MEMORANDUM AND ORDER

JAMES FRANCIS, Magistrate Judge

This case illustrates how serious a risk a party runs when it destroys documents relevant to ongoing litigation. The underlying action was initiated by eleven waiters, busboys, and captains at a Chinatown restaurant who allege that they have been denied compensation to which they are entitled under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq. (the "FLSA"), and the New York State Labor Law. The defendants are the current and former owners of the restaurant. The plaintiffs now move pursuant to Rule 37(b) of the Federal Rules of Civil Procedure and the inherent power of the Court for sanctions against the current owners — Sun Yue Tung Corp. (d/b/a 88 Palace), Gui Yang, Gong Gui Guan, Cheuk Hong Lau, and Yeung Chao Lo (collectively, the "88 Palace defendants") — in connection with the destruction of evidence. Specifically, the plaintiffs request that the Court strike the answer of the 88 Palace defendants and enter judgment against them by default. In the alternative, they request that an order be entered (1) precluding these defendants from offering evidence of their compliance with state and federal labor laws, (2) precluding them from contesting the plaintiffs' damage calculations, (3) instructing the jury that an adverse inference may be drawn against these defendants based on their destruction of evidence, and (4) awarding the plaintiffs their attorneys' fees and costs incurred in connection with the spoliation issue.

For the reasons that follow, the plaintiffs' motion is granted in part and denied in part.

Background

The complaint in this action was served on or about August 11, 2003. It sets forth five causes of action in which the plaintiffs allege that the defendants: (1) failed to pay tips and minimum wages in violation of the FLSA, (2) intentionally failed to pay overtime in violation of the FLSA, (3) intentionally failed to pay minimum wages, overtime, and spread of hours pay in violation of the New York State Labor Law, (4) appropriated the plaintiffs' tips in violation of state law, and (5) failed to reimburse the plaintiffs for uniform expenses in violation of state law. (Complaint, ¶¶ 81-98). In connection with these claims, the plaintiffs served discovery requests on the 88 Palace defendants on about January 15, 2004. Among other things, these requests sought production of "all documents concerning tips and tip shares assigned, earned, and distributed to Plaintiffs, including, but not limited to, pay records, tip records, accounting and bookkeeping records" for the period from May 1989 to the present, "all documents concerning wages paid, and tips received by each Defendant, each managerial employee, each administrative employee, and cashier or counter-person," "all documents concerning the tip and tip shares assigned and distributed to" the defendants and managerial employees, and "all documents concerning . . . 88 Palace Restaurant's earnings and expenditures[.]" (Plaintiffs' First Request for Production of Documents and First Set of Interrogatories, attached as Exh. 3 to Declaration of Mark S. Cheffo dated April 21, 2005 ("Cheffo Decl."), document request nos. 4, 9, 10, 15).

In response to these requests, the 88 Palace defendants initially produced Sun Yue Tung Corp.'s employee rate chart, payroll registers, time card sheets, W-2 wage and tax statements, W-4 certificates, Form 1040 individual tax returns, check stubs, and corporate tax returns. (88 Palace Defendants' Response to Plaintiff's First Request for Production of Documents and First Set of Interrogatories ("Def. Discovery Response"), attached as Exh. 4 to Cheffo Decl., responses to document requests nos. 4, 9, 15). They also represented that they had no documents concerning any tips or tip shares paid to "any managerial employee, bartender, and cashier and/or counter-person." (Def. Disco very Response, response to document request no. 10).

Subsequently, however, it was revealed that three other types of records responsive to the requests had been maintained. First, Yeung Chao Lo, one of the owners of 88 Palace Restaurant, testified during his deposition about "banquet receipts," which reflected monies collected from large parties. (Deposition of Yeung Chao Lo ("Lo Dep."), attached as Exh. 6 to Cheffo Decl., at 72). He stated that such receipts were used internally and not given to the customers. (Lo Dep. at 72). He then described how the receipts were maintained:

Q. Are records like this kept for every banquet that is held at the restaurant?

A. Yes.

Q. And where are they kept, sir?

A. They were kept in, they are kept in our office.

Q. Do you know how far dating back you have records like this?

A. We just keep it for one year.

Q. And then what happens to it?

A. Then we got rid of them, because what's the point of keeping all this paper?

Q. What do you mean you got rid of them?

A. Throw them away.

Q. These are thrown away after one year?

A. Yes.

Q. Were you ever informed that you were no longer supposed to destroy any documents that could be related to this litigation?

A. No.

Q. There was no document retention policy put into place to preserve documents that could potentially be related to this litigation?

A. Nobody told me about it.

Q. So the only records relating to banquets that are maintained at the restaurant relate to 2004; is that correct?

A. I don't know for sure.

* * *

Q. Well, as you sit here today, do you know one way or the other if you have records like those dating back beyond 2004?

A. I don't know. I don't think so.

Q. And why is that, sir?

A. How can we keep them all? The rent in Chinatown is so expensive, how can we keep all this paper, it is not like they are money.

Q. So, after one year, you throw them away; correct?

A. Yes, all the useless things we throw away.

(Lo Dep. at 76-79).

The second set of documents consists of the "money received book," which contained records of the amount of money taken in each day at lunch. Min Ling He, 88 Palace's bookkeeper, described the book as follows:

Q. What information is contained in the received money book?

A. It is written down the daily amount of money that was handed over to the boss.

Q. Besides the date and the amount of money turned over to the boss, is there any other information in the received money book?

A. No.

* * *

Q. And the "money received book" has moneys received from lunch?

A. Yes.

(Deposition of Min Ling He ("He Dep."), attached as Exh. 9 to Cheffo Decl., at 21-22). Ms. He explained that these records were disposed of on a regular basis and that this practice persisted after the litigation commenced:

Q. Okay. My question is, do you have a different "money received book" for each month or for each year?

A. It is the same book but — (pause) — see, after I did my part, the boss tear off that page.

Q. What does the boss do with that page?

A. I don't know.

* * *

Q. I believe earlier you said that somebody rips the page out of the "money received book."

A. Yes.

Q. Is it your testimony that you don't know who rips that page out?

A. Yes.

Q. How do you know that the page is ripped out?

A. Because it would be missing.

* * *

Q. As part of this lawsuit were you ever told that documents, you know, including bills, other materials may be required to be produced?

A. No.

Q. Did you ever have any conversation with your employer or your supervisors regarding the retention of the lunch, dinner and banquet bills?

A. No.

Q. Did you have any conversation with your employers or your supervisor regarding the retention of the "money received book"?

A. No.

(He Dep. at 43-46). Yeung Chao Lo confirmed that he reviews the page from the money received book each day and then discards it if the amount appears to be correct. (Lo Dep. at 103-04). He continued to destroy the pages from the book at least up until the time of his deposition. (Lo Dep. at 104-05).

Finally, Mr. Lo testified that "tip distribution sheets" were posted at the 88 Palace Restaurant indicating how tips were shared among the employees on a daily basis. Some of these were produced to the plaintiffs in discovery, but others went missing. Mr. Lo stated:

Q. So those documents are maintained by the company; is that correct?

A. I am not sure if it is kept because after one week and one month, and there is no dispute, I don't know if the paper will be kept.

Q. So for some period of time the restaurant keeps the document; is that correct?

A. Yes. If there is no, nothing else, then it will be thrown away.

(Lo Dep. at 162).

Q. Before you told me that you would keep them for a week, if there is no dispute you get rid of it; right?

A. If there is no dispute, then why not throw it away?

(Lo Dep. at 165).

Upon learning that the 88 Palace defendants had maintained the banquet receipts, money received book, and tip distribution sheets for some time and then destroyed them, the plaintiffs filed the instant motion.

Discussion

A. Liability

Spoliation is "`the destruction or significant alteration of evidence, or the failure to preserve property for another's use as evidence in pending or reasonably foreseeable litigation.'"Byrnie v. Town of Cromwell, Board of Education, 243 F.3d 93, 107 (2d Cir. 2001) (quoting West v. Goodyear Tire Rubber Co., 167 F.3d 776, 779 (2d Cir. 1999)). A court's authority to impose sanctions in response to spoliation derives from at least two sources. Where a party violates a court order — either by destroying evidence when specifically directed to preserve it or by failing to produce information when directed to do so because the relevant data have been destroyed — Rule 37(b) of the Federal Rules of Civil Procedure provides that the court may impose a range of sanctions, including dismissal or judgment by default, preclusion of evidence, imposition of an adverse inference, or assessment of attorneys' fees and costs. Fed.R.Civ.P. 37(b); see Residential Funding Corp. v. DeGeorge Financial Corp., 306 F.3d 99, 106-07 (2d Cir. 2002); Metropolitan Opera Association, Inc. v. Local 100, Hotel Employees and Restaurant Employees International Union, 212 F.R.D. 178, 219-20 (S.D.N.Y. 2003). Indeed, "[e]ven though a party may have destroyed evidence prior to issuance of the discovery order and thus may be unable to obey, sanctions are still appropriate under Rule 37(b) because this inability was self-inflicted." Turner v. Hudson Transit Lines, Inc., 142 F.R.D. 68, 72 (S.D.N.Y. 1991). Furthermore, "[e]ven in the absence of a discovery order, a court may impose sanctions on a party for misconduct in discovery under its inherent power to manage its own affairs." Residential Funding, 306 F.3d at 106-07 (citations omitted); see also Metropolitan Opera, 212 F.R.D. at 220.

A party seeking sanctions for the destruction of evidence must establish:

(1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed "with a culpable state of mind"; and (3) that the destroyed evidence was "relevant" to the party's claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.

1. The Obligation to Preserve Evidence

The "obligation to preserve evidence arises when the party has notice that the evidence is relevant to litigation — most commonly when suit has already been filed, providing the party responsible for the destruction with express notice, but also on occasion in other circumstances, as for example when a party should have known that the evidence may be relevant to future litigation." Kronisch v. United States, 150 F.3d 112, 126 (2d Cir. 1998); see Fujitsu Ltd. v. Federal Express Corp., 247 F.3d 423, 436 (2d Cir. 2001). "Identifying the boundaries of the duty to preserve involves two related inquiries: when does the duty to preserve attach, and what evidence must be preserved?"Zubulake v. UBS Warburg LLC, 220 F.R.D. 212, 216 (S.D.N.Y. 2003) ("Zubulake IV").

In this case, there is no controversy with respect to the temporal component. The complaint, served and filed in August 2003, articulated claims with sufficient specificity to alert the 88 Palace defendants of the need to preserve from that point in time forward any evidence concerning the restaurant's revenues, its payment of wages, and its treatment of tips. The three categories of documents at issue, then, appear on their face to be encompassed by the preservation obligation, and the defendants do not dispute this with respect to the banquet receipts. They do, however, contend that they were not responsible for retaining the money received book and the tip distribution sheets.

According to the defendants, "[t]he money received book . . . was never maintained as a permanent record." (88 Palace Defendants' Memorandum in Opposition to Plaintiffs' Motion for Spoliation Sanctions ("Def. Memo.") at 5). Rather, in the words of Gui Yang, one of the restaurant's owners, "[i]t is simply a notebook that the cashier uses to write down the total lunch receipts each day. At the end of each day, either Yeung Chao Lo or I usually remove the page bearing that day's total lunch receipts." (Affidavit of Gui Yang dated May 13, 2005 ("Yang Aff."), attached as Exh. 5 to Declaration of Daniel A. Hochheiser dated May 23, 2005 ("Hochheiser Decl."), ¶ 2). The information on that page is then compared to the bookkeeper's calculation of the day's receipts, and, if there is no discrepancy, the page from the money received book is discarded. (Yang Aff., ¶¶ 3, 4). Since the defendants had no obligation to create evidence, they argue that "88 Palace could have stopped maintaining the money received book entirely without falling afoul of its disclosure obligations." (Def. Memo. at 5).

The defendants, however, fail to appreciate the distinction between the creation of evidence and its preservation. They may well have been entitled to cease using the money received book at any time. But that is not what they did. Instead, they continued to record information in it and then destroy those records. That is the essence of spoliation. To be sure, a party may not have an obligation to reduce to tangible form data that are normally ephemeral. See Convolve, Inc. v. Compaq Computer Corp., 223 F.R.D. 162, 177 (S.D.N.Y. 2004) (no obligation to preserve data that appeared fleetingly on oscilloscope screen and were never recorded in normal course of business). But here, it was the normal practice of 88 Palace Restaurant to record in written form the total of each day's lunch receipts in the money received book. It was therefore the defendants' responsibility to preserve those pages in connection with this litigation.

The defendants also argue that they had no obligation to preserve the tip distribution sheets because these documents "were prepared by the tipped employees [and] were not within the exclusive possession or control of the 88 Palace ownership or management." (Def. Memo. at 6). But the defendants acknowledge that they would consider it theft if one of the employees removed a tip distribution sheet from the restaurant. (Lo Dep. at 160-61). More importantly, these documents were relied upon by the managers to conduct the business of the restaurant. According to Yeung Chao Lo, "when there is dispute from other employees as to the distribution of the tips, . . . for example, some person might say, why did that person get 500, I get 100, or I only get one dollar, then I need to look at that paper to tell them who gets what." (Lo Dep. at 161). Thus, the defendants' control over the tip distribution sheets, if not exclusive, was sufficient to give rise to a preservation obligation.

2. Culpability

The preservation obligation runs first to counsel, who has "a duty to advise his client of the type of information potentially relevant to the lawsuit and of the necessity of preventing its destruction." Turner, 142 F.R.D. at 73; see also Fayemi v. Hambrecht and Quist, Inc., 174 F.R.D. 319, 326 (S.D.N.Y. 1997). Where the client is a business, its managers, in turn, are responsible for conveying to the employees the requirements for preserving evidence. See Turner, 142 F.R.D. at 73. Thus, "[o]nce a party reasonably anticipates litigation, it must suspend its routine document retention/destruction policy and put in place a `litigation hold' to ensure the preservation of relevant documents." Zubulake IV, 220 F.R.D. at 218. When the failure to meet these obligations results in the destruction of evidence, sanctions are warranted. And, though the nature of the sanction depends in part on the state of mind of the destroyer, some remedy may be appropriate even where the destruction is merely negligent. See Residential Funding, 306 F.3d at 108;Zubulake v. UBS Warburg LLC, No. 02 Civ. 1243, 2004 WL 1620866, at *6 (S.D.N.Y. July 20, 2004) ("Zubulake V"); Metropolitan Opera, 212 F.R.D. at 219.

In this case, the 88 Palace defendants are responsible for the destruction of each of the three categories of documents. Counsel never informed the owners and managers of the restaurant of the need to maintain relevant documents, and, consequently, routine document destruction policies were never interrupted. The banquet receipts continued to be discarded annually; the pages of the money received book were torn out and disposed of on a daily basis; and the tip distribution sheets were apparently thrown away somewhat randomly, whenever it became apparent that no dispute regarding the sharing of tips had arisen.

While there is no dispute that the 88 Palace defendants failed to prevent the destruction of the banquet receipts and money received book, they argue that they cannot be held responsible for the tip distribution sheets, which were allegedly removed from the restaurant by the employees themselves. (Def. Memo. at 5-6; Yang. Aff. ¶ 5). But the defendants had the obligation to inform their employees of the requirements of preservation:

It is no defense to suggest . . . that particular employees were not on notice. To hold otherwise would permit an agency, corporate officer, or legal department to shield itself from discovery obligations by keeping its employees ignorant. The obligation to retain discoverable materials is an affirmative one; it requires that the agency or corporate officers having notice of discovery obligations communicate those obligations to employees in possession of discoverable materials.

The defendants' conduct demonstrates a sufficiently culpable state of mind to warrant sanctions. "[S]pecific intent to thwart the litigation process is not necessary." Golia, 2003 WL 21878788, at *9 (citing Byrnie, 243 F.3d at 109). A showing of gross negligence is plainly enough to justify sanctions at least as serious as an adverse inference. See Residential Funding, 306 F.3d at 108; Golia, 2003 WL 21878788, at *9-11; Barsoum v. New York City Housing Authority, 202 F.R.D. 396, 400 (S.D.N.Y. 2001). And the utter failure to establish any form of litigation hold at the outset of litigation is grossly negligent. See Golia, 2003 WL 21878788, at *9 (failure to prevent employee from destroying documents at time of termination); Pastorello v. City of New York, No. 95 Civ. 470, 2003 WL 1740606, at *11-12 (S.D.N.Y April 1, 2003) (loss of data due to supervisor's unfamiliarity with document retention policy); Barsoum, 202 F.R.D. at 400 (evidence lost when party left it unattended on her desk). That is what occurred here: the defendants systematically destroyed evidence because they had never been informed of their obligation to suspend normal document destruction policies. The second requirement for imposition of sanctions is therefore met.

3. Relevance

Finally, a party seeking sanctions for spoliation must demonstrate that the evidence destroyed was "relevant" to its claims or defenses. At least where more severe sanctions are at issue, this means that the moving party must show that the lost information would have been favorable to it. As the Second Circuit has held in connection with an application for an adverse inference,

"[R]elevant" in this context means something more than sufficiently probative to satisfy Rule 401 of the Federal Rules of Evidence. Rather, the party seeking an adverse inference must adduce sufficient evidence from which a reasonable trier of fact could infer that the destroyed or unavailable evidence would have been of the nature alleged by the party affected by its destruction.

Relevance in this context may be established in two ways. First, it may be inferred if the spoliator is shown to have a sufficiently culpable state of mind. "Where a party destroys evidence in bad faith, that bad faith alone is sufficient circumstantial evidence from which a reasonable fact finder could conclude that the missing evidence was unfavorable to the party."Residential Funding, 306 F.3d at 109 (citing Kronish, 150 F.3d at 126). Likewise, "a showing of gross negligence in the destruction or untimely production of evidence will in some circumstances suffice, standing alone, to support a finding that the evidence was unfavorable to the grossly negligent party."Id. Second, the moving party may submit extrinsic evidence tending to demonstrate that the missing evidence would have been favorable to it. See id. For example, in Byrnie, 243 F.3d at 109-10, the court found that it could be inferred from the weakness of the defendant's purported reasons for failing to hire the plaintiff that missing notes of interviews of the plaintiff would have supported his claims of discrimination. Similarly, inZubulake IV, 2004 WL 1620866, at *13, the court relied in part on e-mails that had been produced to conclude that others that had been deleted would have been at least as favorable to the party seeking sanctions. See also Golia, 2003 WL 21878788, at *10 ("plaintiffs have established that the documents were relevant, by proffering sufficient evidence from which a jury could conclude that the documents contained evidence that would have been favorable to their claims"); Barsoum, 202 F.R.D. at 400-01 (notes of meeting between employment discrimination plaintiff and supervisor suggested non-discriminatory motive for adverse action, tending to show that audiotape of same meeting that was destroyed by plaintiff would have been unfavorable to her).

In this case, as discussed above, the conduct of the 88 Palace defendants was grossly negligent. However, I need not decide whether the circumstances here are such that that factor alone should be sufficient to infer that the missing documents would have been favorable to the plaintiffs, because there is ample extrinsic evidence to that effect.

First, there is substantial evidence that the 88 Palace Restaurant treated the additional charges imposed on banquet customers as employee tips rather than as a service charge belonging to the restaurant. For example, these monies were not reported in 88 Palace's gross receipts nor were they included as wages in the employees' W-2 tax forms. (Deposition of Gui Yang ("Yang Dep."), attached as Exh. 9 to Declaration of Mark S. Cheffo in Support of Plaintiffs' Motion for Partial Summary Judgment ("Cheffo Sum. Judg. Decl.") at 37, 94-95; Deposition of Louis Miu ("Miu Dep."), attached as Exh. 18 to Cheffo Sum. Judg. Decl., at 110, 112-13, 123, 125-26). Therefore, it can reasonably be inferred that the banquet receipts would likewise show that the additional charges were treated as tips.

Next, the income received by 88 Palace Restaurant is pertinent to the plaintiffs' damages. Yet, there is proof that the restaurant has underreported its revenues. For example, in reviewing the business records, its accountant testified that sales were understated by at least fifty percent. (Miu Dep. at 178-79). It would be fair to deduce that the money received book would have demonstrated similar discrepencies.

Finally, the plaintiffs contend that managerial employees improperly took a share of the tips. That allegation is corroborated by deposition testimony and by those tip distribution sheets that were produced. (Deposition of Gong Gui Guan, attached as Exh. 8 to Cheffo Sum. Judg. Aff., at 112-13; Yang Dep. at 244). It can be presumed that the missing tip distribution sheets would reveal similar information. Thus, each of the requirements for assessing sanctions against the 88 Palace defendants for spoliation has been met. The only remaining question is what specific sanction or combination of sanctions is most appropriate.

B. Choice of Sanctions

The plaintiffs seek judgment by default as a remedy for the defendants' destruction of evidence. Whether a default judgment is warranted should be measured by the standard that applies to its mirror-image: dismissal of the complaint as a sanction upon a plaintiff. As a remedy for spoliation,

outright dismissal of a lawsuit . . . is within the court's discretion. Dismissal is appropriate if there is a showing of willfulness, bad faith, or fault on the part of the sanctioned party. However, because dismissal is a drastic remedy, it should be imposed only in extreme circumstances, usually after consideration of alternative, less drastic sanctions.

An order precluding the 88 Palace defendants from presenting evidence demonstrating compliance with federal and state labor laws is also too drastic an alternative. As long as the plaintiffs can be protected from undue prejudice, the defendants should not be disabled from presenting contrary, truthful evidence.

The most appropriate sanction is to allow the finder-of-fact to consider the gravity of the defendants' conduct, the materiality of the evidence that was lost, and the import of the remaining proof, and to draw an adverse inference against the defendants. "This sanction, although less drastic than the others proposed by the plaintiff[s], is still a serious one, serving the functions of placing the `risk of an erroneous judgment on the party that wrongfully created the risk' and `restoring the prejudiced party to the same position he would have been in absent the wrongful destruction of evidence.'" Golia, 2003 WL 21878788, at *11 (quoting Kronisch, 150 F.3d at 126). The precise contours of the inference are best reserved for determination by the Court in crafting the jury charge for trial.

The plaintiffs are also entitled to an award of the costs, including attorneys' fees, that they incurred in connection with this motion. Such a monetary award "may be appropriate to punish the offending party for its actions or to deter [the] litigant's conduct, sending the message that egregious conduct will not be tolerated." Travelers Property Casualty of America ex rel. Goldman v. Pavilion Dry Cleaners, No. Civ.A. 04-1446, 2005 WL 1366530, at *4 (D.N.J. June 7, 2005) (citing United States v. Philip Morris USA, Inc., 327 F. Supp. 2d 21, 26 (D.D.C. 2004);In re Prudential Insurance Co. of America Sales Practices Litigation, 169 F.R.D. 598, 615-17 (D.N.J. 1997)); see also Advantacare Health Partners, L.P. v. Access IV, No. C 03-04496, 2004 WL 1837997, at *10-11 (N.D. Cal. Aug. 17, 2004). Furthermore, such an award serves the remedial purpose of making the opposing party whole for costs incurred as a result of the spoliator's wrongful conduct. See Turner, 142 F.R.D. at 78-79. "[C]ompensable costs may arise either from the discovery necessary to identify alternative sources of information or from the investigation and litigation of the document destruction itself." Id. (citations omitted). In this case, the plaintiffs have not demonstrated that they engaged in any discovery that they would not otherwise have conducted merely to obtain the equivalent of the destroyed evidence. They did, however, expend resources in the litigation of the instant motion, and those costs are compensable. A precise award need not be calculated at this time. If the plaintiffs prevail on the merits of their claims, they are entitled to their costs and fees, which would include those expenses now at issue. 29 U.S.C. § 216(b); N.Y. Labor Law § 198(1-a). Therefore, the plaintiffs may incorporate the expenses incurred in connection with this motion in any ultimate application for fees or, if they do not prevail on the merits, they may nevertheless provide documentation at the conclusion of the case supporting an award of costs and fees on the current motion. Conclusion

As a result of their gross negligence, the 88 Palace defendants permitted the ongoing destruction of material evidence after this litigation had been initiated. Accordingly, the plaintiffs are entitled to sanctions. Their application for judgment by default or for an order precluding defendants from presenting evidence of compliance with the labor laws is denied, however, as such relief would be out of proportion to the prejudice caused to the plaintiffs. The plaintiffs are entitled to an adverse inference, allowing the finder-of-fact to conclude that the evidence destroyed would have been favorable to them. They shall also be awarded their costs, including attorneys' fees, incurred in connection with this motion, and they may submit documentation supporting such an award at the conclusion of the case.

SO ORDERED.