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Here’s Your Tip Of The Day – Another Appellate Court Defers To DOL On Use Of 80/20 Rule For Tipped Employees

Posted on: September 24th, 2018

By: Brad Adler & Koty Newman

The Ninth Circuit’s recent decision in Marsh v. J. Alexander’s, 2018 U.S. App. LEXIS 26387 (9th Cir. Sep. 18, 2018) is important for employers trying to navigate the FLSA and pay their tipped employees the correct amount.  The Ninth Circuit has joined the Eighth Circuit in deciding that the Department of Labor’s (“DOL”) dual jobs regulation, 29 C.F.R. § 531.56(e) (a/k/a “80/20 rule”), and its interpretation found in the Wage and Hour Division’s Field Operations Handbook are entitled to judicial deference.  This affects what employers must pay their tipped employees in these jurisdictions.

Generally, the federal hourly minimum wage is $7.25 per hour.  However, employers may legally pay their employees in tipped occupations, under federal law, as little as $2.13 per hour.  This is due to the FLSA’s tip credit provision, which permits employers to take a tip credit for employees in tipped occupations, such as serving or bartending.  The tip credit offsets the employer’s duty to pay the minimum wage to their tipped employees.  Even so, when a server’s tipped wages come up short of the hourly minimum wage of $7.25 per hour, the employer has a duty to make up the difference.

But how much is an employer required to pay an employee when that that employee performs some tipped duties and some untipped duties?  With the Ninth Circuit’s recent decision, the wages that an employer must pay an employee who receives tips turns upon whether the employee’s untipped duties are related to the employee’s tipped duties, and how long the employee spends performing each of those duties.

In the case before the Ninth Circuit, Alec Marsh and thirteen other former servers and bartenders challenged their employer’s payment practices under the FLSA.  Plaintiffs alleged that their employers abused the FLSA’s tip credit provision in two ways.  Plaintiffs alleged that employers violated the provision by treating them as tipped employees when they performed work that was unrelated to serving or bartending, such as when they cleaned restrooms or washed windows. Further, plaintiffs alleged that it was a violation for their employers to treat them as tipped employees when they performed untipped tasks related to serving and bartending, such as filling salt and pepper shakers, when those tasks consumed an excess of twenty percent of their time worked during the workweek.

In the Ninth Circuit’s view, the alleged payment practices of plaintiffs’ employers – in essence, crediting an employee’s tips toward the employers’ obligation to pay the full minimum wage for a non-tipped occupation – effectively allowed the employers to treat their employees’ tips as payments to the employers rather than the employees, thereby minimizing the employers’ obligation to pay their employees the full minimum wage for time spent performing work in a non-tipped occupation.  Marsh, 2018 U.S. App. LEXIS 26387, at *6 & n.2.

The Ninth Circuit ultimately determined that this practice is disallowed.  The Ninth Circuit held that the DOL “foreclosed an employer’s ability to engage in this practice by promulgating a dual jobs regulation in 1967, 29 C.F.R. § 531.56(e), and subsequently interpreting that regulation in its 1988 Field Operations Handbook.”  Marsh v. J. Alexander’s, 2018 U.S. App. LEXIS 26387, at *6.  The Court concluded that both the regulation and the DOL’s interpretation of that regulation were entitled to deference.   This result aligns the Ninth Circuit with the Eighth Circuit and its decision in Fast v. Applebee’s Int’l, Inc., 638 F.3d 872 (8th Cir. 2011).

As a result of giving deference to the regulation and its interpretation, the Court concluded that Marsh “stated two claims for relief under the FLSA: first, that he is entitled to the full hourly minimum wage for the substantial time he spent completing related but untipped tasks, defined as more than 20% of his workweek; and second, that he is entitled to the same for time he spent on unrelated tasks.”  Marsh, 2018 U.S. App. LEXIS 26387, at *42.

If you believe that separating employees’ tasks and pay in this manner is unworkable, the Ninth Circuit would disagree.  The Court believes the system is workable because an employer may “keep track of time spent on related tasks by requiring employees to clock in any time spent rolling silverware or cleaning the restaurant before and after the restaurant closes or when business is slow.”  Marsh, 2018 U.S. App. LEXIS 26387, at *38-39.  Of course, it remains to be seen how the other appellate courts will deal with this issue, particularly in light of the arguments asserted in the lawsuit filed by a restaurant group in Texas that the 80/20 rule is invalid (see blog on Texas lawsuit).

Thus, practically speaking, an employer with tipped employees needs to pay careful attention to who is performing tasks unrelated to those tipped occupations, and who dedicates a substantial amount (more than twenty percent) of their working time to tasks that are untipped-yet-related to their tipped occupation.  Because now, payment of those employees is subject to both the DOL’s regulation and interpretation, at least in jurisdictions covered by the Eighth and Ninth Circuits.

If you have any questions or would like more information, please contact Brad Adler at [email protected] or Koty Newman at [email protected].

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