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Ninth Circuit Rejects DOL's Interpretation of Tip Credit Rule

    Client Alerts
  • October 09, 2017

Employees who receive gratuities may qualify for a special federal minimum wage set well below the standard $7.25 per hour. Employers are entitled to use the employees’ tips to reach the full minimum wage under the Department of Labor’s tip credit rules. The tip credit regulations also deal with situations where the employee works at two separate jobs, one of which involves tipped work and the other does not. In these circumstances, the employer essentially must track time spent in the two jobs and pay the full minimum wage for the non-tipped job, without using the tip credit to make up the difference.

Last month in a 2-1 decision, the Ninth Circuit Court of Appeals rejected a DOL interpretation of the dual job regulation that requires employers to track time spent on various tasks within the same general job. In Marsh v. J. Alexander’s LLC, the plaintiffs filed a collective action case on behalf of servers and bartenders, alleging that their employer improperly used the tip credit to avoid paying them the full federal minimum wage for a portion of their job activities. In this case, the plaintiffs alleged that they spent a substantial portion (although below 50 percent) of their working time involved in non-tipped activities such as food preparation, restocking, and cleaning. The plaintiffs pointed to a DOL field investigation handbook that instructs investigators to require employers to separately track non-tipped activities under the dual job rule when they exceed 20 percent of the employee’s working time.

The district court concluded that the DOL interpretation was not entitled to deference from federal courts and rejected the claim, holding that the plaintiff only worked one job. The court said that the employer could use the tip credit to cover federal minimum wage for all work, including the non-tipped activities. On appeal, the Ninth Circuit agreed with this reasoning but remanded the matter for further proceedings.

In its decision, the Ninth Circuit concluded that the DOL interpretation improperly attempted to amend the dual job regulation without a formal rulemaking process. By definition, the dual job rule applies to two separate jobs and not different tasks performed within the same general job. Therefore, the 20 percent rule has no validity, and the plaintiffs must demonstrate that they worked two separate jobs in order to avoid application of the tip credit to all of their work. The court remanded the case in order to allow the plaintiffs to file amended pleadings to this effect.

This decision is contrary to a recent Eighth Circuit case that followed the DOL interpretation. This split may give the U.S. Supreme Court the opportunity to weigh in on the tip credit rule. In the meantime, these tip credit cases will continue to vex employers in the hospitality industry.