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The $253,636 Lesson—How Mismanaging Tips and Overtime Cost a Restaurant Chain Everything

HR ANCHOR by Ready Employer

In June 2024, the U.S. Department of Labor (DOL) Wage and Hour Division (WHD) concluded an investigation into Crackin’ Crab, a seafood restaurant chain in Albuquerque, New Mexico. The investigation resulted in the recovery of $253,636 in back wages, liquidated damages, and civil money penalties.


HR ANCHOR: The $253,636 Lesson—How Mismanaging Tips and Overtime Cost a Restaurant Chain Everything

For business owners and HR managers, this case serves as a critical warning. It highlights two systemic failures common in the hospitality industry: invalidating the Tip Credit by retaining employee tips, and miscalculating overtime based on pay periods rather than workweeks.


At HR ANCHOR, our mission is to anchor your business in compliance. This case study breaks down exactly what went wrong and how to ensure your payroll processes withstand scrutiny.

1. The Facts at a Glance

  • Subject: Crackin’ Crab (X.M. Investment LLC & Beemer Investments LLC)

  • Location: Albuquerque, New Mexico (Two locations)

  • Impact: 19 Employees

  • Financial Penalty Breakdown:

    • $126,818 in Back Wages

    • $126,818 in Liquidated Damages

    • $616 in Civil Money Penalties

    • Total: ~$253,636

  • Core Violations: Fair Labor Standards Act (FLSA) violations regarding Tip Credits and Overtime calculation.

2. The Breakdown: Two Fatal Errors

The severity of the penalty stems from how one violation triggers another, creating a "domino effect" in payroll liability.


Error #1: The Tip Credit Trap

The DOL investigation found that the employer retained a portion of employees' tips.

  • The Law: Under the FLSA, an employer is prohibited from keeping any portion of an employee’s tips for any purpose, whether or not a tip credit is claimed.

  • The HR ANCHOR Insight: The Tip Credit—which allows employers to pay tipped staff less than the federal minimum wage (e.g., $2.13/hr)—is a conditional privilege, not a right.

  • The Consequence: Once the employer "touched" the tips, the Tip Credit was invalidated. The employer was then required to pay the full federal minimum wage ($7.25/hr) retroactively for every hour worked over the investigation period. The difference between $2.13 and $7.25, multiplied by thousands of hours, creates massive liability.


Error #2: The "80-Hour" Overtime Myth

The employer paid overtime only when employees exceeded 80 hours in a two-week pay period.

  • The Law: The FLSA requires overtime pay at 1.5 times the regular rate for hours worked in excess of 40 hours in a single workweek.

  • The Confusion: Many employers confuse the Pay Period (administrative schedule, e.g., bi-weekly) with the Workweek (compliance standard, e.g., Monday to Sunday).

  • The Consequence: By averaging hours over two weeks (e.g., working 50 hours in Week 1 and 30 hours in Week 2), the employer failed to pay for the 10 hours of overtime accrued in Week 1. This is strictly prohibited.

3. The HR ANCHOR Perspective: Why This Happens

At Ready Employer LLC, we frequently audit payroll systems for our clients. We find that these violations rarely stem from malicious intent but rather from system configuration errors:

  1. Cash Flow Mismanagement: Using the tip pool as a slush fund for operational costs (credit card fees, uniform costs, or drawer shortages) without realizing it voids the Tip Credit.

  2. Software Defaults: Many payroll systems allow users to set an "80-hour threshold" for alerts. Owners mistakenly use this as the legal threshold for overtime calculation.

4. Actionable Advice: The HR ANCHOR Checklist

To avoid a similar $250k fate, HR ANCHOR recommends the following immediate actions for all hospitality employers:

  • Step 1: The "No-Touch" Rule for Tips Ensure that 100% of tips are distributed to eligible employees. If you operate a tip pool, ensure it is fully documented and excludes managers or supervisors.

  • Step 2: Define Your Workweek Establish a fixed, recurring 168-hour period (7 consecutive 24-hour days) as your official workweek. This must be documented in your employee handbook.

  • Step 3: Reconfigure Payroll Logic Check your payroll software settings. Ensure overtime is triggered by >40 hours per workweek, not by the total hours in a pay period.

  • Step 4: Conduct a 10-Minute Monthly Audit Randomly select one employee's time card each month. Manually calculate their overtime based on a 7-day week. Compare your manual calculation to the system's output.


Need Help Navigating Compliance?

HR ANCHOR is the educational arm of Ready Employer LLC, dedicated to providing employers with the knowledge needed to build sustainable, compliant workplaces.


For more case studies and educational resources, keep browsing hranchor.com.

Disclaimer: This case study is for educational purposes only and does not constitute legal advice. Laws vary by state and municipality. Please consult with a qualified professional for specific guidance.

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