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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.