Ninth Circuit Limits the Use of Tip Credits

By Haley Morrison
On September 18, 2018, the Ninth Circuit, sitting en banc, considered whether 14 former servers and bartenders were entitled to back wages under the Fair Labor Standards Act (FLSA) for time spent engaged in non-tipped tasks.

The cases all had similar facts and a central question: can employers pay employees less than the minimum wage when the employees earn tips for some tasks, but not for others?

Ultimately, the Ninth Circuit held that in some circumstances, time spent on certain tasks must be paid at least at the minimum wage.

Under federal law — but not in Oregon — employers may take a “tip credit” as to employees in “tipped occupations.” The tip credit offsets employers’ obligation to pay the hourly minimum wage. In other words, companies can pay employees who make at least $30 a month in tips (i.e., a “tipped occupation”), as little as $2.13 in an hourly wage, so long as the tips bring them up to the minimum wage.

Seeking to clarify whether an employee is “tipped” or not, the Department of Labor (DOL) issued several regulations in the 1960s, including one related to employees holding “dual jobs.” The DOL said, in essence, if an employee holds two jobs, and one is tipped and the other is not, no tip credit may be taken for hours worked in the non-tipped occupation. The regulation used several examples, including a person who works both as a server and as a maintenance man; a tip credit is legal for his time as a server, but the full minimum wage must be paid for his hours working in maintenance.

In 1988, the DOL provided additional guidance in its Field Operations Handbook. The Handbook clarified that when an individual is employed in a tipped occupation and a non-tipped occupation (i.e., “dual jobs”), a tip credit is available only for the hours in the tipped occupation. Consider the server and maintenance person illustrated above.

If an employee works only in a tipped occupation, however, the employer may take a tip credit for work that is incidental to the employee’s regular duties, even if those duties do not generate tips.  In other words, it may take a tip credit for the time a server spends filling salt shakers, making coffee, and occasionally washing dishes.

But, if the time spent on such “incidental” tasks becomes significant, meaning more than 20% of the employee’s time, no tip credit may be taken for the time spent on those related-but-not-tipped duties.

And, finally, an employer may not take a credit for the time that a tipped employee spends on work that is not related to tipped occupation, even if s/he does not hold dual jobs. For example, a company cannot take a tip credit for the time a server spends washing windows or cleaning bathrooms.

So what happened here?

Plaintiffs worked as servers and bartenders at a variety of establishments. Named Plaintiff Marsh was a server who worked approximately 32 hours per week, and spent almost half of his time on tasks that did not produce tips, such as: cutting and stocking fruit, cleaning the soft drink dispenser, stocking ice, taking out the trash, and cleaning restrooms. But his wages — $4.65 per hour — included tip credit for all of his working time.

Marsh filed a lawsuit alleging that his employer’s use of the tip credit violated the FLSA because he was a dual employee and/or he spent more than “occasional” time on incidental or unrelated tasks.

The Ninth Circuit first tackled the DOL regulations and Handbook guidance. It held that both are entitled to deference, meaning they provide the framework by which the Court must address the questions at hand.

Applying the regulations, Handbook, and various opinion letters, the Court then concluded that Marsh had stated two valid claims for relief: (1) he was entitled to the full minimum wage, without a tip credit, for the time in excess of 20% of his workweek spent on related but untipped tasks (e.g., cutting fruit), and (2) he was entitled to the full minimum wage, without a tip credit, for the time he spent on unrelated tasks (e.g., cleaning bathrooms).

Unlike many states, Oregon does not allow tip credits against the minimum wage under any circumstances. This ruling brings federal law and FLSA claims a little closer to the prohibition we see here in Oregon.

If you have any questions related to tip credits — or the similar issue of tip pooling, which has likewise been a hot topic in the Ninth Circuit — please contact one of our L&E lawyers.

This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have any questions regarding this update, or for more information about this topic, please contact an attorney in our Labor & Employment Practice Group, or the attorney with whom you normally consult.

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