351 F. Supp. 3d 394
W.D.N.Y.2019Background
- Defendants (the Koesslers and their restaurants/banquet facilities) charged mandatory "service charges" on banquet/catering bills; Plaintiffs were banquet servers who allege those charges were gratuities that Defendants retained in violation of N.Y. Labor Law § 196‑d.
- NY Court of Appeals in Samiento held mandatory service charges can be treated as gratuities when employers allow customers to believe the charge is for employees; NYDOL adopted 12 N.Y.C.R.R. § 146‑2.18 implementing § 196‑d and creating a rebuttable presumption that certain additional charges are purported gratuities.
- Plaintiffs allege Defendants retained mandatory service charges and failed to disclose that charges were not gratuities distributed to staff, so § 196‑d required distribution to employees.
- Defendants moved for judgment on the pleadings, arguing federal preemption by the Internal Revenue Code (IRC) and the FLSA because (1) if service charges are wages for tax purposes the employer must withhold taxes (retaining part of the charge), which § 196‑d allegedly prohibits, and (2) inclusion of service charges in "regular rate" conflicts with FLSA overtime rules.
- Magistrate Judge Foschio recommended denying the motion; the district court reviewed de novo and affirmed Foschio’s R&R and his denial of reconsideration (which had sought to introduce a CPA affidavit).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether IRC preempts N.Y. Labor Law § 196‑d / 12 NYCRR § 146‑2.18 | §196‑d and the regulation properly treat mandatory service charges as gratuities to be distributed when employer misleads customers | IRC and Treasury regs treat mandatory service charges as employer‑wages subject to withholding; withholding requires employer to "retain" part of charge, conflicting with §196‑d | No preemption — defendants failed to show impossibility or obstacle preemption; alternatives (required disclosure) and plausible statutory readings avoid conflict |
| Whether FLSA preempts § 196‑d by forcing inclusion of service charges in "regular rate" and affecting overtime calculations | Mandatory distribution under §196‑d is consistent with labor protections and does not conflict with FLSA goals | Forced distribution makes service charges wages, complicating regular‑rate/overtime and thus conflicts with FLSA scheme | No preemption — defendants concede dual compliance possible and did not show §196‑d frustrates FLSA purposes |
| Whether Magistrate Judge properly struck CPA affidavit on reconsideration | Plaintiffs argued affidavit impermissibly relitigated R&R and raised new arguments | Defendants said affidavit elucidated legal error rather than add facts | Striking affidavit was not clearly erroneous; magistrate correctly treated motion for reconsideration as improper attempt to relitigate legal conclusions |
| Standard of review for R&R and non‑dispositive order | N/A | Defendants sought de novo review of magistrate’s denial of reconsideration | District court applied de novo review to R&R and "clearly erroneous or contrary to law" standard to magistrate’s non‑dispositive order and affirmed |
Key Cases Cited
- L-7 Designs, Inc. v. Old Navy, 647 F.3d 419 (2d Cir.) (standard for motion on the pleadings)
- Graziano v. Pataki, 689 F.3d 110 (2d Cir.) (Twombly/Twombly plausibility standard applied)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (Sup. Ct.) (plausibility standard for pleadings)
- Samiento v. World Yacht Inc., 10 N.Y.3d 70 (N.Y.) (mandatory service charges can be gratuities when customers are led to believe charge is for employees)
- Wyeth v. Levine, 555 U.S. 555 (U.S.) (purpose of Congress is the touchstone in preemption analysis; presumption against preemption)
- Arizona v. United States, 567 U.S. 387 (U.S.) (conflict preemption: impossibility and obstacle frameworks)
- In re Methyl Tertiary Butyl Ether (MTBE) Prods. Liab. Litig., 725 F.3d 65 (2d Cir.) (burden for establishing preemption; impossibility/obstacle discussion)
- Fla. Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132 (U.S.) (physical impossibility preemption)
- Geier v. Am. Honda Motor Co., 529 U.S. 861 (U.S.) (state law penalizes what federal law requires — preemption context)
- Marsh v. Rosenbloom, 499 F.3d 165 (2d Cir.) (state law not preempted absent clear conflict; preemption requires clear evidence)
- Pippins v. KPMG, LLP, 759 F.3d 235 (2d Cir.) (FLSA purpose as worker protection)