Service Charges/Gratuities

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By Abigail Cahak and Noah Finkel

Seyfarth Synopsis: Even though the DOL abandoned its 20% tip credit rule in November 2018, one federal district judge has refused to defer to the agency, opting to defer to the old guidance instead.

As employers using the tip credit know full well, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. FLSA regulations clarify, however, that duties related to a tipped occupation, but not themselves directed toward producing tips, are not considered a separate occupation.  For example, a waitress may nonetheless spend part of her time “cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses” without being employed in “dual occupations.”  Although the regulations impose no limitation on the amount or type of “related duties,” an internal DOL Field Operations Handbook (“FOH”) — a document meant originally for investigators but later made available on the DOL’s website — required that employees may not spend more than 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating.

This “20% rule” was followed by the Eighth and Ninth Circuit Court of Appeals, and several lower courts (but not by the Eleventh Circuit and some district courts), under the reasoning that the DOL’s interpretation of its own regulations was reasonable and thus entitled to deference.  Tracking servers, and bartenders’ time on various tasks has proven impracticable for hospitality employers and has led to a wave of collective actions that often have been expensive to settle.  Mercifully, the DOL laid the 20% rule to rest by issuing an opinion letter last fall stating its position that “no limit is placed on the amount of [related but non-tipped] duties that may be performed . . . as long as they are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties” (emphasis added).  That opinion letter also noted that a revised FOH would be forthcoming.

The 20% rule was not enacted by Congress.  Nor was it imposed by judges.  It did not undergo notice-and-comment rulemaking to become a legislative regulation.  It was not even an interpretive bulletin placed by the DOL into the Code of Federal Regulations.  Rather, the 20% appeared in a handbook given to DOL investigators, and then was urged by the DOL onto courts for the first time in an amicus brief.  Deemed as a reasonable interpretation of the DOL’s own regulations by many courts, the 20% is thus purely a creature of deference.  And if the 20% rule can live only by deference, it stands to reason that it dies by deference too.

But earlier this month, a federal district judge attempted to resurrect DOL tip credit guidance that even the Department had left for dead.  The ruling takes a results-oriented approach and dismisses more recent, well-reasoned guidance to the contrary.

The case brought by current and former servers and bartenders of a group of restaurants, alleged that they were owed unpaid wages due to improper use of the tip credit, including spending more than 20% of their time on non-tip producing work.  In ruling on the employer’s motion for decertification, the court concluded that the DOL did not offer any reasoning or evidence of thorough consideration for “reversing course” with the opinion letter, yet the decision neglected to fully consider that the same opinion letter had previously been handed down in the final days of the Bush Administration, only to be withdrawn in the first months of President Obama’s first term.  The ruling also failed to consider that the 20% rule itself has never been fully explained by the DOL, nor has the Department clearly articulated why 20% is an appropriate number, how duties should be categorized, or how time should be tracked.  In contrast, the November 8 opinion letter provides a detailed explanation for the basis of the rule it articulates and a methodology for ensuring compliance.  The decision is also premised on facts likely distinguishable from future cases.  The court found it significant that the 20% rule was in effect during the three years at issue, such that application of the DOL’s new guidance would be an “unfair surprise” to the plaintiffs.

The decision is one of the first to rule on deference to the DOL’s new opinion letter, but it may be short-lived due to appeal or due to other courts distinguishing or refusing to follow it.  In an attempt to ensure that plaintiffs who had been litigating for years did not have the rug pulled out from underneath them, the court did not fully address the thoroughness or reasoning of the two divergent interpretations.  The decision may very well end up an outlier, particularly as previously-filed tip credit litigation dries up, sending the 20% rule to its grave once and for all.

By Abigail Cahak and Noah Finkel

Seyfarth Synopsis: The DOL has reissued a long-awaited opinion letter withdrawing its previous 20% tip credit rule and making clear that “no limit is placed on the amount of [related but non-tipped] duties that may be performed,” so long as they are performed “contemporaneously with the duties involving direct service or for a reasonable time immediately before or after” direct service.

For about a decade, restaurant employers have faced the daunting prospect of collective and class action litigation by their servers and bartenders paid under the tip credit claiming that they spent more than 20% of their time on so-called side work that didn’t directly produce tips  Without incredibly detailed time records showing exactly when each server engaged in each of their various duties, restaurants have had a hard time rebutting such claims.  Further, because servers and bartenders at restaurants usually are asked to perform somewhat similar duties, restaurateurs usually have not fared well in defeating certification efforts in such cases.

Those collective and class actions all stem from DOL guidance that the tip credit may not be used to the extent an employee spends more than 20% of their time on non-tip producing work.

Late last week, however, the DOL’s Wage-Hour Division issued a long-awaited opinion letter intended to clear up “confusion and inconsistent application” stemming from guidance contained in its Field Operations Handbook (“FOH”) regarding use of the tip credit to pay regularly tipped employees.  The opinion letter provides clarity as to when and how often a tipped employee may perform non-tipped tasks and is welcome guidance to many employers.

Under the FLSA regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation.  The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.”  Yet, DOL guidance interpreting the regulations, contained first in the DOL’s FOH and then set forth in an amicus brief, imposed time and duty-based limitations not present in the regulations themselves: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating.  Deference to the DOL’s guidance and enforceability of the 20% rule has caused a circuit split, with the Eighth and Ninth Circuit Court of Appeals following the rule, and the Eleventh Circuit refusing.  (We previously blogged on the Eighth and Ninth Circuit decisions.)

On November 8, the DOL reissued an opinion letter it had previously handed down in the final days of the Bush Administration, but subsequently withdrew in the first months of President Obama’s first term.  The letter provides clarity as to the DOL’s position on the 20% rule, stating that “no limit is placed on the amount of [related but non-tipped] duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.”   (emphasis added)

With respect to whether a particular duty is related to the tipped occupation, the opinion letter refers readers to O*NET, an occupational database created under the sponsorship of the DOL.  O*NET provides reports of the tasks involved for various occupations, including servers and bartenders.  O*NET’s task list is often very detailed and includes, for example, many tasks plaintiffs’ counsel regularly argue are completely outside a server’s occupation (e.g., “[p]erform cleaning duties, such as sweeping and mopping floors, vacuuming carpet, tidying up server station, taking out trash, or checking and cleaning bathroom”).  The opinion letter further states, however, that if a task is not on the O*NET list, an employer may not take the tip credit for time spent performing the duty (while nonetheless acknowledging that such time may be subject to the FLSA’s de minimis rule).

The reasoning of those courts that followed the 20% rule was deference to the DOL’s expertise in interpreting its own dual jobs regulation.  Now, however, that rule is gone (indeed, the opinion letter states that a revised FOH is “forthcoming”), leaving it unlikely (but not impossible) that courts will continue to follow the FOH.  And although state laws may differ, because many court interpretations of state wage and hours laws have depended on analogy to the federal FLSA, it also is unlikely that the 20% rule will continue to apply to such claims.

Of course, it is possible that the rule could reemerge under a future Democratic administration, but even so, courts may no longer defer to a re-instituted 20% rule because they often reject administrative agency guidance that changes with the political winds.

By Abigail Cahak and Noah Finkel

Seyfarth Synopsis: In an en banc decision, the Ninth Circuit reverses its prior panel opinion rejecting the DOL’s interpretation of FLSA regulations on use of the tip credit to pay regularly tipped employees, finding that the interpretation is consistent with the FLSA regulations.

The Ninth Circuit Court of Appeals sitting en banc issued a decision reversing a prior panel opinion from the court that rejected the Department of Labor’s interpretation of FLSA regulations on the use of the tip credit when paying regularly tipped employees. The ruling joins other circuits, other than the Eleventh, that explicitly or implicitly accept the DOL guidance. That DOL guidance, however, can be withdrawn by the DOL at any time.

Under the FLSA regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” Yet, current DOL guidance interpreting the regulations, contained first in the DOL’s Field Operations Handbook and set forth in an amicus brief, imposes time and duty-based limitations not present in the regulations themselves: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating. The guidance provides that an employer also may not take the tip credit for time spent on duties not related to the tipped occupation because such an employee is “effectively employed in dual jobs.” The DOL’s guidance has previously been followed by the Eighth Circuit Court of Appeals in Fast v. Applebee’s International, Inc. and several lower courts. (We blogged about the Fast decision here.) The Eleventh Circuit Court of Appeals, adopting a decision from the Southern District of Florida, has been the other circuit to refuse to follow the Field Operations Handbook’s guidance, albeit without a detailed discussion of deference to administrative agencies.

In September 2017, a panel of the Ninth Circuit issued its ruling in Marsh v. J. Alexander’s, addressing a number of actions brought by servers and bartenders who alleged that their employers improperly used the tip credit. Relying on the DOL guidance in the Field Operations Handbook, the plaintiffs asserted that their non-tip generating duties took up more than 20% of their work hours, that they were employed in dual occupations, and that they were thus owed the regular minimum wage for that time. The Ninth Circuit panel concluded that the DOL’s Field Operations Handbook was both inconsistent with the FLSA regulations and attempted to create a de facto new regulation such that it did not merit Auer deference. It explicitly rejected the Eighth Circuit’s reasoning in Fast. The plaintiffs shortly thereafter filed a petition for rehearing en banc, which was granted in February 2018.

On September 18, 2018, the Ninth Circuit issued its en banc decision reversing its prior holding. It concluded that, like the statute, the FLSA regulations do not define “related duties” or “occupation,” but suggest that the “DOL likely intended to tie a person’s occupation to her duties.” And, although they define those duties in temporal terms like “occasionally,” the regulations leave undefined the point at which the “transformation” from “occasionally” to a “dual occupation” occurs. According to the Ninth Circuit, the DOL’s Field Operations Handbook therefore addresses these ambiguities by defining “related duties,” imposing a 20% threshold for them, and “mak[ing] explicit the regulations suggestion that occupations are defined by their tasks.” In so holding, the Ninth Circuit expressly realigned itself with the Eighth Circuit’s decision in Fast, leaving the Eleventh Circuit the only one to reject the 20% rule in a brief 2008 decision.

The Ninth Circuit’s reversal is relatively unsurprising given its often employee-friendly rulings. It will also likely embolden plaintiffs’ counsel who have largely driven tip credit litigation premised on the interpretive guidance’s 20% rule. This trend has forced many restaurant and hospitality industry clients to choose between asking servers and bartenders to track their tasks down to the minute, or risk defending a collective action lawsuit based solely on plaintiffs’ testimony that they spent excessive amounts of time on non-tip producing tasks.

Hospitality employers are left with two potential avenues for relief. First, it is possible that the Supreme Court could grant cert in this case. Though the only circuit court to reject the 20% guidance is the Eleventh Circuit, and in an opinion that does not squarely discuss deference to the DOL, at least four justices on the Court may be interested in reviewing a case that grants considerable power to an administrative agency.

Second, and in what could provide immediate relief to restaurant employers, the DOL’s Wage-Hour Division simply could withdraw and revise its Field Operations Handbook guidance setting for the 20% rule. A rule created by an agency without notice and comment rulemaking can be killed without notice and comment rulemaking. The 20% rule is unworkable and breeds litigation, and the DOL could withdraw it and engage in listening sessions and notice and comment rulemaking to generate a more sensible way to ensure that employers pay tipped employees in a fair manner without subjecting them to an impracticable division between tip-producing and non-tip-producing work.

For now, however, hospitality employers should assume the 20% rule is one to be followed and should consult with counsel on ways to minimize so-called “side work” by tipped employees and to reduce exposure to difficult to defend collective and class actions that claim that tipped employees spend more than 20% of their time on work that is not related to tipped duties.

Co-authored by Howard M. Wexler and Robert S. Whitman

Seyfarth Synopsis: Governor Andrew Cuomo has directed the Commissioner of Labor to schedule public hearings to address the possibility of eliminating the tip credit. A tip credit allows an employer to pay less than minimum wage to employees who receive the bulk of their pay in customer tips.

As we say goodbye to 2017, New York employers should also start preparing to say goodbye to minimum wage tip credits.

Governor Andrew Cuomo has directed the Commissioner of Labor to schedule public hearings to address the possibility of eliminating the tip credit. A tip credit allows an employer to pay less than minimum wage to employees who receive the bulk of their pay in customer tips.

As we reported in 2015, the then-Commissioner issued a report questioning the continuation of the minimum wage tip credit. Governor Cuomo appears to be in favor of the elimination of tip credits; he called for the public hearings “to ensure that no workers are more susceptible to exploitation because they rely on tips to survive.” While the Governor has not made any specific proposal, it is likely that, even if the tip credit goes away, employees could still be tipped, and participate in tip pooling/sharing arrangements, but they would have to be paid at least the standard minimum wage that non-tipped employees receive.

As with the minimum wage for all employees across the state, the minimum wage for tipped employees across the state is set to increase on December 31. The Department of Labor has summarized the revisions applicable to the tipped minimum wage for hospitality employers, employers in “miscellaneous industries,” and employers in the “building service industry.” Employers should consult these summaries to determine how much they can deduct for the appropriate minimum wage tip credit as the amount varies based on the industry, job classification, location of the employee and size of the employer.

Co-authored by Noah Finkel and Cheryl Luce

Seyfarth Synopsis: On Monday, the DOL issued a Notice of Proposed Rulemaking announcing rescission of a rule that regulates tip pooling by employers who do not take the tip credit.

The DOL has issued a Notice of Proposed Rulemaking regarding the tip pooling regulations of the Fair Labor Standards Act. The FLSA allows employers to take a tip credit toward their minimum wage obligations, and employee tips may be pooled together, but pooling of tips is allowed only “among employees who customarily and regularly receive tips.” 29 U.S.C. § 203(m). The DOL took the tip pooling law a step further in 2011 when it promulgated a regulation that prohibits employers from operating tip pools even when they do not take the tip credit. The regulation states: “Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.” 29 C.F.R. § 531.52.

The DOL’s tip pooling rule has been unpopular with courts—and for good reason, as we have previously noted. Indeed, several federal courts have found that it is overbroad and invalid, excluding the Ninth Circuit. In the Notice of Proposed Rulemaking, the DOL agrees with the holdings of most courts and, while not outright stamping the rule as “overbroad” or beyond the DOL’s authority, states that the DOL is concerned “about the scope of its current tip regulations” and “is also seriously concerned that it incorrectly construed the statute in promulgating the tip regulations that apply to” employers who do not take the tip credit. The DOL’s about-face is also motivated by policy concerns. The Notice explains that removing the rule “provides such employers and employees greater flexibility in determining the pay policies for tipped and non-tipped workers [and] allows them to reduce wage disparities among employees who all contribute to the customers’ experience and to incentivize all employees to improve that experience regardless of their position.” Finally, the DOL notes that the increase in state laws prohibiting tip credits and the volume of litigation over this issue contributed to its decision to put the rule on the chopping block.

The end of the rule does not come as a surprise as both the DOL and courts have sounded the death knell this year. On July 20, 2017, the DOL issued a nonenforcement policy to not enforce the rule with respect to employees who are paid at least minimum wage. Additionally, the National Restaurant Association filed a petition for certiorari with the Supreme Court asking for review of the Ninth Circuit’s decision, which is still pending.

The DOL announced that if the rule is finalized as proposed, the rule would qualify as an “EO 13771 deregulatory action” under the Trump administration’s “two-for-one” executive order that requires federal agencies to cut two existing regulations for every new regulation they implement. Once the proposal is published in the Federal Register, interested parties will have the opportunity to provide comments regarding the Department’s proposal within 30 days. Only after these steps is the rule made final.

Co-authored by Abigail Cahak and Noah Finkel

Seyfarth Synopsis: The Ninth Circuit has created a circuit split by rejecting the DOL’s interpretation of FLSA regulations on use of the tip credit to pay regularly tipped employees, finding that the interpretation is both inconsistent with the regulation and attempts to create a de facto new regulation.

The Ninth Circuit Court of Appeals issued an important and restaurant-friendly decision rejecting the Department of Labor’s interpretation of FLSA regulations on the use of the tip credit when paying regularly tipped employees.

In Marsh v. J. Alexander’s, the Ninth Circuit addressed a number of actions brought by servers and bartenders who alleged that their employers improperly used the tip credit and thus failed to pay them the required minimum wage. Relying on DOL interpretive guidance, the plaintiffs asserted that their non-tip generating duties took up more than 20% of their work hours, that they were employed in dual occupations, and that they were thus owed the regular minimum wage for that time. The district court dismissed the case, holding that Marsh had not alleged a dual occupation and that deference to the DOL guidance underpinning his theory of the case was unwarranted. Marsh appealed.

Under the FLSA’s regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” Yet, current DOL guidance imposes time and duty-based limitations not present in the regulations: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating. The guidance goes on to state that an employer also may not take the tip credit for time spent on duties not related to the tipped occupation because such an employee is “effectively employed in dual jobs.” That guidance had been followed by the Eighth Circuit Court of Appeals and several lower courts. It created a feeding frenzy among some plaintiffs’ lawyers, causing restaurant employers to ask servers and bartenders to track their time spent on various activities down to the minute, or risk facing a collective action lawsuit in which they have to try to rebut a servers’ claims that they had spent excessive time on activities that arguably were not tip producing.

The Ninth Circuit, however, concluded in Marsh that the DOL’s guidance was both inconsistent with the FLSA regulations and attempted to create a de facto new regulation such that it did not merit deference. In particular, the court noted the regulations’ focus on dual occupations or jobs as contrasted with the DOL guidance: “[i]nstead of providing further guidance on what constitutes a distinct job, [the DOL] takes an entirely different approach; it . . . disallows tip credits on a minute-by-minute basis based on the type and quantity of tasks performed. Because the dual jobs regulation is concerned with when an employee has two jobs, not with differentiating between tasks within a job, the [DOL’s] approach is inapposite and inconsistent with the dual jobs regulation.” Moreover, the DOL guidance “creates an alternative regulatory approach with new substantive rules . . . [and] ‘is de facto a new regulation’ masquerading as an interpretation.”

In so holding, the Ninth Circuit broke with the Eighth Circuit’s 2011 decision in Fast v. Applebee’s International, Inc. and explicitly rejected the Eighth Circuit’s analysis in that case. We previously blogged about the Fast decision here.

Marsh creates a circuit split and is particularly notable coming from the frequently employee-friendly Ninth Circuit. There remains, however, contrary authority in many parts of the country, and the decision has no bearing on state laws, some of which may nonetheless follow the DOL’s reasoning. It’s also likely that this Ninth Circuit panel does not have the last word on this issue. This opinion could receive further review by the full Ninth Circuit or by the Supreme Court, and if the Supreme Court does not resolve the circuit split, other appellate courts are likely to weigh in. Regardless, the decision points out the absurdities of the DOL’s current position and demonstrates the need for guidance on the issue from the DOL once its’ appointees are in place.

Co-authored by Cheryl Luce and Noah Finkel

Seyfarth Synopsis:  An unpopular DOL regulation that prohibits employers from retaining customer tips received another blow this summer. The Tenth Circuit joined the Fourth Circuit and several district courts in holding that the FLSA does not require employers to turn over customers’ tips to employees so long as those employees are paid at least minimum wage. And parting ways with the Ninth Circuit, the court also struck down a DOL rule regulating tips even when employers do not take a tip credit.

In Marlow v. The New Food Guy, Inc., a unanimous Tenth Circuit panel (decided by two judges instead of three due to Justice Gorsuch’s ascension) held that an employer that pays its employees at least minimum wage does not violate the FLSA by retaining customer tips. The Tenth Circuit first found that the catering company, Relish, complied with the FLSA by paying the employee $12 an hour, which is above minimum wage, and held that Section 203(m) of the FLSA, which regulates tips when tips are used to satisfy the minimum hourly wage, does not apply in this case.

The Tenth Circuit also rejected a DOL regulation promulgated in 2011 that states: “Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA.” 29 C.F.R. § 531.52. The Ninth Circuit upheld this regulation in Oregon Restaurant & Lodging Association v. Perez, but the regulation has been rejected by several district courts. In this case, the Tenth Circuit concluded that the DOL tip rule exceeds the DOL’s discretion, which it can only exercise in instances of statutory silence or ambiguity. The Tenth Circuit found no silence or ambiguity in whether the FLSA regulates tips of employees who are paid at least minimum wage. The plain language of the FLSA “does not direct the DOL to regulate the ownership of tips when the employer is not taking the tip credit.”

In a footnote, the opinion picks up on a point that we have argued is fatal to the DOL’s tipping regulation: there’s no remedy for violating it. Even if an employer keeps customer tips, what can its employees recover under the FLSA? Nothing more than the minimum wage owed to them, which, if they receive cash wages of more than minimum wage, they already have received. The FLSA creates a private cause of action for violations of the minimum wage and overtime requirements. The FLSA does not create any remedies for withheld tips.

Now that a circuit split has emerged on whether the DOL tipping rule can stand, we will wait to see if Justice Gorsuch will finally have a chance to weigh in on the issue with his eight new colleagues.

 

Authored by Noah Finkel and Cheryl A. Luce

Seyfarth Synopsis: New decision from Northern District of Georgia rejects the DOL’s interpretation of the FLSA tip credit law. Holds that the FLSA does not regulate tips received by employees who are paid at least minimum wage.

Imagine that you are a restaurateur. You employ servers and bartenders who receive tips, but you pay them at least the minimum wage instead of the lower, minimum cash wage of $2.13 per hour. You are not taking a “tip credit” based on the tips your servers receive to bring them up to minimum wage. Instead, you’re directly paying the servers minimum wage (or more). If you reallocate the tips your servers receive, are you violating the FLSA?

Section 3(m) of the FLSA states that employees must retain all tips they receive if the employer takes a tip credit towards their minimum wage obligation. Prior to April 2011, courts held that Section 3(m) does not require employers to return tip money to employees if the employer does not take a tip credit. You, as the restaurateur, do not have to return tips your servers receive under the FLSA because you pay your them at least  minimum wage and the FLSA does not regulate your tip pool.

That was the case before the Department of Labor tried to regulate what the FLSA does not: tips received by employees who are paid at or above minimum wage. In April 2011, the DOL issued a rule that states, “Tips are the property of the employee whether or not the employer has taken the tip credit under Section 3(m) of the FLSA.” 29 C.F.R § 531.52. This DOL rule has been rejected by many district courts and the Court of Appeals for the Fourth Circuit, who agreed that the rule is not entitled to deference under Chevron or otherwise because the FLSA does not regulate tips of employees who are paid at least minimum wage. As we reported in February, however, the Court of Appeals for the Ninth Circuit went against the grain and upheld the rule in Oregon Restaurant and Lodging Association v. Perez. The Ninth Circuit concluded that because Section 3(m) is silent on whether employees who do not take a tip credit can reallocate tips received by employees, the DOL retained authority to regulate all tips, and the rule is reasonable and entitled to deference.

Recently, in Malivuk v. Ameripark, LLC, the plaintiff asked the Northern District of Georgia to adopt the Ninth Circuit’s approval of the DOL rule for valet attendants who received tips that were then reallocated by Ameripark to pay for overhead expenses. Ameripark argued that the DOL regulation is invalid under Chevron. The Northern District of Georgia agreed with Ameripark—and did not mince words in doing so. The court labeled the Ninth Circuit’s reasoning in Oregon Restaurant as “flawed” and stated, “The DOL Regulation violates the plain language of Section 203(m).”

Malivuk reaffirms that the DOL cannot exceed what the FLSA regulates. The FLSA regulates minimum wage and overtime pay, not wage payment like the laws of many states. If the DOL rule regulating tips received for employees who are paid at least minimum wage were to stay, it would fundamentally transform the FLSA into a wage payment law. The FLSA is not “silent” on how tips received by employees who are properly paid the minimum wage and overtime should be paid out; rather, the FLSA does not regulate these employees because it has no other remedies to offer them. The FLSA’s remedies are for payments below minimum wage and failure to pay overtime; it is not a wage payment law.

As the hospitality and other industries search for ways to share the tips collected by front-of-the-house employees like servers and bartenders with back-of-the-house employees like cooks, dishwashers, and janitors, the DOL’s far-reaching tip pool rule is an encroachment. Rulings like Malivuk allow employers to allocate tips in ways that suit their business needs.

 

Authored by Gerald L. Maatman, Jr. and Jennifer A. Riley

Seyfarth Synopsis: The U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises, in which the court rejected Plaintiff’s theory and affirmed a district court’s order granting summary judgment in favor of Defendants.

Many employers, particularly in the hospitality industry, pay tipped employees less than the minimum wage.  They do so anticipating that tipped employees will receive tips from customers that push employees’ income above minimum wage.  The FLSA and many state laws allow such a practice – often referred to as taking a “tip credit” – so long as employers meet certain conditions.

The vague nature of the statutes and regulations governing the tip credit, coupled with a lack of developed case law interpreting such statutes and regulations, has created fertile ground for litigation.  In particular, some plaintiffs’ wage & hour lawyers have sought to feast on unsuspecting restaurateurs who require tipped employees to perform side work – from wiping tables to cutting fruit to polishing brass.  Plaintiffs argue that such tasks invalidate the tip credit because they put servers, bartenders, and other tipped employees in a “dual job” or second occupation that employers must compensate at minimum wage.

Last week, the U.S. Court of Appeals for the Seventh Circuit served up some welcome relief for employers in Schaefer v. Walker Bros. Enterprises (7th  Cir. July 18, 2016), in which the court rejected Plaintiff’s theory and affirmed a district court’s order granting summary judgment in favor of Defendants.

The Seventh Circuit held that Defendants properly took the tip credit for time servers spent performing side work duties and that Defendants properly informed servers of their intention to take the tip credit by distributing an employee handbook and displaying a DOL poster.  The decision represents a significant victory for hospitality industry employers, particularly the significant number that require servers to perform end-of-shift and beginning-of-shift side work duties at the tip credit rate of pay.

Factual Background

In 2010, Plaintiff-servers brought suit against Walker Brothers contending that the restaurants violated federal and state minimum wage laws in two ways:  (1) by incorrectly using the tip credit to pay servers less than minimum wage while requiring them to perform duties unrelated to their tipped occupation; and (2) by failing to inform the servers of their intent to apply the tip credit to the servers’ wages.

Walker Brothers owns six restaurants in the Chicago suburbs that operate under the name “The Original Pancake House.”  Upon hire, Walker Brothers provides servers with an employee handbook that states, among other things, that the restaurants apply a tip credit that reduces servers’ hourly wages 40% below minimum wage.  The restaurants also display DOL-approved posters explaining the tip credit in well-traveled areas.

In addition to serving customers, servers perform side work tasks that vary, among other things, by the station to which they are assigned.  Defendants required servers, for instance, to wash and cut strawberries, mushrooms, and lemons; mix applesauce and jams, restock bread bins and replenish dispensers of milk; fill ice buckets; brew tea and coffee; wipe toasters and tables; wipe down coffee burners and woodwork; dust picture frames; and occasionally polish brass.

After the district court granted class certification, the restaurants moved for summary judgment.  The district court granted their motion finding that the side work tasks were “incidental to the regular duties of the server (waiter/waitress)” and that Walker Brothers provided notice of the tip credit by giving servers an employee handbook and displaying posters approved by the Illinois DOL.

The Seventh Circuit’s Opinion

The Seventh Circuit affirmed the district court’s judgment in favor of Walker Brothers in all respects and, in doing so, rendered an important decision for the hospitality industry.  Most significantly, the Seventh Circuit found Plaintiff’s position that none of their side work was related tipped work as “untenable.”  It held that servers engaged in making coffee, cleaning tables, and several other activities that the DOL provided as examples of duties that could be performed by persons paid at the tip credit rate.  The court reasoned “[t]hat some of our plaintiffs’ tasks may be performed by untipped staff at other restaurants does not make them unrelated as a matter of law”; rather, the “right question” is whether the tasks are “related” or “incidental” to tipped duties.  The Seventh Circuit noted that the “most problematic” duties were “wiping down [coffee] burners and woodwork and dusting picture frames,” but because the DOL gave “cleaning and setting tables” and “occasionally washing dishes or glasses” as examples of related duties, it could not categorically exclude “clean up tasks” from the definition of duties related to a server’s tipped occupation.  In any event, the Seventh Circuit concluded that it need not decide what to make of wiping woodwork or dusting picture frames because, as the record showed, the time spent on such tasks was “negligible.”  The Seventh Circuit noted that the law “does not convert federal judges into time-study professionals and require every minute to be accounted for.”  Given the flexible standards imposed by the DOL, the possibility that a few minutes a day were devoted to keeping the restaurant “tidy” did not require the restaurants to pay the normal minimum wage for those minutes.

The court also rejected Plaintiff’s “notice” claim, holding that Walker Brothers was able to satisfy all elements of the notice requirements of the statute by combining different documents that it posted or provided to servers.

Implications For Employers

The Seventh Circuit’s decision in Schaefer is a significant victory for the restaurant industry.  Before the Seventh Circuit’s decision, few courts had addressed tip credit claims, and little favorable law existed to validate employers’ regular practice of using servers to perform incidental side work tasks.  As a result of this decision and a growing body of district court decisions favoring restaurant employers, restaurant employers may be able to breathe a little easier.

Authored by Alex Passantino

All around the country, tipping practices have been coming under scrutiny.  Restaurants increasingly have abandoned their use of tip credit — and tipping — partially due to a belief that a higher wage not tied to the fluctuations of tipping is better for morale and operations, and partially due to the complexities of dealing with wage and hour compliance issues for tipped employees.  For those in the latter camp, however, the Ninth Circuit, in Oregon Rest. and Lodging Ass’n et al. v. Perez et al., just decided that the Department of Labor may regulate tip pooling even when the employer does not use the FLSA’s tip credit.

As we have reported previously, restaurant trade associations in Washington and Oregon challenged the Department’s 2011 final rule amending the tip pool regulations.  In promulgating those regulations, the Department expressly rejected a prior Ninth Circuit case, Cumbie v. Woody Woo, Inc., and stated that tips are the property of the employee whether or not the employer has taken a tip credit and that a valid tip pool may only include “those employees who customarily and regularly receive tips.”  In Woody Woo, the Ninth Circuit found that Congress intended only to limit the use of tips by employees when the employer claims a tip credit.

Relying in large part on the Woody Woo decision, the trial court in Oregon held that the 2011 regulations were invalid.  According to the district judge,  the clear intent of section 3(m) of the FLSA was “only to limit the use of tips by employers when a tip credit is taken” and because “an employment practice does not violate the FLSA unless the FLSA prohibits it.”

On appeal, the divided Ninth Circuit panel distinguished the Woody Woo decision by noting that Woody Woo was decided on the statutory language alone — it contained no discussion of the proper measure of deference to agency regulations because, at the time of the decision, there were no agency regulations.  Thus, because the statute did not prohibit the practice, the practice was not restricted.  According to the panel’s majority, the 2011 regulations filled the statute’s “silence” on the issue of whether the FLSA restricts tip pooling practices absent taking a tip credit.

The panel then proceeded to analyze whether the Department’s interpretation of the statute was “reasonable.”  Relying on legislative history and the “purpose and structure of the FLSA,” the court decided that “the DOL’s interpretation is more closely aligned with Congressional intent, and at the very least, that the DOL’s interpretation is reasonable.”

The dissenting judge criticized the majority’s rejection of Woody Woo, which the dissent viewed as binding circuit precedent.  That precedent, the dissent reasoned, held that “section 203(m) did not impose statutory interference because the plain text of section 203(m) had only imposed a condition on employers who take a tip credit, rather than a blanket requirement on all employers regardless of whether they take a tip credit.”  This clear Congressional intent, according to the dissent, ends the inquiry.  No deference — Chevron­ or otherwise — is due to the Department’s interpretation.

Almost certainly, this will not mark the end of the road for this issue.  Undoubtedly, en banc review will be sought.  In the meantime, however, employers who do not take tip credit must understand that the Department of Labor’s position — now approved by one Circuit Court of Appeals — is that the regulatory limitations on tip pooling will apply.  Those employers who are moving away from tip credit should be clear that any “service charge” or “commission” or “labor surcharge” attached to a bill is not a tip, so as to protect the employer’s ability to use those fees in a way it deems appropriate, and not subject to any tip pooling rules.  Unfortunately, even providing clarity that certain charges are “not tips” may be insufficient under certain state laws, and employers should be careful to comply with those requirements as well.