On September 18, 2018, the Ninth Circuit issued its opinion in several consolidated cases, Marsh v. Alexander's (9th Cir. 15-15791, 15-15794, 15-16561, 15-16659, 16-15003, 16-15004, 16-15005, 16-15118, 16-16033, Sept. 18, 2018) addressing whether employers of tipped employees can take a tip credit for time employees spend performing work that does not directly generate tips under the Fair Labor Standards Act ("FLSA").
Although the majority of the opinion focused on whether regulations and guidance issued by the Department of Labor ("DOL") are entitled to deference—which the court determined they were—the decision provides important guidance to any employer who employs workers in tipped jobs and takes a tip credit under the FLSA.
Under the FLSA, employers are permitted to take a tip credit for employees in tipped occupations to offset the employer's obligation to pay the hourly minimum wage. At current rates, employers may pay as little as $2.13 per hour to tipped employees, if the employees receive enough in tips to bring their total compensation up to the minimum wage.
The plaintiffs in the consolidated cases, who were former servers and bartenders of the defendant employers, alleged that their employers abused the tip credit provision. This was done by paying the plaintiffs a reduced tip credit wage and treating them as tipped employees when they were engaged in either: (1) non-tipped tasks unrelated to serving or bartending, such as cleaning toilets; or (2) non-incidental tasks related to serving or bartending, such as hours spent cleaning and maintaining soft drink dispensers, in excess of 20% of the workweek. Specifically, the plaintiffs alleged that they spent significant time engaged in tasks that did not produce tips, such as cutting and stocking fruit, cleaning tables and restrooms, and taking out trash. Their employers took a tip credit for the time spent performing these non-tip producing tasks, thereby violating the FLSA. The plaintiffs relied on the DOL's dual job guidance to support their claims.
The Ninth Circuit agreed with the plaintiffs. It held that the DOL's dual job regulations and guidance governed their claims, and prohibited the employer's alleged practices.
The FLSA defines a tipped employee as "any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips," but does not in turn define the terms "occupation" or "customarily and regularly." However, the DOL has issued regulations to clarify this definition and, specifically relating to the plaintiffs' claims, the DOL issued the "dual job regulation." This regulation addresses the situation where an employee works in two different jobs for the same employer, one tipped and one untipped. Under the regulation, an employer is only permitted to take a tip credit for the hours an employee spends working in the tipped job. Although this is easy to apply when an employee works two completely separate jobs, such as both a waiter and a maintenance man (the example used in the regulation), it does not address the situation presented by the plaintiffs in this case—i.e., where an employee has only one job for an employer, but performs tasks that are tip producing and not tip producing.
The DOL, however, has issued official guidance to address this latter situation, which provides that:
The Ninth Circuit held that this guidance governed the plaintiffs' claims. It opined that under the guidance, employers are not entitled to take a tip credit for any time spent by employees performing work unrelated to their tipped work, such as cleaning restrooms, because such work should be treated as a completely different job from the tipped job under the dual job regulation. The Ninth Circuit then held that even for tasks incidental to tip-producing work, such as stocking ice or cleaning dishes, if the time spent on those tasks exceeds 20% of the workweek, the tip credit cannot be taken for the time spent on such tasks. Employers must pay their employees for all time spent on the incidental tasks at the full minimum wage as a result.
Following this opinion, it is important for employers to be aware of, and keep track of, the time spent by tipped employees doing tasks that are not directly tip-producing. Even for incidental tasks normally associated with tipped work, such as rolling silverware, if that total time is more than 20% of the workweek, that time must be compensated at the full minimum wage. And, if any time is spent by employees doing work that is not "incidental" to tipped work, such as cleaning restrooms, regardless of how much time is spent on those tasks, the time must be compensated without taking a tip credit.
Finally, it is important to note that this case only addressed the use of a tip credit under federal law. Many states have their own laws relating to the permissible use of tip credits, and these may vary from federal law. Those state laws must be consulted as well to ensure that tip credit practices are compliant with all applicable laws.
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