By Julie Jargon 

A former McDonald's Corp. franchisee in the U.S. who was accused of mistreating foreign students who worked for him has agreed to pay $205,977 in back wages and damages to 291 former employees, the U.S. Department of Labor said.

Early last year, 15 foreign students who had worked in McDonald's restaurants owned by Andy Cheung in central Pennsylvania filed complaints with the State Department and Labor Department saying he had underpaid them and compelled them to share cramped living quarters owned by him or his son. The students were on three-month J-1 visas for work and travel.

An investigation by the Labor Department's Wage and Hour Division found that the company through which Mr. Cheung operated his six McDonald's restaurants violated the minimum wage and overtime provisions of the Fair Labor Standards Act.

"Cheung Enterprises not only failed to properly pay its employees, it willfully took advantage of vulnerable student workers living and working in our country under the J-1 visa program," Al Gristina, director of the division's Wilkes-Barre District Office, said in a press release. "This agreement will ensure that the rights and wages of both U.S. workers and student guest workers are protected."

Mr. Cheung said on Tuesday he didn't break minimum wage laws and that he simply deducted employees' housing expenses from their paychecks, in violation of Labor Department regulations, rather than having the workers cash their paychecks and then reimburse him for rent. In a telephone interview, Mr. Cheung said he disagrees with the department's findings "but they are the ones who make the determination. I didn't do anything wrong, I just regret the way I did it."

The students, who came from Latin America and Asia, arrived in the U.S. under the Summer Work Travel Program, which the State Department's website says provides the opportunity "to experience and to be exposed to the people and way of life in the United States."

When the students arrived, they were assigned to work at Mr. Cheung's McDonald's restaurants. Some said they were given so few hours that they hardly earned any money after their boss deducted rent from their paychecks. Others said they were forced to work shifts as long as 25 hours straight without being paid for overtime.

The 15 students who filed complaints demonstrated outside one of Mr. Cheung's restaurants last March. Approximately two weeks later, McDonald's said he had agreed to sell his restaurants and leave the McDonald's system. The company said at the time that it takes "the well-being of the employees working in McDonald's restaurants seriously, " and that it had started investigating the situation as soon as it heard about it.

Investigators found that Cheung Enterprises made improper deductions from employee paychecks, bringing the rate of pay for some employees below the federal minimum wage of $7.25 an hour, and failed to pay some employees overtime wages. Investigators also determined that the company charged the student workers excessive rent that was deducted from their paychecks for substandard, employer-owned housing.

Of the 291 employees to whom Mr. Cheung agreed to pay back wages, 178 were foreign student workers.

In addition to the back wages and damages, Mr. Cheung has agreed to pay a $5,000 civil penalty, the Labor Department said.

Write to Julie Jargon at julie.jargon@wsj.com

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