Ninth Circuit Deviates from Guidance and Other Authority on Tip Credits

We have previously discussed how the Department of Labor (DOL) often issues guidance to assist employers in applying and complying with the DOL’s various regulations. The federal courts generally follow this guidance when analyzing the related regulations, but they are not obligated to do so, as is evident from a recent ruling by the United States Court of Appeals for the Ninth Circuit.

The Fair Labor Standards Act (FLSA) includes a rule permitting employers to reduce an employee’s minimum wage to as low as $2.13 per hour and credit an employee’s tips towards the $7.25 federal minimum wage requirement, so long as the employee makes at least $30 per month in tips. The DOL issued regulations discussing the application of tip credits (1) when the employee works two different jobs for the same employer, such as a maintenance worker and a waiter, and received tips (and the credit) for one job but not for the second job, compared to (2) when the employee works one job that includes both tipped and non-tipped duties, such as a waiter who serves customers but also cleans tables or assists in the kitchen, and can receive a tip credit for this job as a whole.

The DOL subsequently released guidance on this second circumstance, explaining that the employer cannot apply tip credits if the employee is performing non-tipped duties for more than 20 percent of the total hours worked. The Eighth Circuit – which covers North Dakota, South Dakota, Arkansas, Iowa, Minnesota, Missouri, and Nebraska – followed the DOL’s guidance in a 2011 case and applied the 20 percent threshold when analyzing whether tip credits were appropriate.

However, the Ninth Circuit – which covers California, Oregon, Washington, Arizona, Nevada, Idaho, Montana, Hawaii and Alaska – recently issued an opinion finding it owes no deference to the DOL’s guidance and deviating from the Eighth Circuit’s 2011 decision. Specifically, the Ninth Circuit concluded employees cannot avoid application of the tip credit just because they perform non-tipped duties, which are intermingled with their tipped duties, more than 20 percent of the time, as these duties collectively fall under one job with related duties rather than two distinct jobs that have completely distinct duties.  In addressing the DOL guidance, the Ninth Circuit found that the actual regulation made no mention of the 20 percent threshold and the guidance, therefore, created new rules that forced employers to engage in minute-by-minute time tracking of tipped duties versus non-tipped duties that was not set forth in the actual regulation.

So what does this mean for employers? First and foremost, it is always good practice to follow DOL guidance when there is no other authority interpreting or analyzing a specific regulation.  However, with regard to applying tip credits, the Ninth Circuit’s decision illustrates that federal regulations may have different practical applications in different states; employers with operations in the Ninth Circuit states do not need to track the time employees spend on tipped versus non-tipped duties, whereas employers in other states should track these duties and ensure that the 20 percent threshold is satisfied before allocating any tip credits.  National employers with employees in various states should be mindful of these requirements, and it is in their best interest to consult with counsel to ensure that they are accurately complying with the regulations.