In a decision rendered on September 6, 2017, the 9th U.S. Circuit Court of Appeals found that the Department of Labor’s (“DOL”) interpretative guidance on an employer’s obligation to pay tipped workers the federal minimum wage for non-tipped work under the Fair Labor Standards Act (“FLSA”) is not entitled to deference.

The FLSA requires that all employers pay their employees a minimum wage of at least $7.25 per hour. The FLSA, however, creates a special rule for how an employer can compensate a “tipped employee,” which is defined as any employee engaged in an occupation in which he customarily and regularly receives more than $30 per month in tips. The provision allows an employer to pay a tipped employee the difference between $2.13 per hour and the federal minimum wage by taking a credit for the employee’s tips – also known as the “Tip Credit.” If the $2.13 wage plus the tips the employee actually receives is insufficient to meet the federal minimum wage, then the employer must increase the wage paid to meet the minimum wage requirement. The tip credit is widely used by employers in the food and hospitality industries.

In some situations an employee is employed in a dual job, as for example, where a maintenance man in a hotel also serves as a waiter. Pursuant to FLSA’s tip credit provision, an employer may only incorporate the tip credit when an employee is engaged in an occupation in which he customarily and regularly receives tips. Thus, when an individual is employed in a tipped occupation and a non-tipped occupation, for example, as a server and a maintenance worker, the tip credit is only available for the hours spent in the tipped occupation.

In consolidated cases, several servers and waiters allege that their employers failed to pay them the required minimum wage by applying the tip credit to time spent performing non-tipped work. In support, plaintiffs relied on guidance issued by DOL in 2016. The guidance distinguishes between tipped work and non-tipped work by barring an employer from assessing the tip credit for the time that a tipped employee spends on duties that are not related to the tipped occupation if that time exceeds 20 percent of an employee’s hours worked.

In a rebuke to the DOL, the 9th Circuit, however, found that the guidance articulated by the DOL went beyond merely interpreting DOL regulations and sought to create a new regulation. As such, the interpretation is not entitled to deference from the court. Furthermore, the court found that the interpretative guidance frustrates Congress’ goal to permit the continuance of existing practices with respect to tips by requiring employers to analyze and assess every minute of its employee’s workday to assess tip credit eligibility. The court noted that because the dual jobs regulation is concerned only when an employee has two jobs, not with differentiating between tasks within a job, the interpretative guidance is inconsistent with the dual jobs regulation. The decision marks a significant victory for employers in the service industry by emphasizing Congress’ intent to allow the tip-credit to be applied to tipped and non-tipped job functions within the same occupation.

The decision by the 9th Circuit conflicts with a prior decision by the 8th U.S. Circuit Court of Appeals that supports DOL’s guidance creating a split between the circuits.

The case is Marsh v. J. Alexander’s, LLC, 2017 WL 3880742 (9th Cir. Sept. 6, 2017).