Appellate Court Hits Tipped Workers

On September 6, 2017, the Ninth Circuit in Marsh v. J. Alexander’s LLC, No. 15-15791 (9th Cir. 2017) dealt a blow to tipped workers. The Court rejected U.S. Department of Labor (DOL) regulatory guidance that would have strengthened tipped workers’ claims to full minimum wage for the hours spent working outside the scope of tipped work. Currently, unlike California law (which rejects such a notion), the federal Fair Labor Standards Act (FLSA) allows employers to reduce a tipped worker’s wages based on what that worker earns in tips, thereby passing the payment of wages to the customer. This wage reduction for employers is called a “tip-credit.” The DOL’s interpretation of this provision would have made it so that the tip-credit would not apply to the hours an employee spent doing non-tipped work. In other words, when a waiter spends time cleaning, taking out trash, folding napkins and other non-tipped work, the DOL interpretation would have considered this type of work a “dual job,” separate from the employee’s tipped work, for which the worker is entitled to receive full minimum wage. The Ninth Circuit disagreed with the DOL’s interpretation, a decision further disempowering low-wage workers.

Tip-credit Explained

The FLSA generally requires employers to pay a cash wage of $7.25 per hour to their employees. 29 U.S.C. § 206(a)(1)(c). But where an “employee engage[s] in an occupation in which he customarily and regularly receives more than $30 a month in tips,” id. § 203(t), his or her employer may pay a reduced cash wage and claim the employee’s tips as a credit towards the $7.25 per hour minimum, id. § 203(m).

As part of the DOL’s clarification of the statutory phrase “more than $30 a month in tips,” the DOL promulgated the “dual jobs” regulation, which maintains that an employee can be “employed in a dual job.”. 29 C.F.R. § 531.56(e). The regulation provides that if the employee is engaged in one occupation in which “he customarily and regularly receives at least $30 a month in tips,” and is also engaged in a second occupation in which the employee does not receive the required amount of tips, then the employer can take a tip credit only for the first occupation. Id. To further clarify enforcement, the DOL provided guidelines in its Field Operations Handbook (“FOH”), of 29 C.F.R. 531.56(e) to interpret the regulation.

The FOH provides that “an employer may not take a tip credit for the time that a tipped employee spends on work that is not related to the tipped occupation.” FOH § 30d00(f) (2016). For example, the FOH states that “maintenance work (e.g., cleaning bathrooms and washing windows) are not related to the tipped occupation of a server; such jobs are nontipped occupations.” Id. As such, the FOH would support the conclusion that the employee is effectively employed in “dual jobs.” The Ninth Circuit, however, takes issue with this interpretation.

The Ninth Circuit points out that the DOL regulation itself provides two examples of situations where an employee is not employed in dual jobs: (1) “a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses”; and (2) 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.” 29 C.F.R. § 531.56(e). These examples appear to come at odds with the FOH, especially applied to the facts in Marsh.

Marsh Challenge to Tip Credit Application to Non-Tipped Work

In Marsh, plaintiffs argued in reliance on the DOL guidance that certain job-related duties that were not tipped work should be excluded from the FLSA tip credit, and plaintiffs should be paid the minimum wage for the time engaged in these distinct duties. Marsh, No. 15-15791 at 15. Plaintiffs contended that the defendant employer should pay its servers minimum wage – without a reduction for tips - when the servers engaged in duties such as stocking food, taking out trash, sweeping floors, wiping down tables and walls, or other tasks that require no customer interaction. Id.

The Ninth Circuit court disagreed and held that the FOH was not entitled to deference because the “dual jobs” regulation is unambiguous. See Auer v. Robbins, 519 U.S. 452, 462 (1997) (holding that courts should consider agency guidance in cases where the regulation is ambiguous); see also Chase Bank USA, N.A. v. McCoy, 562 U.S. 195, 208 (2011). Looking back to the FLSA and the “dual jobs” regulation, the court determined that the dual jobs regulation interprets § 203(t)’s reference to employees “engaged in an occupation” to mean employed in a “job,” not performing an activity. See 29 C.F.R. § 531.56(e) (emphasis added). Furthermore, citing Abramski v. United States (2014), the Court wrote that “nothing in the FLSA’s ‘context, structure, history, [or] purpose’ suggests that Congress intended to use the term ‘occupation’ in § 203(t) to mean discrete duties performed over the course of the day.” Abramski v. United States, 134 S. Ct. 2259, 2267 (2014). Based on the regulation, the Ninth Circuit determined that plaintiffs could not state a claim by alleging that their discrete tasks or duties comprised a dual job.

The Future for Tipped Workers

Marsh illustrates the continuing controversy around the tip-credit provision, including its discriminatory effects and how it continues to push costs of labor onto the consumer. In its interpretation of the tip credit, the Marsh Court limits the ability of the minimum wage to protect the well-being of low-wage service workers, perpetuating a system that has grown the ranks of the working poor. For employees living hand-to-mouth, being paid at least the minimum wage may be the difference between making rent and eviction, eating and starving, providing for children or having them under the care of the state.