Davis et al v. 2192 Niagara Street, LLC et al
Filing
90
DECISION AND ORDER: For the reasons set forth in the attached Decision and Order, the Court hereby adopts Magistrate Judge Leslie G. Foschio's Report and Recommendation 50 in its entirety. The defendants' motion for judgement on the plea dings 33 is denied. The Court also affirms Judge Foschio's Decision and Order 59 . This case is recommitted to Judge Foschio for further proceedings consistent with the original referral order. SO ORDERED. Signed by Hon. Richard J. Arcara on 1/2/2019. (LAS)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
______________________________________________
MICHELE DAVIS and VICTORIA BLASZAK,
on behalf of themselves and all other employees
similarly situated,
Plaintiffs,
15-CV-0429-A
DECISION AND ORDER
v.
2191 NIAGARA STREET, LLC; CLASSIC EVENTS
AT THE LAFAYETTE, LLC; EVENTS AT THE FOUNDRY,
LLC; MOLLY FORD KOESSLER; WILLIAM KOESSLER, and
RIVERFRONT ON THE NIAGARA, LLC, d/b/a ACQUA,
Defendants.
________________________________________________
This Fair Labor Standards Act case is before the Court on the Defendants’
objections to Magistrate Judge Leslie G. Foschio’s Report and Recommendation, which
recommends denying the Defendants’ motion for judgment on the pleadings; and the
Defendants’ appeal of Judge Foschio’s Decision and Order, which denied the
Defendants’ motion for reconsideration of his Report and Recommendation.
For the reasons stated below, the Court adopts Judge Foschio’s Report and
Recommendation and affirms Judge Foschio’s Decision and Order. The Defendants’
motion for judgment on the pleadings is therefore denied.
BACKGROUND
Because this case is before the Court on the Defendants’ motion for judgment on
the pleadings, the Court “draw[s] all facts—which [the Court] assume[s] to be true unless
contradicted by more specific allegations or documentary evidence—from the [amended]
[c]omplaint and from the exhibits attached thereto,” as well as from the answer and the
1
exhibits attached thereto. L-7 Designs, Inc. v. Old Navy, LLC, 647 F.3d 419, 422 (2d Cir.
2011). A motion for judgment on the pleadings is judged by the same standard as a
motion to dismiss under Rule 12(b)(6): “[T]he complaint must contain sufficient factual
matter to ‘state a claim to relief that is plausible on its face.’” Graziano v. Pataki, 689 F.3d
110, 114 (2d Cir. 2012) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570
(2007)).
1. Factual background
Defendants William and Molly Ford Koessler own and operate several restaurants
and banquet facilities in Buffalo, New York, each of which is also a Defendant in this case.
As part of their business, the Defendants “routinely host weddings, bridal showers,
anniversary parties, and other special events.”
Amend. Compl. ¶ 67.
The named
Plaintiffs were, at different times, employees of the Defendants: Plaintiff Davis worked as
an hourly banquet server and as a “banquet captain,” and Plaintiff Blaszak worked as an
hourly banquet server.
The amended complaint contains six claims under the Fair Labor Standards Act,
29 U.S.C. § 201, et seq., and New York Labor Law. The only claim relevant to the pending
objections, however, is the Plaintiffs’ first claim, which alleges that the Defendants illegally
retained gratuities, in violation of New York Labor Law § 196-d.
New York Labor Law § 196-d states, in relevant part, that “[n]o employer . . . shall
demand or accept, directly or indirectly, any part of the gratuities, received by an
employee, or retain any part of a gratuity or of any charge purported to be a gratuity for
an employee.” (Emphasis added.) In 2008, the New York Court of Appeals considered
whether mandatory “service charges”—for example, a 20% charge automatically added
2
to a banquet customer’s bill—fall within the scope of Labor Law § 196-d. The Court of
Appeals held that § 196-d “can include mandatory charges when it is shown that
employers represented or allowed their customers to believe that the charges were in fact
gratuities for their employees.” Samiento v. World Yacht Inc., 883 N.E.2d 990, 996 (N.Y.
2008).
Following that decision, the New York Department of Labor promulgated a
regulation, 12 N.Y.C.R.R. § 146-2.18, to implement Labor Law § 196-d as interpreted by
the Court of Appeals.
The regulation creates “a rebuttal presumption that any charge in addition to
charges for food, beverage, lodging, and other specified materials or services, including
but not limited to any charge for ‘service’ or ‘food service,’ is a charge purported to be a
gratuity,” 12 N.Y.C.R.R. § 146-2.18(b), which must be distributed to a restaurant’s
employees. N.Y. Labor Law § 196-d. The regulation allows a restaurant or banquet
facility to retain a mandatory service charge for itself, but it may do so only if it makes a
disclosure, in a form prescribed by regulation, that “the administrative charge is for
administration of the banquet . . . is not purported to be a gratuity, and will not be
distributed as gratuities to the employees who provided service to the guests.” 12
N.Y.C.R.R. § 146-2.19(c).
The Plaintiffs allege that, during the time period at issue in the amended complaint,
the Defendants’ “policy [was] to retain the mandatory charge for service that was added
to customer bills at all of Defendants’ banquet events,” rather than to distribute the
charges to the Defendants’ employees. Amend. Compl. ¶¶ 72-74. The Plaintiffs further
allege that the Defendants “had a policy that failed to clearly identify that the mandatory
service charge was not a gratuity or tip.” Id. ¶ 75. For example, the Plaintiffs allege, “on
3
catering contracts provided to customers the mandatory charge was referred to as
‘service charge’” but “failed to include the necessary disclaimers indicating that these
mandatory charges were in fact retained by Defendants and not distributed to banquet
service employees.” Id. ¶ 76. Thus, the Plaintiffs claim that, by operation of Labor Law
§ 196-d and 12 N.Y.C.R.R. § 146-2.18, these “service charges” were gratuities that
should have been distributed to the Plaintiffs and other employees.
2. Procedural history
The Defendants moved for judgment on the pleadings as to the Plaintiffs’ Labor
Law § 196-d claim. See Fed. R. Civ. P. 12(c). The Defendants argue that Labor Law
§ 196-d and its implementing regulation, 12 N.Y.C.R.R. § 146-2.18, are preempted by
several provisions of the Internal Revenue Code (IRC) as well as the Fair Labor
Standards Act (FLSA). 1
Judge Foschio, to whom the Court referred this case pursuant to 28 U.S.C.
§ 636(b)(1), filed a Report and Recommendation that recommends denying the
Defendants’ motion.
The Defendants then filed objections to the Report and
Recommendation, as well as a motion asking Judge Foschio to reconsider his Report
and Recommendation. In support of their motion for reconsideration, the Defendants
submitted an affidavit from a certified public accountant (CPA), which the Defendants
claim was intended to “elucidate the error of law and thereby demonstrate for [Judge
Foschio] the very serious and, indeed, dramatic injustice resulting from the error of law
1
In their motion to dismiss, the Defendants argue that “[t]he proper result [they] seek through federal
preemption also results in harmony between New York Tax Law and New York [L]abor [L]aw.” Docket No.
33-1 at 16. The Defendants, however, do not seek dismissal of the Plaintiffs’ Labor Law § 196-d claim on
this basis. Thus, the Court need not resolve any alleged conflict between New York Tax Law and New
York Labor Law.
4
made by the legal ruling in [his] Report and Recommendation.” Docket No. 58 at 3. This
Court stayed briefing on the Defendants’ objections until Judge Foschio decided the
motion for reconsideration.
Judge Foschio denied the Defendants’ motion for reconsideration and granted the
Plaintiffs’ motion to strike the CPA’s affidavit.
The Defendants then renewed their
objections to Judge Foschio’s Report and Recommendation, and the Defendants also
sought review of Judge Foschio’s Decision and Order denying their motion for
reconsideration.
The Court reviews Judge Foschio’s Report and Recommendation de novo. 28
U.S.C. § 636(b)(1). The Court reviews Judge Foschio’s Decision and Order to determine
whether it is “clearly erroneous or contrary to law.” 28 U.S.C. § 636(b)(1)(A); L. Civ. R.
72(a).
DISCUSSION
1. The collection and disbursement of service charges under the IRC and
Labor Law § 196-d
Understanding the Defendants’ preemption arguments requires an understanding
of the statutory and regulatory framework governing the collection and disbursement of
“service charges” under the Internal Revenue Code (IRC) and New York State Labor Law.
The alleged conflict between federal law and state law in this case arises from the
manner in which the IRC, together with its implementing regulations and guidance, treat
service charges. 2 Since 1959, the IRS has held that, to constitute a “tip,” a payment must,
2 The Defendants’ preemption argument is based heavily on the alleged preemptive effect of various IRS
and United States Department of Labor regulations, as well as informal guidance issued by those agencies.
There is at least some question whether a federal agency’s regulations and interpretations of statutes—
rather than the statutes themselves—can preempt state law. See, e.g., Wyeth v. Levine, 555 U.S. 555,
581 (2009) (Breyer, J. concurring) (noting that the Supreme Court’s decision in Wyeth did not resolve this
5
among other things, be “presented by the customer free from compulsion,” and it must be
an amount that the customer alone decides—that is, the amount “should not be subject
of negotiation or dictated by employer policy.” Rev. Rev. 59-252. See also Rev. Rul.
2012-18 (reaffirming that the “criteria of Rev. Rul. 59-252 . . . should be applied to
determine whether a payment made in the course of employment is a tip or non-tip wages
under section 3121 of the Code”). There is no dispute in this case that, when the facts in
the amended complaint are viewed in the light most favorable to the Plaintiffs, the service
charges at issue are not “tips” for purposes of the IRC.
Rather, the IRS has held—again, since 1959—that charges such as the ones at
issue in this case, if ultimately paid to an employer’s employees, “are considered as a
service charge which constitute wages for Federal employment tax purposes and for the
withholding of federal income tax at source.” Rev. Rul. 59-252. Specifically, Revenue
Ruling 59-252 addressed a situation in which a hotel operated banquet facilities and
charged users of such facilities, “in addition to the regular hotel charges, a certain amount
(usually a percentage of the regular charges) which [was] added to the hotel bill and
collected by the hotel for distribution to the banquet waiters and other employees who
rendered service at the affair.” Id. Even if these charges would ultimately be paid to the
banquet facility’s staff, Revenue Ruling 59-252 held that the charges were not “tips” but
were, instead, “service charges” “which constitute wages.” Id. Again, the Plaintiffs do not
dispute that, if the service charges in this case are distributed to the Defendants’
employees—whether under compulsion of New York Labor Law § 196-d or for some other
reason—they are “wages,” rather than “tips,” for purposes of the IRC. See 26 C.F.R.
question). Because the Plaintiffs did not raise this argument in opposition to the Defendants’ motion, the
Court does not consider it.
6
§ 31.3306(b)-1(b) (“The term ‘wages’ means all remuneration for employment unless
specifically excepted under section 3306(b) . . . or paragraph (j) of [26 C.F.R.
§ 31.3306(b)-1(b)].”); id. § 31.3306(b)-1(j)(3) (“[T]he following types of payments are
excluded from wages: Tips or gratuities paid directly to an employee by a customer of
any employer, and not accounted for by the employee to the employer.”) See also I.R.S.
Manual 4.23.7.6.2(5) (“A contractually fixed gratuity for catering, banquets, weddings . . .
and other events or items is generally considered to be service charges if the amount is
distributed or paid to the service staff. . . . If these amounts are distributed or paid to the
employees, then the amounts are non-tip wages subject to withholding.”)
The IRC’s treatment of service charges as “wages,” rather than “tips,” is important
in this case because of the manner in which the IRC requires that taxes be collected on
wages. If a customer pays a service charge that is to be distributed to the employee, the
charge is part of the employee’s “wages . . . which are under the control of the employer.”
26 C.F.R. § 31.3402(k)-1(a)(1). The IRC states that “every employer making payment of
wages shall deduct and withhold upon such wages” an appropriate “tax.” IRC 3402(a)(1)
(emphasis added). Thus, taxes withheld on the service charge-wages must come from
the service charge—not from the employee’s other wages.
According to the Defendants, then, the alleged conflict between the IRC and Labor
Law § 196-d, as interpreted by 12 N.Y.C.R.R 146-2.18, is straightforward: If the service
charges are distributed to the Defendants’ employees, the service charges are, for
purposes of the IRC, non-tip wages. Federal law therefore requires the Defendants to
“deduct and withhold upon such wages” an appropriate “tax.”
IRC § 3402(a)(1).
According to the Defendants, however, Labor Law § 196-d expressly prohibits what IRC
7
§ 3402(a)(1) requires: Labor Law § 196-d prohibits the employer from, among other
things, “retain[ing] any part” of the service charge. But, the Defendants argue, to comply
with the IRC, the employer must “retain” at least part of the service charge as part of the
employer’s withholding.
2. The standards for preemption of state law
The Constitution’s Supremacy Clause provides that federal law “shall be the
supreme Law of the Land . . . any Thing in the Constitution or Laws of any State to the
Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. The Supremacy Clause codifies the
“fundamental [constitutional] principle . . . that Congress has the power to preempt state
law.” Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 372 (2000).
The decision whether federal law preempts state law “must be guided by two
cornerstones”: “First, the purpose of Congress is the ultimate touchstone in every preemption case”; and “[s]econd, in all pre-emption cases, and particularly in those in which
Congress has legislated in a field which the States have traditionally occupied, [a court]
start[s] with the assumption that the historic police powers of the States were not to be
superseded by the Federal Act unless that was the clear and manifest purpose of
Congress.’”
Wyeth v. Levine, 555 U.S. 555, 565 (2009) (quotations, citations, and
editorial marks omitted). “In light of this assumption, the party asserting that federal law
preempts state law bears the burden of establishing preemption.” In re Methyl Tertiary
Butyl Ether Products Liab. Litig. (In re MTBE Litig.), 725 F.3d 65, 96 (2d Cir. 2013).
Federal law may preempt state law in several different ways, but the only type of
preemption relevant to this case is conflict preemption. A conflict between federal and
state law has “preemptive effect only in two circumstances: first, when ‘compliance with
8
both federal and state regulations is a physical impossibility,’ and second, when the state
law ‘stands as an obstacle to the accomplishment and execution of the full purposes and
objectives of Congress.’” Id. at 97 (quoting Arizona v. United States, 567 U.S. 387, 406
(2012). The Court discusses the standards for each type of conflict preemption in detail
in connection with the Defendants’ IRC and FLSA preemption arguments.
3. The IRC does not preempt Labor Law § 196-d and 12 N.Y.C.R.R. § 1462.18
A. Impossibility preemption
The Supreme Court’s “impossibility” preemption doctrine has taken several forms
over the past half-century. The Court’s “narrow[er] view” of impossibility preemption is
that “federal law will preempt state law . . . only when ‘compliance with both federal and
state regulations is a physical impossibility.’” Id. (quoting Fla. Lime & Avocado Growers,
Inc. v. Paul, 373 U.S. 132, 142-43 (1963)).
The Court’s more recent—and “more
expansive”—view of impossibility finds a preemptive conflict “when ‘state law penalizes
what federal law requires’ or when state law claims ‘directly conflict’ with federal law.” Id.
(quoting, in turn, Geier v. Am. Honda Motor Co., 529 U.S. 861, 873 (2000) and Am.
Telephone & Telegraph Co. v. Central Office Telephone, Inc., 524 U.S. 214, 227 (1998)).
Under either formulation, however, “‘impossibility preemption is a demanding defense,’”
and a court “will not easily find a conflict that overcomes the presumption against
preemption.” Id. (quoting Wyeth, 555 U.S. at 573) (brackets in MTBE omitted).
Under either standard, compliance with both federal law and state law is not
impossible in this case. First, it is not “a physical impossibility” to comply with both state
and federal law. Fla. Lime, 373 U.S. at 142-43. As Judge Foschio noted, the Defendants
can do so by providing customers with the notice mandated by 12 N.Y.C.R.R. § 1469
2.19(c); if they do, the Defendants will not need to distribute service charges to their
employees and will thereby avoid any conflict between federal and state law.
For this same reason, the Defendants have not shown that, under the “more
expansive” view of impossibility preemption, it is impossible to comply with both federal
law and state law. State law in this case does not “penalize[] what federal law requires,”
nor does it “directly conflict” with federal law. In re MTBE Litig., 725 at 97 (quotation
marks omitted). Once again, the Defendants could have complied with both state and
federal law by simply including in their invoices the notice required by 12 N.Y.C.R.R.
§ 146-2.19(c). If they had done so, state law would not, as the Defendants argue, prohibit
compliance with federal law. 3
The Defendants call this solution a “facile dismissal of the problem,” Docket No.
61 at 17, but the Defendants fail to recognize that nothing more is required to defeat an
impossibility-preemption claim.
So long as “there was any available alternative for
complying with both federal and state law—even if that alternative was not the most
practical and cost-effective—there is no impossibility preemption.” In re MTBE Litig., 725
at 99 (italics in original).
“Impossibility” is not shown merely by demonstrating that
3
In response to this argument, the Defendants rely heavily on the Supreme Court’s decision in Felder v.
Casey, 487 U.S. 131 (1988), which found that a state notice-of-claim statute was preempted by 42 U.S.C.
§ 1983. The Defendants’ reliance on Felder is misplaced. Felder involved a state law that required a
would-be civil rights plaintiff to notify a government official or municipality of his intent to sue the official or
municipality before actually doing so. The Supreme Court held that this procedural requirement was
“inconsistent in both purpose and effect with the remedial objectives” of § 1983. Id. at 153. For the reasons
stated below, the Defendants have not made that showing in this case. And, in any event, Felder does not
stand for the proposition that every state-law notice requirement—no matter the form or context in which
the requirement arises, and no matter its purpose—is preempted by arguably inconsistent federal law.
“[T]he purpose of Congress is the ultimate touchstone in every pre-emption case.” Wyeth, 555 at 565
(quotation marks omitted). It goes without saying that § 1983, the IRC, and the FLSA each have a very
different purpose. To say, then, that a state notice-of-claim law is preempted by § 1983 does not say
anything about whether a state labor law notice requirement concerning tips is preempted by the IRC and
the FLSA.
10
something is “difficult,” nor is state law preempted because a party does not like the
options state law gives it for complying with both federal and state law; instead,
“impossibility” is shown by demonstrating that “the two standards are expressly
incompatible.” Id. (quotation marks omitted). That is not the case here: The Defendants
have offered no reason why they could not have provided the notice required by 12
N.Y.C.R.R. § 146-2.19(c), much less “clear evidence” that they could not have done so.
See Wyeth, 555 U.S. at 570-72 (finding no impossibility preemption where state-court jury
required additional warnings on drug label and where drug manufacturer failed to offer
“clear evidence that the FDA would not have approved a change to [the drug’s] label” and
also failed to “argue that it attempted to give the kind of warning required by the [state
court] jury but was prohibited from doing so by the FDA”).
Finally, the fact that the Defendants may believe (rightly or wrongly) that they could
not comply with the IRC if they distributed service charges to their employees does not
make it impossible to comply with both state and federal law. To the extent such a
problem exists, the Defendants could, once again, include in their invoices the notice
required by 12 N.Y.C.R.R. § 146-2.19(c) and avoid any conflict.
See Marsh v.
Rosenbloom, 499 F.3d 165, 178 (2d Cir. 2007) (“That a . . . plaintiff . . . might find it
impossible to comply with both [state and federal] statutes in some circumstances is not
enough to establish an actual conflict between the two in this case.”)
Nor have the Defendants met their burden of showing that they will be in violation
of the IRC if they fail to include in their invoice the notice required by 12 N.Y.C.R.R.
§ 146-2.19(c). The Defendants have failed to meet their burden because they have not
offered “clear evidence” that their interpretation of Labor Law § 196-d is correct. Wyeth,
11
555 U.S. at 571. The Defendants claim that Labor Law § 196-d prohibits them from
“deducting from the service charge the employees’ portion of FICA and Medicare and any
federal, state and local income taxes”—something that 26 C.F.R. § 31.3306(b)-1(b) and
Revenue Ruling 2012-18 requires. Docket No. 45 at 8. This argument is premised on an
interpretation of § 196-d that is far from obvious.
First—and perhaps most importantly—another provision of New York Labor Law
“expressly authorize[s]” “[t]he withholding of federal taxes.” Hochstein v. United States,
900 F.2d 543, 549 (2d Cir. 1990). See N.Y. Labor Law § 193(a)(1) (“No employer shall
make any deduction from the wages of an employee, except deductions which are made
in accordance with the provisions of any law or regulation issued by any governmental
agency.”) (emphases added). In light of this, the Defendants offer no reason to think that
the New York Department of Labor would interpret Labor Law § 196-d to prohibit the
Defendants from complying with federal law by withholding taxes on service charges that
are distributed to the Defendants’ employees. 4
Second, the Defendants’ preemption argument fails to consider the language of
Labor Law § 196-d. Section 196-d prohibits an employer from “retain[ing] any part of a
gratuity or of any charge purported to be a gratuity for an employee.” (emphasis added).
The Defendants offer no reason to think that, by withholding applicable taxes from an
employee’s share of the service charge for remittance to the appropriate state and federal
authorities, an employer has “retained” those taxes in violation of § 196-d. After all, the
4
Indeed, the Defendants have not suggested that the New York Department of Labor has ever taken any
action against an employer that distributes service charges to its employees but also withholds the
necessary taxes from those charges. This fact further undermines the Defendants’ ability to meet their
burden of showing preemption. Cf. Wyeth, 555 U.S. at 571 (“[A]bsent clear evidence that the FDA would
not have approved a change to [a drug’s] label, we will not conclude that it was impossible for [the drug
manufacturer] to comply with both federal and state requirements.”)
12
word “retain” typically denotes having continual custody of an object. See Webster’s Third
New International Dictionary 1938 (1986) (“[T]o hold or continue to hold in possession or
use: continue to have, use, recognize, or accept: maintain in one’s keeping.”) (emphases
added); OED Online, “retain, v.,” (def. 2a), Oxford Univ. Press (July 2018) (accessed
November 29, 2018) (“To keep in one’s own hands or under one’s own control; to keep
back; to keep hold or possession of; to continue to have.”). By contrast, having temporary
custody of an object for the sole purpose of turning it over to a taxing authority does not
clearly suggest that the custodian has “retained” the object. Thus, while Labor Law
§ 196-d may be amenable to the Defendants’ proposed interpretation—that is, as a
prohibition on the Defendants merely withholding their employees’ taxes—that
interpretation is not plain from the statute’s text; indeed, a credible argument can be made
that the statute does not prohibit what the Defendants say it prohibits.
In these
circumstances, the Court cannot find that federal law preempts state law. See Arizona,
567 U.S. at 414-15 (declining to find that federal law preempts state law where state law
could plausibly be read to avoid preemption concerns and where “[t]here is a basic
uncertainty about what the law means and how it will be enforced”).
For these reasons, the Defendants have failed to meet their demanding burden of
showing that it is impossible to comply with both federal law and state law.
B. Obstacle preemption
The next question is whether the Defendants have met their burden of
demonstrating “[t]he second branch of conflict preemption—the obstacle analysis—
[which] is in play when state law is asserted to ‘stand as an obstacle to the
accomplishment and execution of the full purposes and objectives of Congress.’” In re
13
MTBE Litig., 725 F.3d at 101 (quoting Arizona, 567 U.S. at 399) (brackets omitted).
Obstacle preemption “precludes state law that poses an actual conflict with the overriding
federal purpose and objective.” Id. (quotation marks omitted). There is no hard-and-fast
rule for determining whether a state law poses enough of an obstacle to the execution of
federal law so as to be preempted; rather, the question whether a state law is “a sufficient
obstacle is a matter of judgment, to be informed by examining the federal statute as a
whole and identifying its purpose and intended effects.” Id. (quotation marks omitted).
Thus, once again, “‘the purpose of Congress is the ultimate touchstone,’ and ‘the conflict
between state law and federal policy must be a sharp one.’” Id. (quoting, in turn, Wyeth,
555 U.S. at 565 and Marsh, 499 F.3d at 178). Further, “[t]he burden of establishing
obstacle preemption . . . is heavy: ‘the mere fact of tension between federal and state law
is generally not enough to establish an obstacle supporting preemption, particularly when
the state law involves the exercise of traditional police power.’” Id. at 101-02 (quoting
Madeira v. Affordable Hous. Found., Inc., 469 F.3d 219, 241 (2d Cir. 2006) (brackets
omitted and some quotations omitted)). Instead, a conflict between federal and state law
has preemptive effect “‘only where the repugnance or conflict is so direct and positive that
the two acts cannot be reconciled or consistently stand together.’” Madeira, 469 F.3d at
241 (quoting Jones v. Rath Packing Co., 430 U.S. 519, 544 (1977) (Rehnquist, J.,
dissenting in part and concurring in part)) (some quotation marks omitted).
The Defendants have not met their burden of showing that Labor Law § 196-d
“stands as an obstacle to the accomplishment and execution of the full purposes and
objectives of Congress,” Arizona, 567 U.S. at 399 (quotation marks omitted), as
expressed in the relevant provisions of the IRC and Treasury Regulations.
14
The
Defendants characterize the purpose of IRC § 3402(a)(1) and 26 C.F.R. 31.3402(k)-1 (as
well as other relevant statutes and regulations) as ensuring that “disputed remuneration”
is “classif[ied] . . . as service charges, as opposed to tip income,” so as to ensure that the
IRS “is guaranteed to get all of its money.” Docket No. 33-1 at 12-13. Taking this as
correct, the Defendants have not shown that Labor Law § 196-d and 12 N.Y.C.R.R.
§ 146-2.18 sufficiently frustrate this goal so as to be preempted.
As an initial matter, the purpose of Labor Law § 196-d, as identified by the New
York Court of Appeals, is not to interfere with the IRS’s ability to “get all of its money.”
Instead, the purpose of Labor Law § 196-d is “to end the ‘unfair and deceptive practice’
of an employer retaining money paid by a patron ‘under the impression that he is giving
it to the employee, not to the employer.’” Samiento, 882 N.E.2d at 994 n.4 (quoting Mem.
of Indus. Commr., June 6, 1968, Bill Jacket, L. 1968, ch. 1007, at 4). It is, of course, “well
established that the states enjoy ‘broad authority under their police powers to regulate
employment relationships to protect workers within the State.’” Madeira, 469 F.3d at 228
(quoting De Canas v. Bica, 424 U.S. 351, 356 (1976) (editorial marks omitted). Thus, the
purpose of Labor Law § 196-d, as understood by the Court of Appeals, is to use New
York State’s police power to protect employees from the unscrupulous actions of their
employers—Labor Law § 196-d’s goal is not to frustrate the IRS’s collection efforts. “A
showing that the federal and state laws serve different purposes cuts against a finding of
obstacle preemption,” In re MTBE Litig., 725 F.3d at 101, and the fact that Labor Law
§ 196-d has a far different purpose than the relevant provisions of the IRC weakens the
Defendants’ obstacle-preemption argument. Likewise, the Defendants have not identified
anything in 12 N.Y.C.R.R. § 146-2.18’s regulatory history suggesting that the regulation’s
15
purpose was to interfere with the IRS’s tax-collection efforts. See Notice of Adoption:
Hotel & Restaurant Wage Orders, N.Y.S. Register, Rule Making Activities at 26-27 (Dec.
29, 2010), available at https://docs.dos.ny.gov/info/register/2010/dec29/toc.html.
The Defendants have also failed to show that Labor Law § 196-d, as it is actually
interpreted and enforced by the New York Department of Labor, frustrates the IRS’s taxcollection efforts. Labor Law § 196-d has been law in New York State since 1968, and
the Department of Labor’s interpretation of § 196-d, as contained in 12 N.Y.C.R.R. § 1462.18, has been on books since January 2011. Yet, despite this not-insubstantial period
of time, the Defendants have not suggested (much less identified) any instance in which
the New York Department of Labor has enforced Labor Law § 196-d in such as a way as
to frustrate the IRS’s ability to collect all required taxes. Cf. Arizona, 567 U.S. at 415 (“At
this stage, without the benefit of a definitive interpretation from the state courts, it would
be inappropriate to assume § 2(B) will be construed in a way that creates a conflict with
federal law.”) This is not, then, a case in which “‘the repugnance or conflict’” between
federal law and state law “is so direct and positive that the two acts cannot be reconciled
or consistently stand together.” Madeira, 469 F.3d at 241 (quotation marks omitted). As
noted above, Labor Law § 196-d can at least plausibly bear an interpretation that allows
an employer to withhold necessary taxes from a service charge, notwithstanding § 196d’s prohibition on the employer “retain[ing]” a service charge. Moreover, as noted, New
York Labor Law “expressly authorize[s]” “[t]he withholding of federal taxes.” Hochstein,
900 F.2d at 549.
16
Thus, the Defendants have not met their heavy burden of showing that Labor Law
§ 196-d and 12 N.Y.C.R.R. § 146-2.18 stand as an obstacle to the execution of federal
law.
4. The FLSA does not preempt Labor Law § 196-d and 12 N.Y.C.R.R. § 1462.18
The Defendants next argue that Labor Law § 196-d and 12 N.Y.C.R.R. § 146-2.18
are preempted by the Fair Labor Standards Act (FLSA) and its implementing regulations.
Specifically, the Defendants argue that the charges at issue in this case are not “tips,” as
that term is defined by the U.S. Department of Labor regulations and a series of DOL
Opinion Letters. See Docket No. 33-1 at 7-8. Instead, the Defendants argue, the charges
are considered “service charges” and, therefore, part of the Defendants’ employees’
wages. The Defendants argue that “the mandatory fees cannot be service charges—and
therefore wages—under the FLSA (which they must), while, at the same time, constituting
tips under New York law, as Plaintiffs assert.” Id. at 11. The Defendants further argue
that the FLSA preempts state law because “[t]he forced distribution of mandatory fees
. . . upsets the FLSA overtime provisions in a dangerous and punitive fashion.” Id. at 20.
The FLSA requires an employer to pay certain employees one-and-a-half times
their “regular rate” for hours worked in excess of 40 hours per week.
29 U.S.C.
§ 207(a)(1). The term “regular rate” includes “all remuneration for employment,” id.
§ 207(e)(3), excluding tips “received by the employee in excess of the tip credit.” 29
C.F.R. § 531.60.
The Defendants claim that, by including service charges in an
employee’s wages, the Plaintiffs have proposed a “horribly complex [scheme]” that
“creates . . . wage liability above the amount of the mandatory charge collected from the
customer, a result not contemplated by the FLSA scheme.” Docket No. 33-1 at 22. That
17
is, the Defendants argue that the Plaintiffs’ claim “set[s] up a scheme that is in stark
contrast to the FLSA itself, where tips are excluded from the ‘regular rate’ computation
and service charges are not required to be distributed or to become part of the regular
rate.” Id.
The Defendants have not met their heavy burden of demonstrating that the FLSA
preempts Labor Law § 196-d or its implementing regulation.
First, the Defendants
concede that it is possible to comply with both the FLSA and Labor Law § 196-d. See
Docket No. 33-1 at 8 n.3 (“Employers are not required to remit service[] charges, as
opposed to tip income, to their employees. While they may voluntarily convey such
charges upon employees (in whole or in part) if they so desire, . . . they are not required
to do so.”) (emphases in original). And second, the Defendants have not shown that
Labor Law § 196-d “stands as an obstacle to the accomplishment and execution of the
full purposes and objectives of Congress,” Arizona, 567 U.S. at 399 (quotation marks
omitted), as expressed in the FLSA. At most, the Defendants argue that compliance with
both Labor Law § 196-d and the FLSA is expensive and complex. The Defendants,
however, do not seriously contend that compliance with Labor Law § 196-d impedes the
FLSA’s purpose so much that the former is preempted.
Indeed, the Defendants
acknowledge that the FLSA was intended to be a “shield to protect unwary workers.”
Pippins v. KPMG, LLP, 759 F.3d 235, 252 (2d Cir. 2014) (quotation marks omitted). That
is, of course, the same reason the New York legislature enacted Labor Law § 196-d. See
Samiento, 883 N.E.2d at 994 n.4. 5
5
The Second Circuit has suggested that impossibility preemption may be found where “a state law imposes
such enormous costs on a party that compliance with a related federal mandate is effectively impossible.”
In re MTBE Litig., 725 F.3d at 101. See also id. (describing “economic and logistical hurdles” that might
“render[] compliance” with both federal and state law impossible). The Defendants make a conclusory
18
Thus, the Defendants have not met their heavy burden of showing that the FLSA
preempts Labor Law § 196-d and 12 N.Y.C.R.R. § 146-2.18.
5. The Defendants’ appeal of Judge Foschio’s Decision and Order
In addition to objecting to Judge Foschio’s Report and Recommendation, the
Defendants have appealed Judge Foschio’s October 20, 2016 Decision and Order. See
Docket No. 59.
That Decision and Order denied the Defendants’ motion for
reconsideration of Judge Foschio’s Report and Recommendation, and it also struck an
affidavit the Defendants filed in support of their motion for reconsideration.
The
Defendants argued that the affidavit, submitted by a Michigan-licensed CPA, was not
intended to introduce new facts as part of a motion for reconsideration but was, instead,
meant to “elucidate the error of law and thereby demonstrate for the Court the very serious
and indeed, dramatic injustice resulting from the legal ruling” in Judge Foschio’s Report
and Recommendation. Docket No. 58 at 3.
The Defendants label their challenge to Judge Foschio’s Decision and Order as
“objections” to a “Report and Recommendation,” subject to de novo review. This is
incorrect: “The Court must review [a] magistrate judge’s orders with respect to any nondispositive motions—here, for example, the [defendant’s] motion for reconsideration—
only upon appeal by a defendant,” and pursuant to 28 U.S.C. § 636(b)(1)(A). Ayers v.
Esgrow, 12-CV-656(LJV)(LGF), 2017 WL 815262, at *3 (W.D.N.Y. Mar. 2, 2017) (citation
omitted). See also Lacny v. Chesapeake Energy Corp., Civil Action No. 11-0405, 2012
argument that “the scheme proposed by Plaintiffs is horribly complex and creates, under the facts at bar,
wage liability above the amount of the mandatory charge collected from the customer.” Docket No. 33-1 at
22. The Defendants, however, do not develop this argument in any meaningful way, and they certainly do
not provide the detail needed to meet their demanding burden of showing that federal law preempts state
law.
19
WL 2158729, at *1 (W.D. La. June 13, 2012) (identifying a magistrate judge’s order
denying a motion for reconsideration as a non-dispositive order for purposes of the
Federal Magistrates Act). As a result, the Court’s review of Judge Foschio’s Decision
and Order is not de novo.
Rather, the Court reviews Judge Foschio’s Decision and Order to determine
whether it is “clearly erroneous or contrary to law.” 28 U.S.C. § 636(b)(1)(A). A nondispositive order is clearly erroneous “only if,” after “considering the entirety of the
evidence,” the reviewing court “is left with the definite and firm conviction that a mistake
has been committed.” Centro De La Comunidad Hispana De Locust Valley v. Town of
Oyster Bay, 954 F. Supp. 2d 127, 139 (E.D.N.Y. 2013) (quotation marks omitted). And a
non-dispositive order is contrary to law if the order “fails to apply or misapplies relevant
statutes, case law, or rules of procedure.” Id. (quotation marks omitted). “This standard
is highly deferential.” Id. (quotation marks omitted). Thus, a district court may not reject
a magistrate judge’s non-dispositive order “merely because the [district] court would have
decided the matter differently.” Rubin v. Valincenti Advisory Svcs., Inc., 471 F. Supp. 2d
329, 333 (W.D.N.Y. 2007).
The Defendants have not shown that Judge Foschio’s Decision and Order was
either clearly erroneous or contrary to law. First, Judge Foschio did not clearly err in
striking the affidavit submitted with the Defendants’ motion for reconsideration. Judge
Foschio identified the affidavit as an improper attempt to relitigate his Report and
Recommendation. That conclusion is comfortably supported by the contents of the
affidavit: As Judge Foschio observed, the affidavit “reacts to each” of Judge Foschio’s
legal conclusions in the Report and Recommendation and “provide[s] [the affiant’s]
20
opinion as to the correctness of the R&R.” Docket No. 59 at 6 & n.1. This conclusion, as
well as Judge Foschio’s decision to strike the affidavit, is neither clearly erroneous or
contrary to law.
Second,
Judge
Foschio
properly
stated
the
well-settled
standard
for
reconsideration (Docket No. 59 at 4), something the Defendants do not question.
Moreover, Judge Foschio’s decision to deny reconsideration was not clearly erroneous
because, as the Court concluded above, the conclusions in Judge Foschio’s Report and
Recommendation were correct under a de novo standard of review.
Judge Foschio’s Decision and Order (Docket No. 59) is therefore affirmed.
CONCLUSION
For the reasons stated above, the Defendants’ objections to Judge Foschio’s
Report and Recommendation are overruled, and the Court adopts Judge Foschio’s
Report and Recommendation (Docket No. 50) in its entirety. Further, the Court affirms
Judge Foschio’s Decision and Order. See Docket No. 59. The Defendants’ motion for
judgment on the pleadings (Docket No. 33) is therefore denied. This case is recommitted
to Judge Foschio for further proceedings consistent with the original referral order.
SO ORDERED.
Dated: January 2, 2019
Buffalo, New York
__s/Richard J. Arcara____________
HONORABLE RICHARD J. ARCARA
UNITED STATES DISTRICT JUDGE
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