Tip Credits: Split Between the Ninth and the Eighth and Tenth Circuits by Jason R. Mau


Tip Credits: Split Between the Ninth and the Eighth and Tenth Circuits


By Jason R. Mau

            One of the main requirements under the Fair Labor Standards Act (FLSA) compels employers to compensate their employees in a manner which guarantees that the employees make at least the minimum wage for each hour worked.  Normally, this is accomplished by paying non-exempt employees on a direct hourly basis a wage at or above the federal (and Idaho) minimum wage rate of $7.25.  Employers using this basic approach can easily check to ensure their employees are being legally compensated; they can just divide the gross pay in a work period by the hours worked and confirm that the employee is being paid at least $7.25.  These calculations are not so easy for employers of tipped employees, such as in restaurants and hotels.  These employers have the option to pay a reduced hourly wage of at least $2.13, provided the employees receive enough tips to raise them to that hourly $7.25 mark.  The difference, credited towards the minimum wage, is called the “tip credit.”  If the tips are not enough to get them to that mark, the employer must pay the difference, but in most cases, any excess tips go to the employee.  However, as we’ll see in a couple of recent cases, some exceptions regarding tips might apply when an employee is already receiving a salary at or above minimum wage.

Dual jobs case

            One of those exceptions was just reviewed by the Ninth Circuit (whose decisions apply to Idaho employers).  The situation at question in the consolidated case, Marsh v. J. Alexander’s LLC, was compensation paid to servers and bartenders who split time between related duties, some of which were not focused on the generation of tips.  The Department of Justice (DOL), the federal agency overseeing the enforcement of the FLSA, has developed rules for these working arrangements, called the dual jobs regulations, to help employers determine whether they are properly compensating their employees.  The employees in this case, originating in Phoenix, Arizona, argued that their employers failed to pay them appropriate wages. 

            The tip credit provision is applied differently for employees that work for one employer in two different jobs under the DOL’s dual jobs rules.  The example given in the regulations is where a janitor in a hotel also serves as a waiter.  In such an arrangement, the tip credit will not be applied to the non-tip-producing time periods.  In an attempt to provide further guidance on whether an employee was working dual jobs, the DOL presented an interpretation in its Wage and Hour Division’s Field Operations Handbook (FOH) in 2016, stating that where facts indicate that a tipped employee spends more than 20 percent of the total hours worked on these non-tipped jobs, the employer may not apply the tip credit. 

            Thus, one waiter argued that he spent more than 20 percent of the time brewing tea, brewing cups of coffee, cutting and stocking lemons and limes, cleaning the drink dispenser, replacing soft drink syrups, stocking ice, wiping tables, taking out trash, scrubbing walls, sweeping floors, and cleaning restrooms over the course of a week.  His employer took a tip credit for the entire time the waiter spent at work, including these tasks not directly connected with generating tips, but the employer argued that the tip credit was improperly applied to the time spent on the related duties.  The waiter argued that he should be paid a wage of $7.25 per hour for the time spent on these other duties and that the tip credit should not be applied to those periods. The district court disagreed with his argument, refusing to follow the DOL’s FOH interpretation, and alternatively holding that no violation had occurred because for any given workweek, the wage paid divided by the total hours worked still exceeded the minimum wage rate.  The case was appealed to the Ninth Circuit.

The Ninth Circuit’s decision

            The appellate court first reviewed the DOL’s FOH interpretation essentially applying a 80/20 split of duties for the tip credit.  The Court looked back to DOL opinion letters which issued case-by-case determinations of whether a worker was employed in two separate occupations for an employer.  The Court recognized that the DOL had previously looked for clear dividing lines between separate categories of jobs to analyze these dual job cases, but more recently had moved to more of a “time sheet” approach, which required employers to track the time of its employees duty-to-duty, minute-by-minute, to determine tip credit issues.  This approach eventually ended up as the DOL’s official interpretation in the FOH.  Basically, the Ninth Circuit recognized that the DOL’s interpretation shifted from a determination of whether there were different, distinct jobs performed by the employee, to whether there were different intermingled tasks performed within the employee’s shift. 

            The Court ruled that this shift in its interpretations was a de facto new regulation, i.e., the DOL’s interpretation was viewed like it had adopted a new regulation without going through the administrative rule-making requirements.  The DOL’s transition from “job” and “occupation” to “activities” and “duties” was viewed as inconsistent with the statute.  “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.” 

Split from previous Eighth Circuit decision

            The Ninth Circuit panel’s majority decision refused to follow a previous case in the Eighth Circuit that had applied the DOL FOH dual jobs’ interpretation.  The Eighth Circuit, and dissenting opinion in Marsh, determined that applying the DOL’s 20 percent requirement to overall tasks for determining whether an employee has a second job was a reasonable approach because of an ambiguity in the law applying undefined terms and conflicting examples.  The dissent thus read the interpretation to require employers to pay the full minimum wage to employees when they spend a substantial amount of time performing non-tipped work, calling the Eighth Circuit’s decision a persuasive opinion requiring deference to the DOL’s important guidance.  For support, the dissent cited to other FLSA temporal limitations that have been interpreted consistently by the DOL and Congress to also require a 20 percent threshold. 

            The majority though, was unmoved by the temporal requirement because it had not been enacted by Congress or properly promulgated by the DOL through notice and comment rulemaking.  The consolidated cases were vacated and returned to the district court to allow the plaintiffs the opportunity to show that there was a separation between maintenance work before and/or after direct customer interaction that could rise to the level of a dual job. 

Split on other tip credit issues

            A split from Ninth Circuit determinations related to the tip credit is also illustrated in a recent Tenth Circuit case.  In Marlow v. The New Food Guy, Inc. d/b/a Relish Catering, the tip credit issue was whether tips were required to be shared with the servers if the servers were already compensated with a base wage higher than the minimum wage.  The caterer collected tips from customers during catering events but did not share them between the servers employed for the events.  One server filed a lawsuit arguing that the FLSA prohibited her employer from retaining the tips.

            The Tenth Circuit read the applicable tip credit provisions to mean that a tip credit only applied when the employer actually seeks to reduce the minimum wage obligation by claiming a credit for tips received by the employee.  The Court held that since the caterer already paid the employee more than the minimum wage for her duties without regard to tips, the FLSA does not restrict the employer’s use of the tips.  To reach the decision, the Tenth Circuit had to find another regulation at issue improper and beyond the DOL’s authority to adopt and enforce, which otherwise states that the employer is prohibited from using an employee’s tips, whether or not a tip credit was applied.  This application is in direct opposition to a previous Ninth Circuit case.   

            The Ninth Circuit held in Oregon Restaurant & Lodging Association v. Perez, that this same regulation at issue in Marlow actually prohibited an employer from enforcing tip-pooling arrangements.  The regulation was upheld by the Ninth Circuit in Perez to prohibit an employer from forcing tipped employees to share their tips with employees that are not customarily tipped.  Here the tip credit provision (that tips are the property of the employee whether or not the employer takes a tip credit under the FLSA) was presumed valid and upheld. 

The bottom line

            Obviously, for employers that employ tipped workers in Idaho, these Ninth Circuit cases illustrate that applying FLSA tip credit provisions is not a task that should be taken lightly.  Employers should continue to pay careful attention to a tipped employee’s hours, wage, tips and tasks whether the employee is being compensated at the base wage of $2.13 or at the minimum wage level. 

            Even for employers that do not employ tipped workers, these split interpretations between the Circuit Courts should remind Idaho employers that Ninth Circuit precedent may require different modes of operation from those incorporated in neighboring areas.  Until these splits are decided by the United States Supreme Court, as may be the case in the Marlow/Perez issue that has been appealed to the high court, Idaho employers are required to follow the precedent applied by the Ninth Circuit.  If you have any question as to the standard that should be applied within your organization, you should review your application of the tip credit with a legal or HR expert.