Federal Judge in PA Issues Decision Affecting How Employers Calculate Wages Under the FLSA

A federal Judge in the Eastern District of Pennsylvania has issued an important decision that affects how Employers calculate wages under the Fair Labor Standards Act for employees who perform both “tipped work” and work for which they do not receive tips.

 

The FLSA requires all employees who do not fall within enumerated exemptions under that statute (referred to as “non-exempt” employees) be paid the federal minimum wage, which currently is $7.25 per hour; and that non-exempt employees be paid 1-1/2 that rate for all hours worked in excess of 40 hours in a work week(See (1) below). Employers of “tipped employees,” however, are permitted to pay tipped employees $2.13 per hour, so long as that rate combined with the tips the employee receives satisfies the minimum wage requirement for a given work week. The difference between the cash wage and the minimum wage is referred to as the “tip credit.”

 

The first question under the FLSA is who is a “tipped employee”? A “tipped employee” is “any employee engaged in an occupation in which he customarily receives more than $30 in a month in tips.” Tipped employees are commonly found in the restaurant, hotel and gaming industries; but also can include, for example, delivery workers, porters and exotic dancers who receive tips sufficient to satisfy the $30 per month test on a customary basis.

 

It is not uncommon for tipped employees to perform other work for the same Employer which relates to the work for which they are tipped but is not, itself, tipped work. For example, waiters and waitresses often prepare salads, set tables, or fill salt shakers. Employers must determine if the tip credit applies to this related work. If it does not, then the employee must be paid at the applicable federal or state minimum wage for the time spent performing that work. This is known as the “dual job” rule (i.e., a tipped job and a non-tipped job). And that brings us to the recent case of Belt v. P.F. Chang’s China Bistro, Inc.

 

The history of the attempts to resolve this “related work/dual job” conundrum is beyond the scope of this Client Alert. Suffice it to say that since at least 1988 the DOL has taken the position, accepted by courts, that if more than 20% of a tipped employee’s time was spent doing related but not tipped work, the employee had a dual job and no tip credit could be taken for any portion of the time doing the non-tipped work. If 20% or less of the employee’s time was spent doing related jobs, the tip credit could be taken for the entire time. This became known as the 80/20 rule.

 

On November 8, 2018, the Wage and Hour Division of the DOL issued an Opinion Letter purporting to overrule the 80/20 rule. It stated that the DOL would not “place a limitation of the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties and all other requirements of the [FLSA] are met.” This constituted a new interpretation of what is known as the “dual job” regulation eliminating the 20% test. 

In reliance on this new interpretation, the Employer applied the tip credit to all of the time its tipped employees spent doing non-tipped work. The court ruled, however, that the Wage and Hour Division’s new interpretation of the “dual Job” regulation was unlawful and reinstated the 80/20 interpretation. Accordingly, Employers of tipped employees must once again keep careful track of the time those employees spend performing related, but not tip generating, activities. If the amount of time spent on such duties is 20% or less of an employee’s total time in a workweek, the tip credit may be applied to the entire time. If it is greater than 20% or if the non-tip duties are not related to the tip-generating work, the tip credit may not be applied to any portion of that time. Rather, the employee is deemed to have a dual job and must be paid at the minimum wage for the entire time spent doing the non-tip duties.

 

Penalties for violating the FLSA are stiff and can include criminal sanctions. Additionally, New Jersey has recently adopted a Wage Theft Act that also imposes significant fines, penalties and potentially imprisonment for failure to timely pay wages due. Employers who have tipped employees should revisit the way in which they calculate wages for those employees to be certain they are in compliance with this court’s holding.