Full 9th Circuit Approves "20% Rule" for Tipped Employees

Many years ago, the U.S. Department of Labor (DOL) issued guidance known as the "20% Rule" or "80/20 Rule," which provides that, where tipped employees spend in excess of 20% of their workweek on non-tip-earning tasks, no tip credit may be taken for the time spent in such duties.  The 20% Rule has been the subject of much litigation in courts across the country.  In September 2017, a three-judge panel of the Ninth Circuit Court of Appeals rejected the DOL’s guidance, finding that it was not entitled to any deference.1 A year later, on September 18, 2018, the full Ninth Circuit reversed the earlier three-judge panel decision, and held that the DOL guidance was entitled to deference,2 meaning that the 20% Rule is alive and well (at least in the Ninth Circuit). 

The lead plaintiff (who was joined on appeal by employees of other food service companies), was a server at dining chain J. Alexander’s. In addition to serving customers, he alleged that his duties included related but untipped tasks including cutting lemons and limes, cleaning soft drink dispensers, cleaning bathrooms, and taking out the trash.

The plaintiff argued that the employer abused the tip credit provision by paying staff a reduced tip credit wage and treating them as tipped employees when they were engaged in either (1) non-tipped tasks unrelated to serving and 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.

The full Ninth Circuit sided with the plaintiffs and explained "[t]he dual-jobs regulation establishes that an employee is entitled to full minimum wage for any time spent in a nontipped occupation," and that "[t]his provision prevents employers from paying maintenance workers as little as $2.13 an hour, simply because they also happen to work as servers." The court held that the DOL foreclosed an employer’s ability to engage in this practice by promulgating the "dual jobs" regulation, 29 C.F.R. § 531.56(e), and subsequently interpreting that regulation in its 1988 Field Operations Handbook, to what is now known as the 80/20 rule.

Ending a split with the Eighth Circuit on this issue, the full court held that the DOL’s interpretation in the guidance was entitled to Auer deference—which allows courts to defer to an agency's interpretation of its own regulation unless it is "plainly erroneous" or "inconsistent with the regulation"—because the regulation was ambiguous and the guidance’s interpretation "is both reasonable and consistent with the regulation." The DOL acted within bounds when it issued the guidance and its accompanying regulation, according to the Ninth Circuit, explaining further that, "[t]he dual-jobs regulation establishes that an employee is entitled to full minimum wage for any time spent in a nontipped occupation."

The Ninth Circuit includes the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington. Of these states, only Arizona, Hawaii and Idaho permit employers to take a tip credit. In light of the Marsh ruling, employers in Arizona, Hawaii and Idaho that seek to take a tip credit should consider whether they should evaluate a tipped employee’s duties on a minute-by-minute basis and whether tipped employees are primarily focusing their activities on customer service and activities that enhance customer service. Employers should not permit or require tipped employees to perform duties that are customarily performed by employees in non-tipped positions.

Relatedly, a challenge to the DOL’s "80-20 rule" filed in July 2018 by the National and Texas Restaurant Associations is currently pending in the Western District of Texas, which may ultimately lead to consideration by the Fifth Circuit Court of Appeals.   

See Footnotes

1 See Rick D. Roskelley and Kathryn B. Blakey, Ninth Circuit Rejects DOL's Interpretation of the "Dual Jobs" Regulation for Tipped Employees, Littler Insight (Sept. 13, 2017).

2 Marsh et. al v. J. Alexander’s LLCet al., No. 15-15791 (9th Cir. Sept. 19, 2018).

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.