Shahriar v. SMITH & WOLLENSKY RESTAURANT GROUP

Citations: 659 F.3d 234; 18 Wage & Hour Cas.2d (BNA) 193; 80 Fed. R. Serv. 3d 1075; 2011 U.S. App. LEXIS 19625; 2011 WL 4436284Docket: 20-434

Court: Court of Appeals for the Second Circuit; September 26, 2011; Federal Appellate Court

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Salim Shahriar, Muhammad Islam, and Mary Harvey, along with other plaintiffs, filed a class action lawsuit against Smith Wollensky Restaurant Group and Fourth Walls Restaurant LLC, alleging violations of the Fair Labor Standards Act (FLSA) and New York State Labor Law. The plaintiffs, former waiters at the Park Avenue Restaurant, claimed the defendants failed to pay minimum wage and overtime, made illegal deductions from pay and gratuities, and violated the state's "spread of hours" requirement. The United States District Court for the Southern District of New York, under Judge Cedarbaum, granted the plaintiffs' motion for class certification on January 29, 2011, finding that the requirements of Federal Rule of Civil Procedure 23(a) and (b)(3) were met. The Circuit Court affirmed the District Court's decision, allowing the class action to proceed. Various legal representatives and organizations provided support for the plaintiffs in the appeal.

Plaintiffs allege that Park 33 Avenue violated New York Labor Law by mandating servers to share tips with ineligible employees and failing to compensate waiters for overtime when workdays exceeded ten hours. The federal claims were pursued as a collective action under Section 16(b) of the FLSA, while state law claims were submitted as a putative class action. On November 11, 2009, the Plaintiffs sought class certification for their state claims under Federal Rule of Civil Procedure 23. The District Court orally granted this motion on January 28, 2010, confirming that the Rule 23(a) and (b)(3) criteria were satisfied and exercising supplemental jurisdiction over the state claims. Following Park Avenue's petition for leave to appeal the certification order, which was granted on May 14, 2010, the Court affirmed the District Court's decision.

Park Avenue Restaurant, owned by Smith & Wollensky Restaurant Group, Inc. and Fourth Walls Restaurants LLC, is accused of violating tip-related laws. Park Avenue pays servers using state and federal tip credits, allowing reduced minimum wages contingent on tip earnings. While the FLSA permits a tip credit up to 50% of the minimum wage, it cannot exceed the tips actually received. New York law limits the tip credit to $2.25 as of January 1, 2011. Under the FLSA, employers cannot use tip credits if they require tipped employees to share tips with non-tipped employees or managers, thus losing their entitlement to the tip credit in such cases.

A host or hostess qualifies as a tipped employee due to sufficient customer interaction and table attendance duties. In contrast, a salad maker is not considered a tipped employee because they lack direct interaction with diners and perform tasks outside the patrons' view. Under 29 U.S.C. § 203(t), a tipped employee is defined as someone who regularly receives over $30 in tips monthly. New York regulations (N.Y. Comp. Codes R. Regs. tit. 12) specify that food service workers must earn at least $5.00 per hour, with tip credits not exceeding $2.25 per hour, ensuring total compensation meets or exceeds $7.25 per hour.

The Fair Labor Standards Act (FLSA) prohibits employers from requiring tipped employees to share tips with managers, as established in Chung v. New Silver Palace Rest. Additionally, New York law (N.Y. Labor Law § 196-d) prohibits employers from demanding or accepting any part of an employee's gratuities, except for legitimate tip sharing among service roles, such as waiters and busboys. This law is reinforced by case law, indicating a violation occurs if tipped employees are forced to share tips with non-service employees or managers.

Plaintiffs argue that Park Avenue's tipping practices violate both federal and state laws by requiring servers to share tips with non-customer-facing employees, including expediters and kitchen staff, who do not engage in direct service to customers. This practice, as noted in Tandoor Rest. Inc. v. Comm’r of Labor, also constitutes a violation of § 196-d, as it mandates sharing tips with employees who are not engaged in meaningful customer service. The overlap in prohibitions under 29 U.S.C. § 203(m) and § 196-d suggests that violations of one may imply violations of the other.

Plaintiffs allege that at Park Avenue Restaurant, various kitchen and service roles, including expediters, dishwashers, coffee makers, silver polishers, and a manager, participate in a tip-sharing arrangement that violates the Fair Labor Standards Act (FLSA) and New York Labor Law, specifically section 196-d. They argue that including a tip-ineligible employee in the sharing pool unjustly affects all waitstaff, as they are required to share tips with ineligible personnel. The outcome of their claims hinges on whether these individuals can legally be included in the tip pool based on their job duties.

Additionally, Plaintiffs assert that Park Avenue violated New York’s "spread of hours" provision, which mandates extra pay for workdays exceeding ten hours. The Plaintiffs filed a Complaint on January 4, 2008, later amending it to include claims for minimum wage and overtime violations under both the FLSA and New York State Minimum Wage Act, illegal pay deductions, and the aforementioned spread of hours violation.

Following the joining of issues, Plaintiffs sought class certification for their state law claims on November 11, 2009, providing supporting evidence pertaining to the entire class period. Notably, a change in the New York State Hospitality Industry Wage Order effective January 1, 2011, allows mandatory tip sharing among food service workers, though it does not influence the current case's resolution.

In 2008, with consent from the parties and approval from the District Court, the Plaintiffs notified waiters at Park Avenue of their FLSA claims, allowing them to join the lawsuit within the statute of limitations. This resulted in 18 additional plaintiffs, increasing the total to 25. The Plaintiffs provided evidence indicating that all class members were subjected to the same tipping practices, that certain employees who shared tips did not provide customer service, that servers were required to share tips with a manager, and that Park Avenue failed to provide spread of hours pay.

During a January 28, 2010 hearing, the District Court certified the class and retained supplemental jurisdiction over the state law claims, expressing concern about potential issues if Plaintiffs had to refile in state court. The court emphasized it would not dismiss these claims without assurance that they could be adequately pursued in state court. The court acknowledged the policy implications of allowing state claims to coexist with federal ones but deemed it too late to consider dismissal.

Regarding class certification under Rule 23, the court found sufficient numerosity with 275 class members, determined that there were no predominant individual issues, and recognized common questions of law or fact among the class. Park Avenue subsequently filed a petition for leave to appeal the class certification decision, which was granted on May 14, 2010. Park Avenue also sought a stay of proceedings, which was approved on March 15, 2010. On appeal, Park Avenue argued that the District Court abused its discretion in exercising supplemental jurisdiction and erred in its class certification decision, specifically regarding the sufficiency of evidence and failure to rule on each Rule 23 requirement. The analysis began by reviewing the appropriateness of the District Court's exercise of supplemental jurisdiction over the state law claims, with an established standard of abuse of discretion for such determinations. The excerpt underscores the FLSA's intent to protect workers from substandard working conditions essential for their well-being.

New York established minimum wage standards to address inadequate wages for workers, ensuring that service employees receive all gratuities. Victims of wage and hour violations can pursue claims under both the Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL). Under the FLSA, employees may initiate a collective action, which requires individual written consent to join, thereby potentially deterring participation due to fear of retaliation. In contrast, the NYLL allows for a traditional opt-out class action, enabling employees to recover lost wages without the same risks associated with FLSA claims. Due to the overlapping nature of FLSA and NYLL claims, plaintiffs often bring both types of actions together, utilizing the FLSA for collective actions and NYLL for class actions. The current matter examines whether the District Court appropriately exercised supplemental jurisdiction over the NYLL claims, allowing plaintiffs to pursue both actions concurrently in federal court.

Park Avenue argues that the District Court improperly exercised supplemental jurisdiction, claiming that allowing employees to pursue both an FLSA collective action (requiring opt-in) and a Rule 23 class action (opt-out) for state labor law claims contradicts Congress's intent. Park Avenue contends that this creates a conflict due to the larger size of the opt-out class, leading to impracticality and potential unfairness, as employees who do not opt-in may have their FLSA claims extinguished by the state action. 

The court cites 28 U.S.C. § 1367, which allows for supplemental jurisdiction over related claims in civil actions with original jurisdiction, provided they arise from a common nucleus of operative fact. The court finds that the FLSA and NYLL claims share such a nucleus since they both relate to Park Avenue's compensation practices. 

The court also notes that declining supplemental jurisdiction is only justified under specific circumstances outlined in § 1367(c), and such discretion should align with principles of economy, convenience, fairness, and comity. The permissive nature of § 1367(c) implies that declining jurisdiction is not mandatory, and the exercise of supplemental jurisdiction is traditionally a matter of judicial discretion rather than a right of the plaintiff.

Subsection (c) of 28 U.S.C. § 1367 outlines the discretionary nature of supplemental jurisdiction, specifying circumstances under which district courts may refuse to exercise it. In this case, the NYLL and FLSA claims are determined to be part of the same case or controversy, prompting an examination of the factors in § 1367(c) to ascertain if supplemental jurisdiction might be abused. 

Under § 1367(c)(1), the NYLL claims regarding spread-of-hours pay and illegal deductions from tips do not introduce complex state law issues. The spread-of-hours claim primarily depends on factual determinations about workdays exceeding ten hours and corresponding pay, while the illegal deductions claim centers on whether tips were shared with non-service employees. Therefore, these claims do not present novel legal questions.

Section 1367(c)(2) stipulates that a state law claim must substantially predominate over a federal claim for a court to exercise discretion in declining supplemental jurisdiction. Given that the FLSA and NYLL employ similar standards for determining tip eligibility and arise from the same facts, the resolution of the FLSA claims is likely to impact the NYLL claims. The number of state law plaintiffs versus FLSA plaintiffs does not affect this analysis, as predominance pertains to the type of claim rather than the number of parties involved. Consequently, the state law claims do not substantially predominate over the FLSA claims, which share the same underlying issues, thus supporting the exercise of supplemental jurisdiction.

The addition of plaintiffs to the 19 certified state law class action does not alter the factual findings or claims regarding Park Avenue's practices. Consequently, the plaintiffs' state law claims do not significantly outweigh their federal claims, which fall under the District Court's original jurisdiction, as per 1367(c)(2). Section 1367(c)(3) is inapplicable because the District Court has not dismissed any claims over which it held original jurisdiction. Regarding whether there is a “compelling reason” under section 1367(c)(4) for the District Court to refuse supplemental jurisdiction over the New York Labor Law (NYLL) claims, Park Avenue's argument against class certification due to a conflict between opt-in collective actions under the Fair Labor Standards Act (FLSA) and opt-out class actions under NYLL is rejected. The FLSA does not prohibit the exercise of supplemental jurisdiction over state law wage claims, as indicated by section 216(b), which holds employers liable for unpaid minimum wages or overtime compensation, plus liquidated damages.

Employers who violate section 215(a)(3) are liable for legal or equitable relief, which may include employment reinstatement, promotion, payment of lost wages, and liquidated damages equal to the lost wages. Employees can initiate actions against employers, including public agencies, in federal or state courts on behalf of themselves and similarly situated employees, provided they give written consent to participate, which must be filed in court. The FLSA's section 216(b) allows employees to bring claims for minimum wage, overtime, and anti-retaliation, but the consent requirement is specific to wage claims under the FLSA, not general wage claims. Furthermore, states may enact more protective wage laws, as indicated by the FLSA's savings clause, which allows state laws to coexist with the FLSA and mandates that states can impose higher minimum wages and greater overtime benefits. The FLSA is not the exclusive remedy for wage claims, and restricting access to federal courts for class-wide remedies would contradict the FLSA's purpose. Legislative history does not support limiting joint prosecution of FLSA and state law wage claims in the same federal action, as the original provisions allowed collective actions without requiring unnamed plaintiffs to opt in.

The Fair Labor Standards Act (FLSA) of 1938 initially established regulations regarding wage and hour laws, which Congress later amended in 1947 with the Portal-to-Portal Act. This Act introduced an opt-in requirement applicable solely to FLSA actions, without indicating any intent to prevent class certification or to inhibit supplemental jurisdiction over state wage law claims. Notably, courts have recognized that the opt-in provision for FLSA collective actions does not conflict with the opt-out provisions of state law class actions under Rule 23.

Several circuit courts, including the Seventh, Ninth, and D.C. Circuits, have affirmed that supplemental jurisdiction is appropriate over state labor law class claims when federal question jurisdiction exists due to FLSA claims. They argue that certifying a Rule 23 class action alongside an FLSA collective action could prevent confusion arising from separate proceedings. They emphasize that unless exceptional circumstances exist, the differing procedural requirements of the FLSA and Rule 23 should not hinder supplemental jurisdiction.

The only circuit to decline supplemental jurisdiction in such a context was the Third Circuit in De Asencio v. Tyson Foods, where employees brought claims under both the FLSA and Pennsylvania's Wage Payment and Collection Law.

The district court's class certification for employees' state labor law (WPCL) claims was upheld by the Third Circuit, which found no abuse of discretion in determining that the FLSA and WPCL claims arose from the same controversy. However, the appellate court ruled that the district court improperly exercised supplemental jurisdiction over the WPCL claim, which raised novel and complex state law questions that predominated over the FLSA claim. The Third Circuit highlighted two unresolved state law issues: whether a WPCL claim could be based on an implied employment contract derived from oral representations and whether the WPCL applied to at-will, non-collective bargaining employees. The need for state courts to address these questions favored declining supplemental jurisdiction. 

The Third Circuit distinguished this case from De Asencio, emphasizing that the latter involved a specific state law complexity that warranted a different outcome under 28 U.S.C. § 1367(c)(1). Despite recognizing the strong interest in consolidating the FLSA and WPCL actions, the court noted that the opt-in and opt-out class distinctions significantly affect litigation dynamics. Ultimately, the Third Circuit found no abuse of discretion in the district court's choice to exercise supplemental jurisdiction over the NYLL claims, asserting that conflicts between the FLSA and Rule 23 procedures do not constitute valid reasons to decline jurisdiction under § 1367(c).

A district court's class certification decision under Rule 23 is subject to an abuse of discretion standard of review, which means it can only be overturned if it constitutes an error in law or a clearly erroneous factual finding. The court retains discretion as long as it applies the correct legal standards, and its decisions must fall within a permissible range. When a district court denies class certification, appellate courts apply a less deferential standard compared to when class status is granted. Additionally, even if a statutory basis for denying supplemental jurisdiction exists, exercising such jurisdiction may be warranted to avoid duplicative litigation and confusion among potential class members. The principles governing class certification rulings include evaluating whether the class is sufficiently numerous, whether there are common questions of law or fact, whether the representative parties' claims are typical, and whether those parties will adequately protect the class interests, as outlined in Rule 23(a).

The court determined that common questions of law or fact among class members predominate over individual issues, affirming that a class action is the superior method for resolving the controversy, in accordance with Federal Rule of Civil Procedure 23. A district judge can certify a class only after ensuring all Rule 23 requirements are met, which involves resolving factual disputes and establishing relevant underlying facts. The court emphasized that the obligation to make these determinations remains unaffected by overlaps between Rule 23 requirements and merits issues. Additionally, the judge should not evaluate merits unrelated to Rule 23 and has the discretion to limit discovery and hearings to prevent class certification motions from resembling partial trials on the merits.

In the context of the case, Park Avenue contested the District Court’s certification of state law claims as a class action, arguing insufficient evidentiary support for Rule 23 requirements. However, the record and hearing transcript indicated that the District Court did not abuse its discretion in certifying the class action. Specifically, the numerosity requirement was met, with approximately 275 class members, aligning with precedents that presume numerosity with forty or more members.

The District Court correctly identified common questions of law and fact among the plaintiffs, as all claims stem from the same compensation policies and tipping practices at Park Avenue, governed by New York State statutes. The claims of the representative parties were deemed typical of the class, as any misclassification of tip-ineligible employees would impact all plaintiffs similarly, confirming the satisfaction of commonality and typicality requirements. Evidence presented included declarations, deposition testimony, and payroll records demonstrating uniform tipping policies.

Regarding the adequacy of representation, the plaintiffs showed that class representatives were prepared to fully prosecute the action and had no known conflicts, allowing for the presumption of adequate representation despite the absence of an express finding by the District Court. Should any representative prove inadequate later, substitutions could be made without jeopardizing the class action.

For Rule 23(b)(3), the plaintiffs alleged that all servers were subject to a uniform tip-sharing system, with Park Avenue not disputing this practice. If plaintiffs can demonstrate that certain employees were ineligible for tips under New York law, all class members may prevail on their claims, although individual damages may differ. The District Court's conclusion that common issues predominated over individual damages was supported by the evidence presented. As a result, the findings and conclusions related to the Rule 23 requirements were upheld, leading to the affirmation of the District Court's order certifying the New York State law claims.