A five-restaurant chain failed to pay overtime to employees whose weekly hours totaled more than 40 when working at more than one location. When the case went to court, the owners claimed they weren’t aware that they owed overtime pay. And so arose the case of Chao v. Barbeque Ventures LLC, in which the Eighth Circuit had to decide whether those owners had acted in good faith.

NO ONE KEPT TRACK

Each restaurant manager independently hired and scheduled employees without input from other restaurants or senior management. The area director oversaw all five restaurants and visited each about twice a month. He testified that he knew some employees worked at more than one location.

Restaurant managers reported the hours worked by their employees to Payroll Management Inc., an independent third party that processed the payroll and issued paychecks and W-2 forms. No one combined the hours of employees working at more than one location to see whether they were owed overtime pay.

A COSTLY MISTAKE

The Secretary of Labor sued the owners in 2006, alleging failure to pay overtime compensation to 25 employees in violation of the Fair Labor Standards Act (FLSA). The complaint sought — on behalf of those employees — $90,055 in unpaid overtime compensation, liquidated damages (damages agreed on in advance) and postjudgment interest. The trial court ruled for the government without a trial. The owners appealed only the grant of liquidated damages.

THE GOOD FAITH ISSUE

First, the Eighth Circuit noted that, under the FLSA, an award of liquidated damages is mandatory unless employers can show that they acted “in good faith” and with “reasonable grounds for believing” that they had complied with the FLSA. Then “the court may, in its sound discretion, award no liquidated damages.”

This “good faith” requirement is a subjective standard. Employers must establish “an honest intention to ascertain and follow” the dictates of the FLSA. To carry their burden, employers must show that, though they “took affirmative steps to ascertain” the act’s requirements, they “nonetheless violated its provisions.”

3 OWNER ARGUMENTS

The owners argued that they had demonstrated good faith on three grounds:

1. Lack of specific knowledge. They claimed they hadn’t known that employees worked at multiple locations. The Eighth Circuit found this argument failed to meet the burden of showing an “honest intention” to ascertain and follow the FLSA’s requirements. Thus, lack of knowledge wasn’t sufficient to establish good faith.
2. Lack of employee complaints. The owners claimed that they had proved that no employees complained about not getting overtime pay. The Eighth Circuit held that the fact that an employer has broken the law for a long time without employee complaints doesn’t demonstrate the good faith required by the statute.
3. Payroll Outsourcing. The owners claimed that they had established good faith by outsourcing their payroll. The Eighth Circuit noted that it had previously rejected (in Goldberg v. Kickapoo Prairie Broadcasting Co.) the proposition that delegating the payroll function to a subordinate satisfies the FLSA.

Thus, the Eighth Circuit concluded that the owners had failed to establish an honest intention to meet FLSA requirements and upheld the award of liquidated damages.

NO EASY TASK

This case demonstrates how complying with the FLSA is no easy task. To be safe, wise employers conduct periodic self-audits to determine whether all employees not receiving overtime compensation are actually exempt under the FLSA’s provisions.