The Ninth Circuit Court of Appeals recently rejected the U.S. Department of Labor’s (“DOL”) tip-credit guidance, commonly known as the “80/20 rule,” as well as its guidance on tasks unrelated to a tipped occupation. The guidance provides that employers may not take a “tip credit” under the Fair Labor Standards Act (“FLSA”) for time employees spend on related, but non-tip generating duties – known in the industry as “sidework” (e.g., making coffee, cleaning tables, preparing food) – if the tipped employee spends more than 20% of his or her time performing these duties. Additionally, an employer may not take a tip credit for any time that a tipped employee spends on tasks that are unrelated to the tipped job. The Ninth Circuit in Marsh v. J. Alexander’s, LLC, No. 15-15791 (9th Cir. September 6, 2017) rejected this guidance holding that it is inconsistent with the FLSA and the DOL’s “dual jobs” regulation that it is meant to interpret and, instead creates a “de facto new regulation.”

BACKGROUND

Generally, the FLSA requires employers to pay their employees a minimum wage, which is currently $7.25 per hour. However, employers may pay a reduced wage to tipped employees – those employees who regularly receive more than $30 a month in tips – and claim the employees tips as a credit towards the $7.25 per hour requirement. Thus, employers are allowed to pay their tipped employees $2.13 per hour as long as the employees earn at least $5.12 per hour in tips.

The DOL’s “dual job” regulation addresses the tip credit in situations in which an employee works two jobs, one that is tipped and one that is not tipped. In such situation, an employer can only take a tip-credit for the hours the employee spends working the tipped occupation. The example given by the DOL is a hotel maintenance person who also works as a waiter. In that situation, the employer may only take a tip credit for the hours the employee spends working as a waiter, and not for the hours spent working as a maintenance person.

This is distinguishable from a tipped employee who performs duties that are related to his or her tipped occupation, but are not themselves tip-generating duties. In such circumstance, an employer can take a tip-credit for all hours spent in a tipped occupation, even those hours spent performing related, but non-tip generating duties. The example given by the DOL is a waitress who spends part of her time “cleaning and setting tables, toasting bread, making coffee and occasionally washing the dishes or glasses.”

The DOL promulgated internal agency guidance that interprets the dual job regulation. This guidance is not part of the regulation itself, but is contained in the DOL’s Wage and Hour Division’s Field Operating Handbook (“FOH”).

The FOH adopts the “80/20 rule.” The 80/20 rule provides that when a tipped employee spends more than 20% of his or her hours performing “related duties” that are non-tip generating (i.e., preparatory and closing activities, cleaning and setting tables, making coffee, etc.), then an employer may not take a tip credit for the time the employer spends performing those duties. The FOH also provides that an employer cannot take a tip credit for any time a tipped employee spends performing tasks unrelated to the tipped occupation.

THE MARSH V. J. ALEXANDER’S, LLC DECISION

The Ninth Circuit in Marsh v. J. Alexander’s, LLC, rejected the FOH’s guidance on the dual job regulation. Specifically, the Court rejected the 80/20 rule and the rule prohibiting a tip credit for any time spent on unrelated tasks. The Court held that if an employer has “hired a person for one job (such as a waitress or counterman), but that job includes a range of tasks not necessarily directed towards producing tips, the person is still considered a tipped employee engaged in a single-job so long as the person ‘customarily and regularly receives at least $30 a month in tips.’”

The Court emphasized that the FLSA and the dual jobs regulation focus on jobs that are tipped, as a whole, and not discrete tasks within those jobs. The Court noted that the FOH

effectively imposes additional time-tracking duties on employers who must sort the employee’s tasks into three categories: (1) those that are tip-generating, (2) those that are related to the tip-generating occupation, but are non-tip generating, and (3) those that are not related to the tip-generating occupation. The FOH then “disallows tip credits on a minute-by-minute basis based on the type and quantity of the task performed.” The Court held that this is a “de facto new regulation” that is inconsistent with the dual jobs regulation and the FLSA.

The decision creates a circuit split on this issue. The Eighth Circuit Court of Appeals in Fast v. Applebee’s Int’l, Inc., 638 F.3d 872 (8th Cir. 2011), gave deference to a substantially similar version of the DOL’s 80/20 rule.

WHAT DOES THIS MEAN FOR EMPLOYERS OF TIPPED EMPLOYEES?

The decision provides clarity (at least temporarily) for employers in the Ninth Circuit with regard the 80/20 rule: It will not be given deference. Employers in the Ninth Circuit (for now) are not required to engage in time tracking and accounting for minutes spent in diverse tasks before claiming a tip credit.

Nonetheless, employers in the Ninth Circuit should still consider the following factors when assigning non-tip generating duties to tipped employees, who may claim that they are engaged in dual jobs:

  1. Is there a “clear dividing line” between two different types of duties the employee is assigned? For example, if a waitress is required to perform maintenance duties, the employee may be engaged in dual jobs because maintenance duties are unrelated to waitressing duties.
  2. Is the non-tip generating activity is assigned to a single tipped employee, or are the duties assigned to all tipped employees in the same tipped occupation? If one waiter is assigned to arrive at a restaurant two hours before opening to perform general preparatory duties for the whole restaurant, then that employee may be engaged in dual jobs. However if these duties are assigned generally to the entire waiter/waitress staff, then the employees are likely engaged in a single tipped occupation.
  3. Do the non-tip generating activities consume a substantial portion of the employee’s workday? An employee may have an argument that it is engaged in dual jobs if non-tip generating activities consume a substantial portion of the employee’s workday, especially if the non-tip generating duties are temporally separated from tip-generating duties.

Employers of tipped employees are encouraged to consult with counsel to ensure compliance with applicable laws.