Review Tip-Credit Practices in Arizona, Hawaii and Idaho

Full 9th Circuit approved 80/20 rule for tipped employees

By Carly Nese, David B. Jordan and Daniel B. Boatright © Littler September 25, 2018
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Review Tip-Credit Practices in Arizona, Hawaii and Idaho

Many years ago, the U.S. Department of Labor (DOL) issued guidance known as the "20-pecent rule" or "80/20 rule," which provides that when tipped employees spend in excess of 20 percent of their workweek on non-tip-earning tasks, no tip credit may be taken for the time spent in such duties. 

The 20 percent rule has been the subject of much litigation in courts across the country. In September 2017, a three-judge panel of the 9th U.S. Circuit Court of Appeals rejected the DOL's guidance, finding that it was not entitled to any deference. A year later, on Sept. 18, the full 9th Circuit reversed the earlier three-judge panel decision and held that the DOL guidance was entitled to deference, meaning that the 20 percent rule is alive and well (at least in the 9th 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) nontipped tasks unrelated to serving and bartending, such as cleaning toilets; or (2) nonincidental tasks related to serving or bartending, such as hours spent cleaning and maintaining soft drink dispensers in excess of 20 percent of the workweek.

The full 9th Circuit sided with the plaintiffs and explained that the "dual-jobs regulation establishes that an employee is entitled to full minimum wage for any time spent in a nontipped occupation," and that the "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 8th 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 9th 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 9th Circuit includes 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 nontipped positions.

Relatedly, a challenge to the DOL's 80-20 rule that was 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 5th Circuit Court of Appeals.   

Carly Nese is an attorney with Littler in Los Angeles. David B. Jordan is an attorney with Littler in Houston. Daniel B. Boatright is an attorney with Littler in Kansas City, Mo. © 2018 Littler. All rights reserved. Reposted with permission. 

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