Tip-ping the Scales: New Challenge to the DOL’s Revised Tip Credit Rule

As was reported late last year, the Department of Labor (“DOL”) in 2018 published an Opinion Letter (FLSA2018-27), effectively rescinding the agency’s 80/20 tip credit rule. In general, the tip credit rule permits employers in tip-producing industries, such as the restaurant industry, to compensate employees at a minimum rate of $2.13 per hour, and to take a credit against the tips an employee receives. An employer is additionally responsible for the remainder of an employee’s wages, if any, between what the employee earned in wages and tips combined, and the federal minimum wage.

The Obama-era 80/20 tip credit rule imposed a percentage-based standard under which an employee who spent 20% or more of the employee’s working time performing non-tipped duties was entitled to compensation at no less than the federal minimum wage for such non-tipped duties. Opinion Letter FLSA2018-27 recalibrated the DOL’s approach, shifting the Agency’s compliance focus away from a rigid percentage-based analysis. Instead, the 2018 Opinion letter, as under a former Bush-era policy, suggests that the tip credit should be available to employers so long as tipped employees’ non-tip producing duties “are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.” The DOL subsequently amended its Field Operations Handbook (“FOH”) at FOH 30d00(f) to reflect this change in policy.

On March 22, 2019, however, a federal district court in the Eastern District of Arkansas took a different tack. See Esry v. P.F. Chang’s China Bistro, Inc., 2019 WL 1320789, at *6 (E.D. Ark. Mar. 22, 2019). In denying the defendant’s motion for summary judgment in a class and collective action for unpaid wages, the court declined to defer to the DOL’s FOH guidance, holding that “[t]he [DOL’s] new interpretation is not persuasive. This is so in part because the revised Handbook ‘purport[s] to change the DOL’s interpretation after years of consistently construing the Dual Jobs Regulation as limited by the 80/20 rule.’” The court also based its determination on allegedly contradictory case law interpretation of the “dual jobs” regulation, 29 C.F.R. § 531.56(e), at issue. Specifically, the court held that the Eighth Circuit’s textual analysis of the regulation in question, as set forth in Fast v. Applebee’s Intern., Inc., 638 F.3d 872, 878-79 (8th Cir. 2011), is binding. In particular, the Fast court had held that the regulatory language with respect to the phrases or terms “part of her time” and “occasionally” together “clearly place[] a temporal limit on the amount of related duties an employee can perform and still be considered to be engaged in the tip-producing occupation,” an interpretation that was squarely consistent with the 80/20 rule. By contrast, because FOH 30d00(f) places no such temporal limitations on the amount of related duties in which an individual can engage for tip credit eligibility purposes, the FOH is inconsistent with the regulatory language and with case precedent.

The court’s decision reflects an ongoing tension between standards that have fluctuated between administrations. As a result, employers, and particularly multi-jurisdictional employers, should continue to monitor how courts interpret and apply the DOL’s new guidance moving forward.