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Updates to the DOL’s Tip-Credit Guidance and a Word of Caution

April 18, 2019

By Allison Pearson Rhodes

In February 2019, the Department of Labor’s (DOL) Wage and Hour Division updated its Field Operations Handbook (FOH), which provides guidance for how the DOL interprets and applies its regulations. Specifically, the DOL revised its guidance regarding 29 C.F.R. § 531.56(e), which addresses when employers may take a tip credit for jobs that involve both tip-generating and non-tip-generating duties. The DOL previously interpreted 29 C.F.R. § 531.56(e) to mean that employers could not take a tip credit for non-tipped duties when they comprised more than 20 percent of an employee’s duties.  Courts often reached conflicting opinions on how to apply this provision, and the scope of employers’ obligations. The February 2019 revisions to the FOH sought to clarify the DOL’s interpretation of 29 C.F.R. § 531.56(e), and echoed a December 2018 opinion letter, which formally rescinded the prior interpretation of the tip-credit regulation. 

Read “DOL Issues New Guidance on Tip Credits” published December 21, 2018

The FOH February 2019 revisions state that an employer may take a tip credit for any amount of time that an employee spends on related, non-tipped duties performed either contemporaneously with the tipped duties — or for a reasonable time immediately before or after performing the tipped duties —regardless of whether those duties involve direct customer service. Thus, the DOL’s new guidance relieves some pressure on employers to track the exact amount of time employees perform non-tipped duties and focuses, instead, on when employees perform those duties and how they relate to their tipped duties. In short, this was good news for employers with tipped employees.

A recent opinion from the Eastern District of Arkansas, however, casts doubt on whether courts will apply the DOL’s new guidance. In Esry v. PF Chang’s China Bistro, Inc., Case No. 4:18-cv-000156-JLH, the plaintiff was a server who alleged, individually and on behalf of all others similarly situated, that she spent more than 20 percent of her time performing non-tipped duties and should have been paid at least minimum wage for her time performing non-tipped duties. On March 22, 2019, the Eastern District of Arkansas denied the employer’s motion for summary judgment and refused to give deference to the DOL’s new guidance regarding the tip credit. The court relied on the Eighth Circuit’s analysis of 29 C.F.R. § 531.56(e) in Fast v. Applebee’s Intern., Inc., 638 F.3d 872, 878-79 (8th Cir. 2011), which gave deference to the prior version of the Field Operations Handbook.  In Fast, the Eighth Circuit found that the DOL’s 80/20 rule “was a reasonable interpretation of the terms ‘part of the time’ and ‘occasionally’ used in that regulation.”  Conversely, in Esry, the court held the DOL’s new interpretation contradicts the language of 29 C.F.R. § 531.56(e) because the regulation “clearly places 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.” Thus the Eastern District of Arkansas concluded, “Unless and until Fast is overruled or the Department of Labor issues new guidance, this Court will follow Fast and apply the twenty-percent rule.”

Unfortunately, the opinion in Esry means employers in Arkansas, specifically in the Eastern District of Arkansas, should continue to abide by the DOL’s prior interpretation of the 29 C.F.R. § 531.56(e). Thus, employers with tipped employees should track the amount of time employees perform non-tipped duties and pay at least minimum wage when that time exceeds 20 percent of their work. Our attorneys will continue to monitor how courts apply the DOL tip-credit guidance, and report on any developments. If you have any questions about how this may impact your business, our attorneys are available to answer any questions.

Written by Attorney Allison C. Pearson at Friday, Eldredge & Clark, LLP. She is an associate in the Labor and Employment Practice Group.

This information is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Labor and Employmentattorneys.

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