United States: Hospitality Employers Beware: Confusion Of The Use Of The Tip Credit Persists

Last Updated: September 18 2017
Article by Michael Starr

Michael Starr is a Partner for Holland & Knight's New York office


  • The Ninth Circuit recently rejected federal Department of Labor (DOL) interpretive guidance that banned employers from using the federal tip credit for time spent on non-tip-generating activities if those tasks exceed 20 percent of the employee's working time.
  • Hospitality employers with multi-state operations must now deal with two conflicting interpretations of the federal law concerning permissible and non-permissible use of the federal tip credit, as well as uncertainty in states for which there is no federal appellate court ruling, and possible state law variations.
  • Employers must exercise caution because other courts follow the DOL interpretation, and some state labor departments have adopted their own version of the 20 percent limit.

A nettlesome issue in the hospitality industry in recent years has been the extent to which waiters, waitresses and other tipped employees can engage in tasks related to their tipped occupations but not actually directed toward producing tips (such as, preparatory work and cleanup) without losing eligibility for the federal tip credit to satisfy the minimum wage. The Ninth Circuit recently rejected federal Department of Labor (DOL) interpretive guidance that banned employers from using the federal tip credit for time spent on non-tip-generating activities if those tasks exceed 20 percent of the employee's working time. Employers, though, must exercise caution because other courts follow the DOL interpretation, and some state labor departments have adopted their own version of the 20 percent limit.

Under the "tip credit" provision of the Fair Labor Standards Act (FLSA), an employer satisfies its obligation to pay the minimum wage by taking a credit for tips received by a "tipped employee." A "tipped employee" is defined as "any employee engaged in an occupation in which he [or she] customarily and regularly receives more than $30 a month in tips." 29 U.S.C. §203(t). In interpreting that statutory provision, the DOL long-ago enacted a regulation, 29 C.F.R. §531.56(e), governing situations in which a single employee had two different jobs: one tipped and the other not – such as, someone doing maintenance in a hotel some of the time, but also working as a waiter at other times. The regulation requires that the tip credit be applied only for the time that the employee is engaged as a waiter and not time spent as a maintenance worker. The regulation, however, distinguishes that from, for example, a waitress who spends part of her time doing what is commonly called "side work," such as cleaning and setting tables, toasting bread, making coffee, folding napkins and the like. According to the regulation, those tasks are "related duties" to the tipped occupation, even though they are not themselves "directed towards producing tips."

In Marsh v. J. Alexander's LLC, 2017 WL3880742 (9th Cir. 9/6/2017), the Ninth Circuit held that it would not extend judicial deference to DOL enforcement guidance that disallowed a tip credit against the federal minimum wage for time spent in "preparation work" or other activities "related" to a tipped occupation but not themselves "directed toward producing tips" (such as, for example, side work for a waiter or waitress), if those duties exceeded 20 percent of the tipped employee's working time. The court reasoned that the guidance was inconsistent with formal DOL regulations and was an effort to "create de facto a new regulation" in the guise of interpretation.

This leaves open the question of whether there are any limits of the amount of time a tipped employee can spend in non-tip-generating tasks without putting in jeopardy the employer's use of a tip credit to satisfy the federal minimum wage. Through its Field Operations Handbook (FOH), a compendium of policies used by the DOL in its enforcement of the FLSA, the DOL has asserted that there is a limit, and that it is 20 percent.

Some years ago, in Fast v. Applebee's, 638 F.3d 872 (8th Cir. 2011), the Eighth Circuit endorsed the DOL's approach. The Ninth Circuit has now rejected it.

The Ninth Circuit reasoned that the operative regulation and the statute itself refers to dual "occupations" or "jobs," but not two types of activities. Relying on earlier written DOL opinions, the court found no problem disallowing the tip credit if there were a "clear dividing line" between two distinct jobs performed by the same worker at different times of day. (It gave as an example that the tip credit would not apply to time spent by a waitress preparing vegetables for the salad bar prior to a restaurant's doors opening to the public, as those tasks are typically performed by chefs.) But it found no basis in the regulation for imposing time limits on certain tasks typically performed in the tipped occupation, done intermittently throughout an employee's work day, and intermingled with duties directed at generating tips. Because the DOL interpretive guidance was, in the court's view, rulemaking "in the guise of interpreting a regulation," it was not entitled to legal effect.

Hospitality employers with multi-state operations must now deal with two conflicting interpretations of the federal law concerning permissible and non-permissible use of the federal tip credit, as well as uncertainty in states for which there is no federal appellate court ruling, and possible state law variations, which must be observed if more stringent than federal law. Until the issue is definitively resolved, hotel and restaurant employers who utilize the federal tip credit should be reluctant to assign to wait staff tasks far removed from those typically associated with those jobs (like cleaning bathrooms) and are advised to limit, to the extent practicable, the amount of time spent in tasks that could be characterized as not "direct[ly]" related to generating tips.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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