Executive Summary: On September 6, in Marsh v. J. Alexander’s LLC, the Ninth Circuit Court of Appeals refused to give deference to the U.S. Department of Labor’s (“DOL”) tip-credit guidance under the Fair Labor Standards Act (“FLSA”). The guidance—commonly known as the “80/20 rule”—provides that employers may not take a “tip credit” for time spent performing duties “related” to tip-producing activities (e.g., cleaning tables or rolling silverware) if these duties constitute more than 20 percent of the tipped employee’s time in a given week. In holding that the 80/20 rule is inconsistent with the FLSA because it improperly analyzes an employee’s duties rather than the performance of distinct jobs, the Ninth Circuit created a circuit split on this issue, and potentially paved the way for a U.S. Supreme Court decision with national impact.

Background: The FLSA generally requires employers to pay their employees a minimum wage of $7.25/hour. Where an employee “engage[s] in an occupation in which he customarily and regularly receives more than $30 a month in tips,” however, an employer may pay a reduced wage and claim the employee’s tips as a “credit” towards the $7.25/hour requirement. Practically speaking, the federal tip credit allows employers to pay their tipped employees $2.13/hour (so long as the remaining $5.12 is earned in tips).

The FLSA’s regulations address the use of tip credits for employees who work for the same employer in “dual jobs”—i.e., one tipped position and one non-tipped position. Generally, an employer may not take a tip credit for the hours in which the employee works in the non-tipped position. For instance, an employee who works as both a maintenance man and waiter must be paid the full minimum wage for all hours he works as a maintenance man. Nonetheless, an employer can still take a tip credit where employees merely perform duties “related” to their tipped job, such as “a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.”

Although not set forth in the regulation, the DOL’s Field Operations Handbook (most recently updated in 2016) contains the 80/20 rule that places an additional limitation on tip credits. Pursuant to this guidance, an employee must be paid the full minimum wage for all work “related” to tipped work if such work exceeds 20 percent of the employee’s hours in a given workweek. Lower courts have disagreed as to whether the 80/20 rule is a permissible interpretation of the FLSA’s “dual jobs” analysis.

The Decision: In Marsh, the Ninth Circuit considered the validity of the 80/20 rule in nine consolidated cases brought by servers and bartenders. The plaintiff-server admitted that he was a tipped employee, but alleged that he spent more than 20 percent of his time performing tasks that were “not directly connected with generating tips.” For instance, he claimed that he brewed tea and coffee; cut and stacked lemons and limes; cleaned soft drink dispensers; stocked ice; and performed other duties. Even though each individual task only took minutes each day, he alleged that these tasks collectively accounted for more than 20 percent of his time. As such, he claimed that his employer violated the 80/20 rule by utilizing a tip credit for the entire time he worked as a server (including the time he performed “related” side work).

In declining to give the 80/20 rule deference, the Ninth Circuit held that the guidance “is both inconsistent with the regulation ... and attempts to ‘create de facto a new regulation.’” Importantly, the court noted the evolution of the “dual jobs” test from analyzing whether an employee is engaged in two distinct jobs (as set forth in the regulation) to focusing on the range of “intermingled duties” that an employee performs in a single job (as set forth in the DOL’s guidance). Indeed, the Ninth Circuit noted that the guidance “takes an entirely different approach” from the regulation by “pars[ing] through an employee’s tasks into three separate categories (tip-generating, related to the generation of tips, or unrelated to the generation of tips), and then disallow[ing] tip credits on a minute-by-minute basis based on the type and quantity of the tasks performed.” The court further held that the guidance would improperly require an employer to track the time each employee spent on individual tasks each day. Although the Court did not elaborate on what the “dual jobs” test may involve, it rejected the 80/20 rule as set forth in the DOL’s Field Operations Handbook. As such, the Ninth Circuit vacated the lower court’s ruling but allowed plaintiffs the opportunity to amend their complaints.

Employers' Bottom Line: The DOL’s 80/20 rule has been a point of uncertainty for employers since its inception in 1988. The potential impact of Marsh is significant because it marks the first federal circuit split on this issue. In Fast v. Applebee’s Int’l, Inc., the Eighth Circuit considered an earlier, but substantially similar, version of the 80/20 rule and deferred to the DOL’s guidance.

While the Marsh decision has, at least temporarily, clarified the issue for states within the Ninth Circuit (WA, OR, MT, ID, NV, CA, AZ, HI, and AK), uncertainty remains in other parts of the country. With a clash between the circuits finally at hand, there is an increased chance that the U.S. Supreme Court will take up an appeal and bring uniformity to this issue nationally.