Controlling labor costs is one of the greatest challenges an employer has, particularly in the hospitality industry. Unfortunately, that challenge is only getting harder to manage. According to a recent report of the Bureau of Labor Statistics, restaurant industry wages have been rising faster than in many other industries.

Because labor costs are a significant, yet to some degree controllable, expense, the pressure on hospitality managers to reduce such costs can be significant. Because a manager’s continued employment and/or income can hinge on controlling labor costs, it is no surprise that they sometimes take creative steps to bring about a “desired” outcome. Unfortunately, that “out of the box thinking” may violate the law. Therefore, while a sudden, dramatic reduction in labor costs may seem like a cause for celebration, owners/operators should definitely take a closer look to make sure the labor cost savings are not being converted into more-expensive legal liability in the future.

A manager attempting to reduce labor costs may run afoul of the Fair Labor Standards Act (“FLSA”), the federal statute that governs minimum wage and overtime payments. (Many states have similar statutes, and some counties/municipalities may have “living wage” ordinances.) For example, a manager may attempt to set a lower hourly wage than the law allows, thinking that tips will be enough to make up the difference. Similarly, violations frequently occur when a manager requires or allows employees to work “off-the-clock,” either by letting them do (or requiring them to do) unpaid, preshift “set up” work or requiring attendance at “cleaning parties” or the like. More disturbing are those managers who manipulate employees' time entries.

Given these and other potential pitfalls, it is essential that owners/operators take proactive steps to minimize their risk of liability. First, all restaurants should adopt specific policies addressing -- and should train all managers on -- proper wage payment procedures, the importance of not allowing employees to work off-the-clock, and the handling of tips. Second, should a specific restaurant location experience a dramatic decrease in its labor costs, the company should consider conducting an audit to ensure that no violations have occurred.