In reissuing an opinion letter withdrawn by the Obama administration, on November 8, 2018 the Wage and Hour Division (WHD) of the Department of Labor (DOL) nullified enforcement guidance that made the tip credit unavailable to tipped employees who spend more than 20% of their time performing allegedly non-tip generating duties. The DOL’s actions effectively invalidate the decision of the Eighth Circuit Court of Appeals in Fast v. Applebee’s International, Inc., 638 F.3d 872 (8th Cir. 2011), and the very recent, en banc decision of the Ninth Circuit Court of Appeals in Marsh v. J. Alexander’s LLC, 905 F.3d 610 (9th Cir. 2018). Both of these Circuit Court opinions were premised on deference to the now-invalidated Obama-era DOL enforcement guidance.
The Fair Labor Standards Act (FLSA) generally requires employers to pay non-exempt employees minimum wage (currently $7.25) but treats “tipped employees” – those who customarily and regularly receive at least $30 per month in tips – differently. Because tipped employees receive substantial compensation through tips, the FLSA permits employers to pay them a direct wage of $2.13 per hour and take a “credit” for the tips received by the employee to satisfy the remaining portion of the minimum wage. If the direct wage and the total tips received by an employee is less than the minimum wage for all hours worked in a given workweek, the employer must make up the difference. Commonly, though, servers receive tips well in excess of the minimum wage and, in fact, often earn far more than traditionally non-tipped workers such as kitchen prep personnel, particular at fine dining establishments.
Thereafter, DOL Opinion Letters failed to establish any bright-line rules for what does, and does not, constitute “dual jobs” or how employers might apply the concept their employees. However, in a 1988 revision to its Field Operations Handbook (FOH), and more recently in an amicus brief submitted in 2011 during the Eighth Circuit’s Fast case, the DOL expanded the dual jobs concept to include single jobs involving dual tasks, stating 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.” This language often has been referred to as the “80/20” or “20%” Tip Credit Rule.
The FOH enforcement guidance had it problems from the get-go. It fails to address a number of questions, including most significantly, what specific duties constitute allegedly “tip-generating” work versus those “related to tipped work” but not themselves tip-generating? Second, how is an employer to record such time? For example, if a server fills a ketchup bottle, or rolls silverware into napkins, or wipes down tables, while waiting for the next customer to arrive, are any of those tip-generating activities or are they simply related, but untipped, duties? What if a customer asks for a lemon wedge for their drink, is the server engaged in tip-generating work when he or she pulls a lemon from the refrigerator, cuts a wedge, and brings it to the customer? And is – or should – the answer be different if the lemons were cut by the server in anticipation of a customer’s arrival versus doing so at the customer’s request? These are just a few of the myriad examples that have arisen and made employers’ heads spin. As a result, employers routinely urged courts not to defer to this Rule, challenging it as unworkable and inconsistent with the FLSA and its implementing regulations. At one point, the DOL agreed, withdrawing it in a January 16, 2009 opinion letter. That opinion letter, however, was signed during the waning days of the Bush Administration and promptly was withdrawn by the Obama Administration, citing the fact that it had been signed but had never been mailed.
Despite the problems with the Rule, using the language of the FOH and the Fast decision to their advantage, since 2011 tipped workers have brought a flurry of litigation, alleging that because their non-tip-generating duties exceed 20% of their duties, employers must pay them the full minimum wage for all of those hours and not the tip credit rate applicable to tipped employees. Fast-forward to 2017, when a three-judge Ninth Circuit panel disagreed with the analysis in Fast, noting that “[b]ecause the dual jobs regulation is concerned with when an employee has two jobs, not with differentiating between tasks within a job, the [FOH’s] approach is inapposite and inconsistent with the dual jobs regulation.” The panel decision also stated that the guidance “ignores the regulation’s requirement to identify distinct jobs” and contradicts the statute, which “considers only whether an employee is engaged in a single job that generates the requisite amount of tips.” That employer victory was short-lived when, in an en banc decision in September 2018, the Ninth Circuit overturned the panel decision, holding that the 80/20 Rule was valid and was entitled to deference.
Abandonment of the 80/20 Rule
The current DOL clearly disagreed with its predecessor administration and with the decidedly pro-employee decisions in Fast and Marsh. Reissuing the 2009 opinion letter, now designated as FLSA2018-27, the DOL expressly notes, “We do not intend to place a limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties and all other requirements of the Act are met.” The Opinion Letter adds, “We also believe that guidance is necessary for an employer to determine on the front end which duties are related and unrelated to a tip-producing occupation so that it can take necessary steps to comply with the Act.” To that end, the DOL notes that “[d]uties listed as core or supplemental for the appropriate tip-producing occupation in the Tasks section of the Details report in the Occupational Information Network (O*Net), . . . shall be considered directly related to the tip-producing duties of that occupation” and, as long as they are performed contemporaneously with (during or within a reasonable time before or after direct customer service), any amount of these duties may be performed without adversely affecting the employer’s eligibility to use the tip credit. This position is consistent with that taken by Jackson Lewis, both in private litigation for clients and in defense against claims asserted by the DOL.
The DOL’s abandonment of the 80/20 Rule unquestionably will bring great relief to employers in the restaurant and hospitality industries and will enable them to more effectively assess which, if any, duties performed by tipped employees are subjecting the employers to potential loss of the tip credit. If you have any questions about this development, please consult your wage and hour attorney.