United States: DOL's ‘80/20' Tip Credit Rule Entitled To No Deference, Ninth Circuit Holds, Creating Circuit Split

Last Updated: September 19 2017
Article by Jeffrey W. Brecher, Felice B. Ekelman and Eric R. Magnus

Finding it wholly inconsistent with the statute and the regulation it purports to interpret, the Ninth Circuit has held invalid the United States Department of Labor's "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 allegedly non-tip generating duties.  Marsh v. J. Alexander's, LLC, 2017 U.S. App. LEXIS 17199 (9th Cir. Sept. 6, 2017).  The Ninth Circuit expressly disagreed with the Eighth Circuit, establishing a circuit split. 

Restaurants have been plagued by "80/20" lawsuits over the last several years, with employees alleging the tip credit should not apply because they spent too much time (i.e., more than 20% of their time) performing "side work" such as brewing tea or coffee or rolling silverware.  As a result, they claim they should have been paid at the full minimum wage rate, not the lower cash wage rate given to tipped employees.  The so-called "20% Rule" is not contained in the FLSA itself or the regulations adopted by the DOL to implement the tip credit provision, but instead emanates from the Field Operations Handbook used by the DOL as guidance for investigations by its field officers.  The Ninth Circuit held, in a thorough, 40-page analysis, that the 20% Rule is owed no deference and rejected it.  The Ninth Circuit is the largest federal judicial circuit in the United States, having jurisdiction over California and eight other Western states, Guam and the Northern Mariana Islands.

Background

While generally the FLSA requires employers to pay a minimum hourly cash wage (currently $7.25) to their employees, the FLSA provides that when an employee is "engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips," the employer may pay a reduced cash wage (currently $2.13) and claim a "tip credit" to make up the difference between the reduced cash wage and the $7.25 hourly minimum.  If the combination of the reduced hourly wage and the tips fails to meet the $7.25 minimum, the employer must increase the cash wage to make up the difference.

Fifty years ago this month, the DOL implemented its first regulations defining the key words and phrases set forth in the FLSA amendments enacted by Congress to create the tip credit.  Those regulations established the concept of "dual jobs," clarifying that when an employee is engaged in one occupation routinely satisfying the $30-per-month tip provision, but also is also engaged in a second occupation not satisfying the tip requirement, the employer may take the tip credit only as to the first occupation.  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."

Over the next two decades, the DOL issued a series of Opinion Letters in an effort to establish guidelines for employers attempting to apply the dual-jobs concept to their employees.  These Opinion Letters created no bright-line rules.  However, in revised guidance first issued to its field officers in 1988, and reasserted in an amicus brief submitted to the Eighth Circuit in 2011, the DOL stated 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." 

Rejection of the 80/20 Tip Credit Rule

Marsh is a consolidation of several cases involving former servers and bartenders at various businesses who, citing the DOL's 1988 field guidance, alleged their employers improperly claimed the tip credit and therefore failed to pay them the required minimum wage.  The district court held that the DOL's interpretation of the regulation was not entitled to deference and dismissed the claims. On appeal, the Ninth Circuit agreed that the DOL's interpretation was not entitled to deference under the two-part analysis established by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to evaluate the validity of regulations.

Traditionally, the terms "occupation" and "job" have been used interchangeably.  Therefore, "[b]ecause the dual jobs regulation is concerned with when an employee has two jobs, not with differentiating between tasks within a job, the [field operations guidance's] approach is inapposite and inconsistent with the dual jobs regulation," the Ninth Circuit concluded.    "Most fundamentally," added the Court of Appeals, the guidance "ignores the regulation's requirement to identify distinct jobs" and "the [guidance's] minute-by-minute and task-by-task approach is contrary to the statute, which considers only whether an employee is engaged in a single job that generates the requisite amount of tips."  The practical effect, held the Court, was the creation of a "de facto [] new regulation masquerading as an interpretation."  For these reasons, the Court held the guidance is not entitled to Chevron deference and is invalid.  The Court of Appeals remanded the cases to the district court, however, to determine whether the jobs at issue might qualify as "dual jobs" under the regulations and the Opinion Letters interpreting them, without reference to the 20% Rule set forth in the field operations guidance.

The Circuit Split

The Ninth Circuit's decision expressly parts ways with Fast v. Applebee's International, Inc., 638 F.3d 872 (8th Cir. 2011), in which the Eighth Circuit held the guidance was owed deference.  In Fast, the Eighth Circuit concluded the dual-jobs regulation was ambiguous because the terms "part of [the] time" and "occasionally" used in the regulation's examples connoted a temporal limit and the DOL's 20% Rule was not an inconsistent interpretation of these terms.  The Ninth Circuit disagreed, noting that "[m]ost important[ly], the Eighth Circuit failed to consider the regulatory scheme as a whole, and it therefore missed the threshold question whether it is reasonable to determine that an employee is engaged in a second 'job' by time-tracking an employee's discrete tasks, categorizing them, and accounting for minutes spent in various activities."

The decision comes as welcome news to hospitality employers located in the Ninth Circuit who use the tip credit, yet have been faced with the potential burden of analyzing the work performed by tipped employees on a minute-by-minute basis to assess whether the work is eligible to be paid using the tip credit and then aggregating those minutes to evaluate the applicability of the 20% limitation.

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