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DOL’s interpretation of dual jobs reg gets deference; no tip credit for non-tipped work

By Ronald Miller, J.D.

In a divided en banc decision, the Ninth Circuit ruled that the DOL foreclosed an employer’s ability to take a tip credit against the minimum wage for tipped employees who spent more than 20 percent of the workweek completing related but untipped tasks, and for time spent on unrelated tasks, by promulgating a dual jobs regulation in 1967, and in subsequently interpreting that regulation in its 1988 Field Operations Handbook. In so ruling, the appeals court agreed with an employee that both the regulation and the agency’s interpretation were entitled to deference. Accordingly, the court reversed a district court’s judgment finding that the employee had not stated a claim under the FLSA for minimum-wage violations. Judge Graber filed a separate opinion concurring in part and dissenting in part, while Judge Ikuta filed a separate dissenting opinion (Marsh v. J. Alexander’s LLC, September 18, 2018, Paez, R.).

The FLSA permits employers to take a tip credit for employees in tipped occupations. The tip credit offsets an employer’s obligation to pay the hourly minimum wage. In this consolidated appeal, former servers and bartenders alleged that their employers abused the tip-credit provision by paying them the reduced tip-credit wage and treating them as tipped employees when they engaged in either (1) non-tipped tasks unrelated to serving or bartending; or (2) non-incidental tasks related to serving or bartending in excess of 20 percent of the workweek.

The lead plaintiff in underlying suit worked as a server for J. Alexander’s, a chain restaurant. He typically worked around 32 hours per week, but spent almost half of this time on tasks that did not produce tips. Because the employer required him to complete tasks unrelated to his tipped occupation, and to spend more than 20 percent of his time per week on tasks related to his occupation that did not produce tips, he alleged that, pursuant to the DOL’s dual jobs regulation, he was a dual jobs employee working in multiple occupations. Thus, he contended, the restaurant was not entitled to continue paying him the tip-credit wage for time spent working in an untipped occupation, and the employer’s use of the tip credit violated the FLSA’s minimum-wage requirements.

Dual jobs regulation. The district court dismissed the employee’s suit, concluding he failed to state an FLSA claim as a matter of law for three reasons: (1) he could not state a minimum-wage violation as long as he was paid the minimum wage per workweek, irrespective of how much he was actually paid per hour; (2) the dual jobs regulation, 29 C.F.R § 531.56(e), is unambiguous and does not recognize that servers work in different occupations when the non-tipped tasks are related to the tipped occupation; and (3) even if the dual jobs regulation is ambiguous, the DOL’s interpretation of the regulation in the 1988 Field Operations Handbook (Guidance) was not entitled to deference under Auer v. Robbins.

On appeal, a divided Ninth Circuit agreed with the district court that the DOL’s interpretation of its dual jobs regulation was not entitled to deference. Following a vote to grant the employee’s petition for rehearing en banc, the Ninth Circuit reversed the district court’s judgment, and concluded, as the Eighth Circuit did in Fast v Applebee’s Int’l, Inc., that the Guidance was entitled to Auer deference.

Deference to agency interpretations. As an initial matter, the employers contended the dual jobs regulation was not entitled to deference under Chevron. The Ninth Circuit disagreed, pointing out that it was beyond question that the DOL promulgated the dual jobs regulation in the exercise of its congressionally delegated authority. Moreover, the appeals court concluded that the employers’ challenge to the dual jobs regulation as having been promulgated without adequate notice and an opportunity to comment was too late, since challenges to agency rules under the Administrative Procedure Act (APA) are subject to a six-year limitations period.

Applying the Chevron framework, the Ninth Circuit concluded that Congress has not spoken to the precise question at issue. Thus, it agreed with the Eighth Circuit that Congress has crafted an ambiguous statute and tasked the DOL with implementing the provisions, so it must “defer to the agency’s regulation so long as it is not arbitrary, capricious, or manifestly contrary to the statute.” Next, the appeals court concluded that the agency’s answer to the tip-credit provision was based on a permissible construction of the statute. The dual jobs regulation establishes that an employee is entitled to the full minimum wage for any time spent in a non-tipped occupation. The appeals court concluded that the dual jobs regulation was a reasonable choice within a gap left by Congress.

Regulation’s ambiguity. Continuing with its analysis, the appeals court also had to conclude whether the Guidance—which established the 20-percent related duties benchmark and separates occupations by duties—was entitled to judicial deference under Auer. Here, because the dual jobs regulation is ambiguous and the Guidance’s interpretation is both reasonable and consistent with the regulation, it agreed with the Eighth Circuit that the Guidance was entitled to Auer deference. The dual jobs regulation, like the FLSA, does not offer a precise definition for “occupation.” The same is true of the regulation’s reference to “related duties,” which suggests two distinctions: one between related and unrelated duties; and the other between duties related to a tipped occupation and duties that are part and parcel of a tipped occupation. These interpretative gaps all serve as additional evidence of the regulation’s ambiguity.

DOL’s Guidance. Next, the appeals court considered whether the DOL’s Guidance was “plainly erroneous or inconsistent with the regulation,” and found it consistent with nearly four decades of interpretative guidance and with the statute and the regulation itself. The Guidance attempts to address the regulation’s ambiguity by establishing three definitions, each of which builds on an interpretation of the regulation. First, the Guidance limits “related duties.” Second, it establishes that a tipped employee who spends a substantial amount of time, defined as in excess of 20 percent of hours worked, may not be paid the reduced tip-credit wage. Third, the Guidance makes explicit the regulation’s suggestion that occupations are defined by their tasks. Because the interpretation that the DOL advances in its Guidance is “entirely consistent with its past views,” Auer deference is warranted.

Partial concurrence, partial dissent. Judge Graber agreed with the majority that the employer’s procedural challenge to the dual jobs regulation was untimely. He also agreed that the dual jobs regulation warranted Chevron deference. Further, he found that the employee’s claims rise or fall depending on whether the court owes Auer deference to the interpretation of the regulation contained in the DOL’s Field Operations Handbook. Graber observed that the employee’s claims tracked the two methods for determining when an employee is engaged in “dual jobs” for purposes of the regulation. In his view, only one interpretation comported with the regulation. Thus, he would conclude that the employer denied the employee wages for work unrelated to his tipped occupation. However, Graber would not find that the interpretation for non-tipped work related to the employee’s job should not survive.

Dissent. In a dissenting opinion joined by Judge Callahan, Judge Ikuta argued that the DOL’s purported interpretation was no interpretation at all. Rather, she asserted that the DOL, in the guise of interpreting a regulation, created detailed and specific legislation that effectively eliminated an employer’s statutory right to take a tip credit. This legislative act was accomplished without compliance with the APA or notice to the regulated community. Thus, she argued that by deferring to the agency, and letting it improperly assume legislative authority, the majority failed in its duty to check that agency’s attempt to “exploit ambiguous law as license for its own prerogative.” Judge Ikuta would not give Auer deference to the DOL’s legislative rulemaking under the guise of deferring to an interpretation.