By: Lee D. Moylan
On November 8, 2018, the Department of Labor issued Opinion Letter FLSA 2018-27 to resolve “confusion and inconsistent application” of Section 531.56(e) of the FLSA Regulations concerning tipped employees and the use of the tip credit under the FLSA.
By way of background, under Section 203(m) of the FLSA, employers are not required to pay “tipped employees” cash wages equal to the federal minimum wage (currently $7.25 per hour). Instead, employers may pay these employees only $2.13 per hour, and take a “tip credit” to make up the difference between that hourly rate and the required federal minimum wage. The “tip credit” cannot exceed the amount of tips actually received. The FLSA defines a “tipped employee” as any employee engaged in an occupation in which he/she customarily and regularly receives not less than $30/month in tips. In interpreting this definition, the FLSA Regulations recognize that employees could have two separate jobs – one that is non-tip-generating, such as a maintenance person in a hotel, and one that is tip-generating, such as a waiter/waitress in that hotel. The Regulations clarify that, in such a case, the employer cannot compensate the employee using the “tip credit” for any work performed in the non-tipped job. The Regulations distinguish this employee with “dual-jobs” from an individual who has one job with both tip-generating and non-tip-generating duties, such as a waitress who cleans and sets tables or makes coffee. Because it is not always clear when an employee has “dual jobs” or a single job with tip-generating and non-tip-generating duties, almost a decade ago, the DOL attempted to provide guidance to employers on this point.
Specifically, in its Field Operations Handbook (“FOH”), the DOL stated that the Regulations allow the taking of the tip credit for non-tip-generating duties, provided these duties are related to the tipped occupation. The DOL imposed a caveat to this, though. If the employee is “routinely assigned to maintenance,” or spends a “substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance,” no tip credit may be taken for the time spent performing those duties. This “rule” came to be known as the “80/20 rule.” As it has played out, however, the FOH has not provided clear guidance, but, rather, has caused confusion among courts on how to interpret the 80/20 rule. For example, some courts have held that the rule means that an employer loses the ability to take the tip credit for all hours worked by a tipped employee if the employee spends more than 20% of his/her time performing non-tip-generating work, whether or not the work is related to the tip-generating work. Other courts, though, including the Ninth Circuit, have held that the rule means only that, if an employee spends more than 20% of his/her worktime on non-tip-generating duties, just those duties may not be compensated using the tip credit.
Recognizing this confusion, last month, the DOL issued Opinion Letter FLSA2018-27. In that Opinion Letter, the DOL withdrew the 80/20 rule and clarified that, in its view, there is no limitation on the amount of non-tip-generating duties a tipped employee may perform while still being compensated using the tip credit. Rather, whether an employee may be compensated with the tip credit relates to the type of non-tip-generating duties performed. Those duties must be performed contemporaneously with the duties involving direct service to customers or for a reasonable time immediately before or after performing such direct-service duties. To assist employers in determining what types of duties fall into this category, the DOL directed employers to refer to the list of duties that are considered core or supplemental for the appropriate tip-producing occupation in the Tasks section of the Details report in the Occupational Information Network (O*NET). This list can be found at: https://www.onetoonline.org/link/summary/35-3031.00 or 29 C.F.R. §531.56(e). According to the DOL, if a duty is listed on the O*NET task list, it may be compensated using the tip credit, but, if it is not so listed, no tip credit may be applied for the time spent performing it. Still, the DOL pointed out that the de minimis rule may apply to those duties not on the O*NET task list. As a reminder, the DOL describes the de minimis rule as follows: infrequent and insignificant periods of time beyond scheduled working hours that cannot practically be ascertained need not be compensated or recorded. This applies only if the time is truly uncertain and indefinite and concerns no more than a few seconds or minutes in duration and where failing to record the time “is justified by industrial realities.”
Key take aways: It is important to note that DOL opinion letters are not binding on courts or on agencies enforcing state law. Therefore, employers should continue to monitor state and federal court decisions to ensure compliance. That said, employers have much to be hopeful about in light of FLSA2018-27. Courts often defer to the DOL’s interpretation of its regulations when the regulations, such as the tip credit regulation, are ambiguous. Courts defer when interpreting federal law, as well as state law when the state law does not impose a different or more employer-friendly rule (such as in California where employers are prohibited from taking a tip credit).