credit card companies when the customer pays by credit card. There are also cases holding that this practice is also permissible under federal law.1 The rationale behind permitting this practice is that there is a cost to convert the credit card gratuity into cash for the employee and that cost is imposed not by the employer but by the credit card company.

Using the credit card processing fees as an analogy, Indus Valley argued that it was permissible to deduct the fees charged by the internet delivery service companies from employee gratuities. Indeed, Indus Valley contended that the same rationale that permits an employer to deduct the processing fee charged by credit card companies applies to the fees assessed by internet vendors as there is a cost to convert the gratuity left by the customer through the internet delivery service provider into cash and that cost is not imposed by the employer but instead is imposed by the internet delivery service provider.

Unfortunately, the Court disagreed. In Indus Valley’s contract with the internet delivery service providers, it states that the fees charged by the internet delivery service provider include credit card processing fees as well as advertisement fees, marketing service fees, and the provider’s commissions. The Court noted that the fees charged by the internet delivery services providers went beyond what is necessary to turn the credit card gratuity into cash. In fact, according to the Court, the fees included regular business expenses, such as advertising, which cannot be deducted from employee gratuities. Therefore, the Court denied summary judgment to Defendants on Plaintiffs’ Tip Claims. Unfortunately, this is not surprising as this area of the law is designed to protect employees and whenever there is any uncertainty in the law it is frequently construed against the employer and in favor of the employee.

This case is a mixed bag for New York City restaurants. The good news is that under both the NYLL and FLSA, if employers require employees to wear a "uniform" that could otherwise pass for basic street clothing, there is no requirement to reimburse employees for the cost of the clothing nor is there any requirement to pay additional monies to employees to launder the clothing. The bad news is that until SeamlessWeb, GrubHub, and similar companies change the wording of their contracts, employers cannot deduct from employee gratuities the fees charged by such internet delivery service companies. This is due to the fact that the contracts issued by these companies do not differentiate between the fees charged to process customer credit cards and the other services provided by the internet delivery service companies. The fees these companies charge include elements that are general business expenses, which cannot be deducted from employee gratuities. Accordingly, it is strongly advised that all restaurants immediately cease the practice of deducting from employee gratuities the fees charged by SeamlessWeb, GrubHub, and similar internet service providers.

1. Please note that some jurisdictions do not permit the practice even though it may be legal under federal law. For example, Philadelphia recently passed an ordinance prohibiting the practice and therefore Philadelphia restaurants may not deduct the processing fee charged by credit card companies from employee gratuities.