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.
On September 6, 2017, the Ninth Circuit Court of Appeals declined to accord deference to the U.S. Department of Labor's (DOL) interpretation of its "dual jobs" regulation. The court reasoned that the interpretation, as articulated in the DOL's Field Operations Handbook (FOH), was inconsistent with the dual jobs regulation and attempted to create a de facto new regulation. The appellate court rejected the FOH's requirement that employers evaluate employee work on a duty-by-duty and minute-by-minute basis to determine whether an employer may take a tip credit for specific time worked. The court favored the DOL's earlier guidance on the regulation, which instructed employers to look for a "clear dividing line" to distinguish between when an employee is engaged in a customarily tipped occupation versus a second and separate non-tipped occupation.
To provide context to this ruling, it is helpful to first understand the relevance of classifying an employee as a "tipped employee" and the "dual jobs" regulation and guidance.
Tipped Employees and Tip Credits
Section 203(t) of the federal Fair Labor Standards Act (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." When an employee is a tipped employee, absent state or other federal restrictions, an employer may fulfill part of its hourly minimum wage obligation to the tipped employee by taking a credit for the employee's tips if the employer: (1) pays a cash wage to the tipped employee of at least $2.13 per hour; (2) pays additional wages to bring the employee's wages up to the current federal minimum in the event the tip credit is insufficient to do so; (3) informs the employee of the tip-credit rules; and (4) permits the employee to retain all tips he or she collects.
"Dual Jobs" Regulation and Guidance
In an effort to clarify § 203(t)'s "tipped employee" provision, the DOL promulgated a regulation addressing the application of the tip credit provision to the situation in which an employee works for an employer in two different jobs or occupations.1 This "dual job" regulation provides that when an employee is employed in more than one occupation for the same employer, no tip credit may be taken for the hours the employee is engaged in a job wherein he does not customarily and regularly receive at least $30 a month in tips.
Following the promulgation of the dual job regulation, employers requested guidance from the DOL regarding how to determine whether employees are engaged in a single occupation. The DOL's guidance came in the form of a series of Opinion Letters. Though the Opinion Letters provided case-by-case guidance, general principles to be evaluated emerged from these determinations. First, the DOL deemed an employee was engaged in two occupations when there was a "clear and dividing line" between the two different types of duties, such as when one set of duties was performed in a distinct part of the work day. Second, the DOL considered whether an employer assigned a set of duties to a single employee, and whether the duties occupied a significant portion of the employee's time.
Field Operations Handbook's New Requirements on Employers
The DOL provided revised guidance to its field officers on the issue of "dual jobs" in its 1988 FOH. This revision provided that where tipped employees spend in excess of 20 percent of their time in preparation work or maintenance, no tip credit may be taken for the time spent in such duties.2 Thus, instead of determining whether an employee was engaged in two jobs for purposes of finding a "clear and dividing line," the FOH in essence required an employer to sort an employee's tasks into two categories (tip-generating and not tip-generating) and to determine whether the non-tip-generating tasks take up more than 20 percent of the time worked. The current FOH also provides that no tip credit can be taken for time spent on duties that are "not related" to generating tips.3
The Ninth Circuit Weighs in: Marsh v. J. Alexander's LLC
The plaintiff in Marsh v. J. Alexander's LLC, No. 15-15791, 2017 WL 3880742 (9th Cir. Sept. 6, 2017), was a waiter at a restaurant in Arizona who asserted that he spent over 20 percent of his time performing what the FOH defines as "related but not tip-generating activities" and that he performed several "not related" activities as well. Based on these allegations, the waiter asserted that pursuant to the FOH, he was entitled to non-tip-credited pay for every minute he spent performing such tasks. Thus, the issue before the Ninth Circuit was whether the FOH should be given deference in interpreting the "dual jobs" regulation." The Ninth Circuit determined that it should not.
The court explained that although generally courts defer to an agency's interpretations of its own ambiguous regulations, the exception to this rule is when the agency's interpretation is "plainly erroneous or inconsistent with the regulation." Auer v. Robbins, 519 U.S. 452, 461 (1997). Further, courts must always ensure that the interpretation is not inconsistent with a congressional directive. Mines v. Sullivan, 981 F.2d 1068, 1070 (9th Cir. 1992).
With this in mind, the court explained that the "dual jobs" regulation itself interpreted § 203(t)'s language "engaged in an occupation" to mean "job," not performance of individual "duties." When the regulation refers to minute-by-minute tasks or activities, it uses the term "duties" rather than occupation. Further, the interpretation of "occupation" to mean "job" is consistent with the statute's most natural meaning.
The FOH, alternatively, takes an entirely different approach. It parses an employee's tasks into three separate categories and then disallows tip credits on a minute-by-minute basis based on the type and quantity of the task performed. Accordingly, the court held that because 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. Therefore, the court declared that the FOH was "de facto a new regulation" masquerading as an interpretation, and Ninth Circuit declined to defer to it.
The Ninth Circuit's Marsh decision is a departure from that taken previously by the Eighth Circuit.4 The Eighth Circuit found that the dual jobs regulation itself was ambiguous and therefore interpretive deference to the DOL was warranted. The Ninth Circuit expressly disagreed with the Eighth Circuit's reasoning, explaining that the Eighth Circuit failed to consider the regulatory scheme as a whole and therefore missed the threshold question of whether it was reasonable to determine whether an employee is engaged in a second "job" by time-tracking and categorizing an employee's discrete tasks.
The Ninth Circuit concluded its opinion by noting that it was not holding that other DOL guidance does not warrant deference, citing specifically to the principles and guidance set out by the DOL in the Opinion Letters on the dual jobs regulation.
The Ninth Circuit includes the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington. Of these states, however, 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 the tip credit may assign some non-tip generating duties to tipped employees and still take the tip credit for the time spent on such activities, without being unduly concerned about recording how tipped employees devote their working time on a minute-by-minute basis. However, employers must make sure that tipped employees are primarily focusing their activities on customer service and activities that enhance customer service. Employers must still be mindful of the "dual jobs" regulation, and should not permit or require tipped employees to perform duties that are customarily performed by employees in non-tipped positions.
Because the Ninth Circuit has expressly disagreed with the Eighth Circuit on this issue, it is possible that the Supreme Court may someday be asked to resolve this split. Until that happens, however, employers outside the Ninth Circuit must continue to approach this issue with caution, because other courts may choose to follow the Eighth Circuit rather than the Ninth Circuit.
1 29 C.F.R. § 531.56(e).
2 FOH § 30d00(e) (1988).
3 FOH § 30d00(e) (2016).
4 Fast v. Applebee's Int'l, Inc., 638 F.3d 827 (8th Cir. 2011).