Finding it wholly inconsistent with the statute and the regulation it purports to interpret, the Ninth Circuit, in Marsh v. J. Alexander’s, LLC, has held invalid the United States Department of Labor “80/20” tip credit rule, or “20% Rule,” which limits the availability of the tip credit when tipped employees spend more than 20% of their time performing non-tip generating duties.
Pursuant to the Fair Labor Standards Act (FLSA), an employer may fulfill part of its hourly minimum wage obligation to a tipped employee by, among other things, taking a credit for the employee’s tips and paying a cash wage to the tipped employee of at least $2.13 per hour plus any additional wages necessary to bring the employee's wages up to the federal minimum wage. The DOL later explained, in the regulation defining the key words and phrases set forth in the FLSA amendments that created the tip credit, how the application of the tip credit would apply when an employee works “dual jobs”.
According to the agency, when an employee works for a single employer in two different jobs or occupations, no tip credit may be taken for the hours the employee is engaged in a job wherein he/she does not customarily and regularly receive at least $30 a month in tips. As an example of a dual job, the regulations cite to a hotel maintenance man who also serves as a waiter at the hotel, only the latter of which would be subject to the tip credit. As examples of scenarios where an employee is not performing dual jobs, the regulations cite to “a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses” and to a “counterman who also prepares his own short orders or who, as part of a group of countermen, takes a turn as a short order cook for the group.”
Twenty years after the passage of the regulations, the DOL issued its Field Operations Handbook (FOH) as guidance to its field officers. In the FOH, the DOL states that where “tipped employees spend a substantial amount of time (in excess of 20 percent) performing preparation work or maintenance, no tip credit may be taken for the time spent in such duties.”
Relying on DOL’s FOH guidance, the plaintiff in Marsh, a consolidation of several cases involving former servers and bartenders at various businesses, claimed that he had spent more than 20% of his time performing non-tip generating activities and was entitled to non-tip credit compensation for every minute spent on such work. In other words, he claimed the employer had failed to pay him the required minimum wage. The Court framed the issue before it as one of deference. Specifically, whether the FOH guidance, which created the 80/20 rule, should be given deference. The Court determined that it should not.
The Court’s position was based on what it viewed as a difference in the FOH and the regulation’s interpretation of the same terms. It explained that the regulation interprets “occupation” to mean “job” rather than individual duties or tasks and “duties” to mean minute-by-minute tasks or activities rather than an occupation. The regulations call for the disallowance of the tip credit based on the type of jobs or occupations performed. The FOH, on the other hand, parses employee tasks and disallows the tip credit on a minute-by-minute basis based on the type and quantity of the task performed, which according to the Court, is inconsistent with the regulation. The practical effect, held the Court, was the creation of a “de facto [] new regulation masquerading as an interpretation.” The Court found the FOH guidance is not entitled to deference and is invalid in the Ninth Circuit.
Coverage: Employers with tipped employees in the Ninth Circuit. The Ninth Circuit includes the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. However, only Arizona, Hawaii, and Idaho permit employers to take a tip credit.
Effective: The decision was issued in September 2017.
Action Required: If you are in one of the states that permit employers to take the tip credit and you take the tip credit, you should continue ensuring your tipped employees are primarily focusing on their tipped duties. However, you can now assign non-tip generating duties without being unduly concerned with tracking employee duties on a minute-by-minute basis.
As always, please contact your Service Team if you have any questions.