Brennan v. NATIONAL HOTEL COMPANY

• Decision Date: 22 March 1973
• Docket Number: No. 71-3634.,71-3634.
• Citation: 476 F.2d 17
• Parties: Peter J. BRENNAN, Secretary of Labor, United States Department of Labor, Plaintiff-Appellant, v. NATIONAL HOTEL COMPANY and Menger Hotel, jointly and severally, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

476 F.2d 17 (1973)

Peter J. BRENNAN, Secretary of Labor, United States Department of Labor, Plaintiff-Appellant, v. NATIONAL HOTEL COMPANY and Menger Hotel, jointly and severally, Defendants-Appellees.

No. 71-3634.

United States Court of Appeals, Fifth Circuit.

March 22, 1973.

Richard F. Schubert, Sol. of Labor, Bessie Margolin, U. S. Dept. of Labor, Washington, D. C., M. J. Parmenter, Regional Sol., Truett E. Bean, Atty., U. S. Dept. of Labor, Dallas, Tex., Carin Ann Clauss, Jacob I. Karro, Atty., U. S. Dept. of Labor, Washington, D. C., for plaintiff-appellant.

Louis J. Dibrell, Galveston, Tex., for defendants-appellees.

Charles W. Merritt, Wendell Davis, Jr., New York City, Albert L. McDermott, Washington, D. C., amicus curiae for American Hotel and Motel Assn.

Before GEWIN, BELL and GODBOLD, Circuit Judges.

GEWIN, Circuit Judge:

The Secretary of Labor brought this suit under the minimum wage provisions of the Fair Labor Standards Act (FLSA)¹ to restrain the National Hotel Company in its capacity as owner and operator of the Menger Hotel (hereinafter Menger Hotel) from continuing to withhold compensation allegedly due its tipped employees. In the face of an administrative determination to the contrary the district court decided that at all times the defendant had paid its tipped employees enough to satisfy the minimum wage requirements of the FLSA and accordingly dismissed the Secretary's suit. We reverse, not because we necessarily agree with the administrative conclusion ultimately rejected by the district court, but because in arriving at its decision the district court did not employ the correct standard for reviewing the administrative determination before it.

§ 3(m) of the FLSA² authorizes employers to take a partial credit against the minimum wage they are required to pay for amounts presumably received in tips by their tipped employees. The amount of the credit depends on the amount of tips actually received by the employees, but in no event can it exceed 50 percent of the applicable minimum wage. The statute leaves the initial determination as to the amount of tips being received to the employer but permits an employee who feels he is being shortchanged to seek a redetermination by the Secretary of Labor. Once the employee establishes to the satisfaction of the Secretary that the amount he is actually earning in tips is less than the amount the employer is taking credit for, then the employer is liable to the employee for the difference, and only this lesser amount may be added to the cash wages being paid the employee to determine whether the employer is meeting the minimum wage requirements of the FLSA.

Relying upon § 3(m), the Menger Hotel paid its tipped employees only 50 percent of the applicable minimum wage during the period in question; apparently it was confident that the remaining 50 percent of the wages to which these employees were legally entitled would be received in tips. After an investigation of the hotel's payroll records convinced his representative that the tip wage credits being taken by the hotel were unjustified, the Secretary brought this suit to force compliance. Before the case came to trial, the district court in accordance with the provisions of § 3(m) and the regulations adopted thereunder remanded the case to the Secretary for an administrative hearing and determination on the question of how much the hotel's tipped employees were actually pocketing in tips.³

Pursuant to the remand order, a hearing examiner appointed by the Administrator of the Wage and Hour Division of the Department of Labor conducted a full adversary hearing to determine the amount of tips received by the hotel's employees which could be credited against the minimum wages due them under the FLSA. At the hearing both parties were permitted to present whatever evidence and argument they could muster, and the American Hotel and Motel Association was allowed to appear as an interested party and file a brief in support of the defendant.

In support of its position the Secretary offered the testimony of a large number of the hotel's tipped employees. With one exception each of these witnesses testified that at regular intervals he had made a daily record, on forms supplied by the hotel, of the amount received in tips that day and that at the end of each month in which a record was kept the total amount earned in tips that month was reported to the hotel. Each witness swore that these records and reports accurately reflected the amount of tips received. The payroll records of the hotel showed no tip receipts other than the amounts reported by its employees, and these amounts were insufficient, when added to the cash wages paid by the hotel, to equal the minimum wage required by the FLSA.

The hotel willingly admitted that it paid its tipped employees no more than 50 percent of the applicable minimum wage in spite of the fact that their monthly reports plainly indicated that they were not receiving enough in tips to justify the tip wage credit being taken. In defense the hotel took the position that self-interest, engendered by the manifold advantages to be derived from understating tip income, rendered tipped employees incapable of reporting their tips honestly and that in recognition of this fact the hotel properly disregarded the purportedly unreliable reports turned in by its employees in deciding how much to pay them. To illustrate the alleged incredibility of these reports the hotel introduced exhibits showing what percentage of his gross sales the tips reported by each employee equalled and, by comparison, what percentage of sales the tip credits taken by the hotel equalled. It cited tax cases and a Department of Labor survey to support its theory that while the employees' tip reports were inordinately low as a percentage of sales, the tips it had credited them with earning represented a reasonable percentage of sales and were comparable to what employees in similarly situated hotels were receiving. In addition it produced written statements, signed by the employees at the hotel's request and disavowed by them at the hearing, in which they admitted that they had not understood the necessity of reporting tip income accurately and that they had in fact earned as much in tips as the hotels had taken in tip credits.⁴ In this fashion the hotel urged the hearing examiner to find as fact that the presumption that its tipped employees were earning at least 50 percent of the requisite minimum wage in tips was justified and to ignore their reports to the contrary.

Upon this record the hearing examiner found that the amount of tips reported monthly by each of the hotel's employees was in fact the amount he received and that the hotel could take credit for no more than this amount in computing the cash wages it was required to pay its tipped employees under § 3(m).⁵ The hearing examiner's findings were adopted by the Administrator of the Wage and Hour Division of the Labor Department and certified by him to the district court. On cross-motions for summary judgment the district court reviewed the entire record as developed before the hearing examiner, drawing its own conclusions as to what evidence was entitled to great weight and what testimony was credible. In effect the standard of review applied, though not articulated, by the district court was that if the preponderance of the evidence supports a conclusion contrary to that reached by the administrative body in question, then the administrative determination must be ignored. Guided by this standard of review, the trial court decided that at all times the defendant's employees did receive tips in amounts sufficient, when added to the cash wages paid them by the defendant, to satisfy the minimum wage requirements of the FLSA. On this basis the Secretary's suit was dismissed.⁶

Although the standards by which the judiciary reviews...