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Full 9th Circ. To Rethink Nixing DOL Tip-Credit Guidance

Law360—Cara Bayles

A confederation of waiters, bartenders and other service workers got a second shot Friday at claims they’re underpaid for tasks that don’t garner tips, when the Ninth Circuit agreed to revisit its decision favoring restaurant owners who’d challenged a 2016 U.S. Department of Labor administrative guidance.

In September, a Ninth Circuit panel found courts owed no deference to the 2016 document outlining when employers can claim tips as a credit toward the $7.25 federal minimum wage they’re required to pay workers. The panel said the DOL had attempted to “create de facto a new regulation” with its guidance, which interpreted an agency regulation to mean that employers cannot claim the credit if a worker spends too much time on duties that don’t generate tips.

But the Ninth Circuit was apparently persuaded by an en banc petition from workers who had sued their employers over the credit. They argued in a September brief that the panel’s ruling not only created a circuit split, but that it could create a dangerous precedent that may “[injure] millions of low-income employees who depend on tips to survive.” They pointed out the decision could allow employers to reduce wages to $2.13 per hour even for workers who spend much of their time performing duties that don’t earn tips.

“The majority opinion reaches into the pockets of hundreds of thousands of workers in this circuit: the people we see on a daily basis serving coffee, food and refreshments. These workers are among America’s lowest-paid and most economically vulnerable,” the petition said. “Plaintiffs-appellants contend that the food-and-beverage-service industry chisels its workers by extracting untold millions of hours of non-tipped labor — cleaning, preparing, and straightening up — while the employer claims a tip credit for those services to slash their paid wage from $7.25 to $2.13 per hour.”

In the consolidated cases, the workers are former servers and bartenders who allege that their employers improperly claimed the tip credit and, as a result, failed to pay them the required minimum wage. Six of the appeals in the consolidated cases arose from orders granting motions to dismiss, two appeals are from judgments on the pleadings and the final appeal comes from an order granting summary judgment.

The plaintiffs in the underlying cases include employees who work at P.F. Chang’s, IHOP, Denny’s and AMC Theatres.

The law guiding how to pay such workers can be murky, and in their en banc petition, the workers admitted that “there is no clear rule, but rather concepts and illustrations, which by nature provide vague and incomplete guidance.”

While the Fair Labor Standards Act requires employers to pay workers the federally designated minimum wage of $7.25 per hour, a special tip credit rule exists allowing employers to reduce the hourly pay of individuals who make more than $30 a month in tips.

The DOL has issued regulations that attempt to clarify when that rule applies. One such regulation explains that if an individual works “dual jobs” at the same establishment, the employer can’t claim the tip credit for untipped work. As an example, the regulation explains that a hotel maintenance worker who also works as a waiter at the establishment can only have the credit applied for hours spent waiting tables.

In 2016, the DOL issued a guidance explaining the regulation applied to individual tasks within a single job. It said an employer couldn’t take a tip credit for the time a worker spends on tasks that don’t generate tips if those duties exceed 20 percent of an individual’s hours worked. For example, when a waiter is required to clean bathrooms, that work doesn’t earn tips like serving customers does. Under the guidance, a worker who performs both tasks would effectively be employed in “dual jobs.”

But the Ninth Circuit panel ruled in September that the guidance muddied rather than clarified the rule, which “is concerned with when an employee has two jobs, not with differentiating between tasks within a job.”

The guidance disallowed tip credits on a minute-by-minute basis based on the type and quantity of the tasks performed, which was “inapposite and inconsistent with the dual jobs regulation,” the panel said.

But two weeks later, in an en banc petition, the workers said the court should have deferred to the DOL’s interpretation of its own regulation. They argued the guidance is part of a decadeslong effort by the DOL to clarify its rules on tippable duties and that the 20 percent rule mirrored past regulations.

The workers also noted the decision had created a circuit split on the issue, since it conflicts directly with the Eighth Circuit’s 2011 decision in Fast v. Applebee’s. They also argued the decision creates a “stark tension” with related decisions by the Fifth, Sixth, Seventh and Tenth Circuits.

The workers also criticized the panel’s “wooden” interpretation of the term “dual jobs,” noting it would be rare for workers to have “multiple discrete ‘occupations’” with the same employer. And they rejected the court’s finding that the interpretation would require employers to keep minute-by-minute tabs on the work performed, saying, “There is nothing remarkable about this.”

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The plaintiffs are represented by Outten & Golden LLP and Werman Salas PC.

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The cases are Alec Marsh v. J. Alexander’s LLC, case number 15-15791; Crystal Sheehan v. Romulus Inc., case number 15-15794; Silvia Alarcon v. Arriba Enterprises Inc., case number 15-16561; Sarosha Hogan et al. v. American Multi-Cinema Inc., case number 15-16659; Nathan Llanos v. P.F. Chang’s China Bistro Inc., case number 16-15003; Kristen Romero v. P.F. Chang’s China Bistro Inc., case number 16-15004; Andrew Fields v. P.F. Chang’s China Bistro Inc., case number 16-15005; Alto Williams v. American Blue Ribbons Holdings LLC; and Stephanie Fausnacht v. Lion’s Den Management LLC, each in the U.S. Court of Appeals for the Ninth Circuit.