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DOL's Tip Guidance Protects Workers' Wages, 9th Circ. Told

Law360—Cara Bayles

Waiters, bartenders and other service workers told the en banc Ninth Circuit on Tuesday that they’re underpaid for tasks that don’t garner tips, saying a three-judge panel erred in favoring restaurant owners who’d challenged a 2016 U.S. Department of Labor administrative guidance on minimum wage exemptions for tipped employees.

Representing the workers, Jahan Sagafi of Outten & Golden LLP asked the court to reverse a September decision that found courts owed no deference to a 2016 DOL document outlining when employers can claim tips as a credit toward the $7.25 federal minimum wage. The panel had found the DOL attempted to “create de facto a new regulation” with its guidance, which interpreted an agency regulation to mean that employers cannot claim the credit and pay as little as $2.13 an hour to a worker who spends more than 20 percent of working hours on duties that don’t generate tips.

At Tuesday’s en banc session in San Francisco, Sagafi said that the language of Fair Labor Standards Act was ambiguous and that the DOL should be shown deference in its interpretation of what work qualifies for the tip credit program. Over the past 50 years, he said, the department has sought to clarify the minimum wage exception through a series of regulations and guidances. That process led to the 20 percent rule, which Sagafi said was a reasonable interpretation of the FLSA, since a server who doesn’t interact with customers isn’t generating tips.

“Once I as a restaurant owner force my waitress to stay away from customers and go to a room and fill 100 salt shakers and fill 100 ketchup bottles for two hours during the course of the day, more than 20 percent, she is not seeing the customer,” he said. “It has transformed into a different job. She is an expeditor or a kitchen staff. She is something, but she is not a waitress.”

The former servers and bartenders who brought the nine consolidated cases 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 FLSA requires employers to pay workers the federally designated minimum wage of $7.25 per hour, the special tip credit rule allows employers to reduce the hourly pay of individuals who make more than $30 a month in tips. But, the workers say, the law is ambiguous about when the rule applies.

The DOL has issued regulations that attempt to clarify that point. 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 his or her server job.

In 2016, the DOL issued a guidance explaining the regulation applied to individual tasks within a single job. That meant 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.”

In September, a Ninth Circuit panel sided with U.S. District Judge Stephen M. McNamee’s ruling that the DOL’s 2016 interpretation of the FLSA was owed no deference under the U.S. Supreme Court’s 1997 Auer v. Robbins decision, since the guidance is not consistent with the regulation it purports to clarify. He threw out the case for failure to state a claim.

The Ninth Circuit granted en banc review in February.

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... Judge M. Margaret McKeown said under that analysis an employee could get $30 in tips on day one, then spend the rest of the week in a backroom not earning any tips.

“Why isn’t giving some baseline for this a reasonable interpretation of how to execute the legislation?” she asked.

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Sagafi, too, faced questions about the practical application of the 20 percent rule. Judge Kim Wardlaw asked how employers or employees would keep track of tipped and untipped work. He answered that a waitress could still mop the floor of a restaurant before it opens, but would first clock in at the minimum wage for time spent not interacting with customers.

“Then, when they get their first customer, they just go over to the register, they use their fingerprint, type in an ID, swipe a card — with today’s technology, it could take four seconds — and she’s shifted over to the tip credit rate,” he said. “So she started at $7.25, then shifted over to $2.13 as soon as that customer comes. From that point on, she’s definitely in 20 percent compliance, because a restaurant that’s faithfully trying to comply with the law is not going to send her into the backroom to the kitchen for an hour and a half. It’s going to let her do her job.”

The workers are represented by Outten & Golden LLP.

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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, case number 16-15118; and Stephanie Fausnacht v. Lion’s Den Management LLC, case number 16-16033, each in the U.S. Court of Appeals for the Ninth Circuit.

--Additional reporting by Vin Gurrieri and Ben James. Editing by Adam LoBelia.

Additionally, you can view the arguments on YouTube here: https://www.youtube.com/watch?v=0VZQSHGzjAM&feature=youtu.be