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CHUNG v. THE NEW SILVER PALACE RESTAURANT

September 13, 2002

CHU CHUNG, ET AL., PLAINTIFFS
V.
THE NEW SILVER PALACE RESTAURANT, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Alvin K. Hellerstein, District Judge

MEMORANDUM AND ORDER GRANTING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT

The New Silver Palace Restaurant in New York City's Chinatown, at the intersection of Canal and The Bowery and the entrance to the Manhattan Bridge, has offered restaurant and catering services to the public for many years: since August 1997, when it purchased the assets of the restaurant in the bankruptcy of the old Silver Palace and, before then, as the old Silver Palace Restaurant. The Silver Palace restaurants have been involved in almost continuous labor strife since 1995, reflected in lawsuits and proceedings in the New York Supreme Court, before the National Labor Relations Board, and in this United States District Court.

The particular issues now before me relate to the tip credit provided by section 3(m) of the Fair Labor Standards Act ("FLSA"), 29 U.S.C. § 203 (m). May the restaurant pay less than a minimum wage to waiters if the waiters are required to share their tips with management? And should the individual defendants who required the tip sharing be considered "employers" under section 3(d) of the FLSA, 29 U.S.C. § 203 (d), and thus be liable in damages to the plaintiffs? I hold in this decision that the FLSA was violated, and that the individual defendants are jointly and severally liable to the plaintiffs for damages provided by the Act.

The plaintiffs are waiters who were employed by the restaurant. Between August 1997, when the New Silver Palace Restaurant opened, and November 1999, the restaurant's waiters were required to pool their tips and share them, according to a formula, with one another, with the busboys, and with the members of management who were involved in managing the restaurant floor and who, because they wore business suits on the job, were known as "black jackets." Plaintiffs sued to recover the tips they were forced to share with management and for damages under various federal and state statutes, and for treble damages under RICO. After discovery, plaintiffs moved for summary judgment on their Third Claim for Relief, moving under section 3(m) of the FLSA, 29 U.S.C. § 203 (m), against The New Silver Palace Restaurant, Inc., and four of its principals — defendants Jonathan Chiu, Foon Szeto, Yuk Yin Law, and Hau Moon Leung — to recover the difference between the reduced hourly wage they were actually paid because of the tip credit allowance, and the federally prescribed minimum wage. Plaintiffs also moved for summary judgment on their Fourth Claim for Relief under section 1 96-d of the New York Labor Law against only The New Silver Palace Restaurant, Inc., to recover the amount of tips they were required to share with management. At the conclusion of oral argument on June 25, 2002, I granted summary judgment to the plaintiffs on their Fourth Claim for relief on the issue of liability, reserving the issue of damages for further proceedings, and I reserved decision on the Third Claim for Relief. I now grant plaintiffs' motion for summary judgment on the issue of liability on the Third Claim for Relief as well.

A. Background

The dispute between the restaurant employees and management began in 1995, when the union that had represented the waiters and busboys at the old Silver Palace since 1980, Local 318 of the Restaurant Workers Union, challenged the legality of the tip-pooling arrangement at the restaurant. Under this arrangement, which had been in place for some time, all tips to waiters were pooled, and distributed to waiters, busboys and "black jackets." In the negotiations for a collective bargaining agreement, restaurant management insisted that the "black jackets" receive a larger share of the tip pool than they had received in the past. The Union adamantly refused, and argued that the practice was illegal under the New York Labor Law. A lockout of union employees resulted, from August 1993 to March 1994.

B. Tip-Sharing Practices Found Illegal by New York Supreme Court and in NLRB Proceedings

In 1995, the union filed charges with the National Labor Relations Board, seeking, among other relief, an administrative ruling that management's proposal that waiters be required to give "black jackets" a share of the tip pool was an illegal object of bargaining because it was prohibited by section 196-d of the New York State Labor Law. Also in 1995, the New York State Attorney General sued the old Silver Palace and its management in Supreme Court, New York County, seeking an injunction prohibiting management of the Silver Palace from sharing in employees' tips, also under section 196-d.

On November 13, 1995, Justice Harold Tompkins of the New York State Supreme Court, New York County, granted an injunction preventing the Silver Palace "black jackets" from sharing in the waiters' tip pool. In his decision, Justice Tompkins ruled that because the management employees sharing tips at the Silver Palace included the General Manager of the restaurant and several part owners of the restaurant, the sharing arrangement was illegal under section 196-d of the New York State Labor Law. People v. Ngan Gung Corp., No. 402708/95, at 4 (Supreme Ct., N.Y. County, Nov. 13, 1995) (slip opinion). Two months later, in a decision issued in February of 1996, NLRB Administrative Law Judge Steven Fish also concluded, inter alia, that the demand of management of the old Silver Palace that employees share their tips with "black jackets" violated section 196-d, and ordered the restaurant to bargain in good faith with the union and to cease all discrimination against the union or its members. Ngan Gung Restaurant, Inc. and 318 Restaurant Workers Union, Case No. 2-CA-26450 (N.L.R.B. Div. of Judges Feb. 26, 1996) (unpublished opinion).

C. Bankruptcy and the New Silver Palace Restaurant

In January 1995, before the New York Supreme Court issued its injunction and before the NLRB issued its order, the old Silver Place filed for Chapter 11 bankruptcy protection. On December 8, 1995, the Bankruptcy Court appointed a trustee, finding that the management of the old Silver Palace could not be trusted with the responsibilities of a debtor in possession. After unsuccessful negotiations between union representatives, management, and the trustee to establish a new collective bargaining agreement, the bankruptcy court ordered the old Silver Palace closed on May 29, 1997. On July 24, 1997, the Silver Palace's assets were purchased at auction by defendants Jonathan Chiu and Richard Chan, the majority shareholder. A month later, on August 26, 1997, Chiu and Chan reopened the restaurant under the name the "New Silver Palace."

From the day the New Silver Palace opened, its management instituted the same tip-pooling arrangement as was in place at the old Silver Palace, so that "black jackets" shared in the waiters' tip pool. Just as at the old Silver Palace, the "black jackets" owned or controlled shares in the restaurant, served as its officers and on its board of directors, and had the power to hire and fire employees and set work schedules. The rulings of the New York Supreme Court and the NLRB were ignored. One waiter who objected was fired in March of 1999. Management created a rival union, the "New Silver Palace Restaurant Workers Association" (NSPRWA), and told the waiters that if they did not share tips with the "black jackets," the restaurant would close. One waiter who refused to sign a petition in favor of tip sharing also was fired.

D. Managerial Authority and Ownership Interests of "Black Jackets"

Seven "black jackets" shared in the waiters' tip pool. All had ownership interests in the New Silver Palace, directly or through their children or family; most were members of the board or officers; and at least four wielded substantial managerial authority, including the authority to hire and fire employees, set work schedules and sign checks. Plaintiffs' motion for summary judgment is directed against two of these four, defendants Yuk Yin Law and Hau Moon Leung.*fn1 A description of these two, and of the two other defendants who were the General Managers of the New Silver Palace and against whom plaintiffs also direct their motion, follows:

1. Jonathan Chiu

Jonathan Chiu, with defendant Richard Chan, purchased the assets of the old Silver Palace in July 1997 after it had filed for bankruptcy in January 1995, and reopened the restaurant under the name "New Silver Palace." Chiu owned or controlled approximately 33% of the shares of the restaurant, was Co-Chairman of the Board of Directors, and President and General Manager. Chiu testified at deposition that he was the most knowledgeable individual concerning hiring and firing procedures at the restaurant and its personnel decisions, had authority to sign checks, frequently reviewed the restaurant's business and accounting records, supervised the restaurant's bookkeeper, and dealt directly with its accountant. He was deeply involved in the administration and management of the business from the opening of the restaurant until his resignation as an officer and director in September of 2001.

2. Foon Szeto

Foon Szeto owned a substantial share of the New Silver Palace, having purchased shares in the corporation worth $100,000. Szeto was a member of the Board of Directors of the restaurant, was Co-Chairman of the Board of Directors, was President until July 29, 1999 and Vice-President thereafter (until January 17, 2001), had check-signing authority, and was responsible for fielding complaints by "black jackets" about service employees. Szeto also ...


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