The Wage and Hour Division of the U.S. Department of Labor has issued four new opinion letters, continuing its steady reversal of Obama-era policies. Three of those Opinion Letters are addressed in depth in this Bulletin.

The end of the “80/20” rule for tipped employees

Can a restaurant employer ask a server to perform non-tip-generating work – such as cleaning and setting tables, making coffee, and occasionally washing dishes – and still pay the server a lower hourly “tipped” wage for the performance of that work? That was the issue addressed in Opinion Letter FLSA2018-27.

Prior DOL guidance had provided that an employer could pay a server a tipped wage for the time that the employee spent on duties “related to” the tipped occupation, even though the duties did not generate tips, provided that the employee spent no more than 20 percent of his or her time performing these related, non-tip-generating duties. This was known as the “80/20” rule.

The new opinion letter ends the “80/20” rule. The opinion letter reinstates and reproduces, with minor updates, an opinion letter that was issued in 2009, in the final days of the Bush Administration, and withdrawn shortly afterward by the Obama Administration. As discussed in more detail below, the reissued opinion letter eases restrictions on an employer’s application of the tipped wage.

Before FLSA2018-27 was issued, employers were uncertain as to what was and what was not a “tip-generating” duty. Moreover, keeping track of the time spent by employees in these “related duties” was a cumbersome chore.

Now the DOL has clarified that “no limitation shall be placed on the amount of these duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously ... or for a reasonable time immediately before or after such direct service.” (Emphasis added, footnotes omitted.)

In determining whether a particular duty is “related” to the tipped occupation, the DOL says that employers may rely on information in its Occupational Information Network (known as “O*NET”):

[T]he determination that a particular duty is part of a tipped occupation should be made on the following principles: Duties listed as core or supplemental for the appropriate tip-producing occupation in the Tasks section of the Details report in the Occupational Information Network ... shall be considered directly related to the tip-producing duties of that occupation.

(Emphasis added.) In other words, regularly assigned, non-tipped duties related to tipped services as defined in the O*NET will be considered part of a tipped employee’s job for tip credit purposes, provided that the duties are performed contemporaneously with, or reasonably close in time to, performance of the tipped services. For example, a restaurant may pay the tipped wage to a server who is folding napkins or making coffee because the O*NET says that these duties are related to waiting on tables and are usually performed contemporaneously.

FLSA2018-27 is notable for at least two reasons. First, it expressly supersedes the 80/20 guidance found in the DOL’s Field Operations Handbook. This will be welcomed by restaurant employers, who have long found the 20 percent limitation to be unworkable from a practical standpoint. Second, it relies on the completeness of jobs and tasks listed on the O*NET, because the only duties that count toward the tip credit are the core or supplemental duties listed there. The opinion letter says that if a unique or newly emerging occupation is not described in O*NET, “the duties usually and customarily performed by employees in that specific occupation shall be considered ‘related duties’ so long as they are consistent with the duties performed in similar O*NET occupations.”

However, the Opinion Letter does not address how the DOL will treat unlisted occupations that are not unique or newly emerging, or for which no similar occupations are listed at all. The DOL suggests that time spent by employees performing tasks not listed in O*NET may be subject to the de minimis rule (which says that an employer does not have to account for insubstantial periods of time worked by employees beyond their scheduled work hours if the extra time cannot, as a practical matter, be precisely recorded). But the DOL and the courts have provided little guidance concerning the application of the de minimis rule in the context of tipped and related non-tipped work.

The DOL’s new opinion letter comes at a time when lawsuits are being brought by both employees and employers concerning this issue. On July 6, the Restaurant Law Center filed a lawsuit in the Western District of Texas challenging the 80/20 rule as a violation of the Administrative Procedure Act and the separation of powers principles of the U.S. Constitution. Meanwhile, in September, the U.S. Court of Appeals for the Ninth Circuit reversed en banc the dismissal of an 80/20 lawsuit brought by restaurant workers, ruling that both the applicable regulation and the DOL’s guidance interpreting it were valid and entitled to deference. The DOL’s latest guidance on this issue is expected to ease employers’ compliance burdens and result in less litigation.

“Reasonable relationship” between guaranteed salary and usual earnings

The next opinion letter, FLSA2018-25, concerns whether a guaranteed weekly salary for a professional employee has a “reasonable relationship” to the employee’s “usual earnings” for purposes of satisfying the salary basis test.

The employer who requested the opinion letter was an engineering firm that classified its engineers and designers as exempt professionals. The employees were guaranteed a weekly salary of $2,100, which was derived by multiplying $70 by 30 hours (the minimum number of hours those employees typically worked each week). The firm paid this amount even for weeks in which the employees worked less than 30 hours. However, if the employee worked more than 30 hours, the firm would pay an additional $70 an hour for each hour worked in excess of 30. According to the firm, its employees’ work hours are virtually impossible to predict from week to week given the varying project requirements they faced. The firm reported that its employees’ average weekly compensation ranged from $1,793 to $3,761, with an average of $2,721 per week.

One of the requirements for the professional exemption is to satisfy the “salary basis test,” which generally requires that exempt employees be paid a salary at or above a threshold level that does not vary with the number of hours worked. The DOL assumed the firm’s employees met the “duties test” applicable to the professional exemption, so the only issue was whether the firm satisfied the salary basis test.

The DOL noted that 29 C.F.R. § 541.604 permits an employer to provide an otherwise exempt employee with “additional compensation without losing the [professional] exemption.” Moreover, the regulation allows employers to calculate employee earnings “‘on an hourly, daily, or shift basis, without losing the exemption or violating the salary basis requirement,’ if they receive a guaranteed weekly salary of at least the standard salary level and ‘a reasonable relationship exists between the guaranteed amount and the amount actually earned.’”

“A ‘reasonable relationship’ exists when ‘the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly ... rate for the employee’s normal scheduled workweek.’”

The regulations provide an example of what is meant by a reasonable relationship: a guaranteed weekly salary of $500 “is roughly equivalent—and therefore reasonably related –to usual weekly earnings of $600-$750,” a ratio of 1.5 to 1. “Accordingly, a 1.5-to-1 ratio of actual earnings to guaranteed weekly salary is a ‘reasonable relationship’ under the regulations.” Using that ratio as a guidepost, the DOL found that there was a “reasonable relationship” between the engineering firm’s guaranteed weekly salary of $2,100 and “any usual weekly earnings up to $3,150 [$2,100 x 1.5].” On the other hand, the DOL concluded that usual earnings of $3,761 “materially exceed” the 1.5-to-1 ratio and were therefore not “roughly equivalent” to the guaranteed weekly salary of $2,100:

The regulations, of course, do not provide that a 1.5-to-1 ratio of actual earnings to guaranteed weekly salary is the absolute maximum permissible ratio to satisfy the “reasonable relationship” test ... [b]ut in the facts and circumstances presented here, usual earnings that are nearly 1.8-times [sic]—close to double—the guaranteed weekly salary materially exceed the permissible ratios found in the regulations ....

Finally, this Opinion Letter addresses how an employer might calculate “usual earnings” when employee hours fluctuate widely from workweek to workweek. The firm calculated usual earnings by reference to employees’ pay during the 2017 calendar year. The DOL acknowledged that the appropriate calculation requires “an employee-specific analysis, and simply calculating the average earnings for an entire job classification or group of employees” may not always be accurate. However, the DOL said that the method used by the engineering firm provided “ample representation of employees’ variations in earnings and hours” under the circumstances.

“Amusement or recreational establishment” exemption

Employees working for an amusement or recreational establishment are exempt under 29 U.S.C. § 213(a)(3) from the minimum wage and overtime pay provisions of the FLSA, provided that the establishment either “does not operate for more than seven months in any calendar year, or ... during the preceding calendar year, its average receipts for any six months of such year were not more than 33⅓ [percent] of its average receipts for the other six months of [the] year.”

In FLSA2018-26, the DOL addressed whether a company who “contracts with operators and owners of dozens of hotel, motel, apartment, and condominium buildings to exclusively operate and maintain the swimming pool facilities at those properties” qualified as an amusement or recreational establishment. Employees of the pool management services company performed, at each location, “lifeguard, maintenance, and cleaning services,” and no work in addition to their pool-related duties.

To qualify for the exemption, the employer must be “(1) ‘an establishment’ (2) ‘frequented by the public’ (3) ‘for its amusement or recreation.’” DOL regulations define each of those elements:

First, an “establishment” is a “distinct physical place of business,” as opposed to “an entire business or enterprise.” Multiple business operations on the same premises ... may constitute separate establishments if each operation (1) is physically separated, (2) functionally operates as a separate unit having separate records and bookkeeping, and (3) does not exchange employees more than occasionally. All three elements must be satisfied .... Second, an establishment is “frequented by the public” if it is “generally accessible to the public.” Merely charging an access fee will not preclude a finding of “frequented by the public.” ... Third, an establishment is for the amusement and recreation of the public if it “exists for the purpose of amusement or recreation – such as a stadium, golf course, swimming pool, summer camp, skating rink, zoo, or other similar facility.”

(Citations omitted.)

The DOL found that the swimming pools serviced by the company would be “amusement or recreational establishments” only if (1) the pool facilities were physically separated from the hotels, apartments, and condos of which they were a part, and (2) “nonresidential occupants” of the apartments and condominiums were permitted to use them. This is because, as the DOL notes, hotels, motels, apartments, and condominium properties “ordinarily do not qualify as amusement or recreational establishments.” For example, “a rooftop or adjacent outdoor pool” would qualify as physically separate. By contrast, “restricted indoor pools within penthouse suites or pools with poolside food and beverage service from hospitality or residential staff” are not physically separate.

In addition to being physically separate, “the pool facility must also conduct its business operations separately from the hotel, motel, apartment, or condominium” to qualify for the exemption. Based upon the facts presented by the employer, the DOL concluded that “because your [pool management services company] employs its own staff at each swimming pool to exclusively perform pool services, its business operations appear functionally independent.” In making this determination, the DOL assumed that this operational independence included separate records and bookkeeping.

Addressing the “frequented by the public” requirement, the DOL noted that “if the pool facilities are restricted to renters and property owners,” they are not exempt. However, the pool establishments will be treated as “open to the public” if they are “generally accessible to nonresidential occupants,” even if “access is restricted to paying customers.” Finally, the DOL acknowledged that the business at issue – providing lifeguard and maintenance services — existed “for the purpose of amusement or recreation because their primary purpose is the operation of an amusement or recreational facility — a swimming pool.”

The DOL did not address whether the pool management company satisfied the “seasonality” requirements of this exemption.

(The fourth opinion letter addresses the partial exemption for employees of non-profit, private volunteer fire departments.)