The Fight Over the 20% Rule Continues as a Federal Court Rejects DOL Opinion Letter

January 16, 2019

It is a new year. But the same fight continues in the courts over when restaurants can pay service employees the tip credit wage. As result, there is continuing confusion for the restaurant industry about when and how to pay tipped employees sub-minimum wage.

Just a few months ago, we wrote about a United States Department Of Labor Opinion Letter which purported to change prior DOL Guidance by eliminating the longstanding 20% Rule for how much time during the week a tipped employee may perform side work while getting paid the tip credit wage. The new Opinion Letter also purported to redefine what duties may constitute appropriate side work by, among other things, setting out a more expansive scope of duties for acceptable side work than what the courts and the DOL had previously allowed.

Before the DOL Opinion Letter, the 20% Rule had been part of DOL Guidance for decades and had long been given deference by the Courts. See DOL Guidance, Field Operations Handbook at §30d00(f)(2016). Briefly, the DOL Guidance provided that tipped employees could be paid the tip credit wage while perform non-tipped duties so long as those duties were “incidental” to service, “generally assigned” to tipped employees, and not so time consuming to take any more than 20% of a tipped employee’s work time during the week. Just in September 2018, just two months before the DOL issued its new Opinion Letter, the Ninth Circuit in Alec Marsh v. J. Alexander’s ruled that the DOL’s Guidance was a reasonable interpretation of federal law by the DOL that was entitled to deference by the courts. In other words, the court ruled that the 20% Rule had the force of law and would be enforced by the courts in part due to the over 30-year history of the DOL applying such rule consistently without challenge. Over that period of time, restaurants across the country had established policies and practices to comply with the 20% Rule and employees also had come to rely on the 20% standard to evaluate whether they were being paid fairly. Yet, oddly, shortly after the DOL scored such a victory for its own Guidance and its own 20% Rule, it sought to abrogate that standard and issued a new one by fiat through its new Opinion Letter published in November. For these reasons, we predicted in our prior article that the Opinion Letter and the DOL’s new interpretation of the regulations would be tested in Court.

The new Opinion Letter failed its first test, and the restaurant who sought enforcement of the new DOL standard lost its case in court. On January 2, 2019, a federal court in the District of Wisconsin rejected the DOL’s new standard for applying the tip credit. In essence, the Court found the DOL Opinion Letter was issued hurriedly and without the necessary process required for changing longstanding legal precedent relied on by potential parties. The court ruled that the Opinion Letter was accordingly not entitled to deference and would not be enforced by the Court.

In Cope et al. v. Let’s Eat Out, Inc. (document attached), the plaintiffs claimed that Buffalo Wild Wings had willfully violated the Fair Labor Standards Act by, among other reasons, paying servers and bartenders sub-minimum, tip-credit rates while performing improper types and excessive amounts of non-tipped work. In July 2016, the Court conditionally certified an FLSA collective action. This permitted the suit to proceed against the restaurant on behalf of not just the individual plaintiffs but also all current and tipped employees of Defendants’ Buffalo Wild Wings restaurants who were paid subminimum wages during the prior three years.

After the DOL Opinion Letter was issued, Defendants moved to decertify the collective action. They argued that with regard with regard to the claim that the restaurant had unlawfully paid servers and bartenders the tip credit wage for non-tipped duties and in excess of 20% of their time, the DOL Opinion Letter should be given deference and applied retroactively. The court denied the restaurant’s motion.

In a strongly worded decision, the federal court held that the DOL Opinion Letter was “unpersuasive” and “unworthy” of judicial deference. The court noted that the DOL had for over 30 years consistently interpreted its own Regulations as requiring employers not to assign tipped employees to perform non-tip-producing tasks for more than 20% of the hours such employees worked in tipped occupations in a workweek. The court noted that the DOL had even republished Guidance reaffirming the 20% Rule as recently as 2016. Furthermore, the court found that the Opinion Letter which reversed this long-held Guidance was issued “abruptly” without offering any “reasoning or evidence of any thorough consideration for reversing course” on prior the Guidance that had established the 20% Rule. Finally, the court reasoned that giving judicial deference to an Opinion Letter “pronouncing the sudden forthright withdrawal of such longstanding guidance would result in “’unfair surprise’” to the plaintiffs and the class who brought the lawsuit when the “time-honored” 20% rule interpretation was understood to be the law.

Where does this Leave Restaurant Employers? Unfortunately for restaurants, the rule to be applied to determine what rate to pay tipped employees remains uncertain. There is now a federal court decision that has rejected the Opinion Letter and enforced the prior DOL Guidance that established the 20% Rule. But this is just one court’s view. It remains unclear how other federal courts will decide. With that said, future plaintiffs are likely to rely on Cope to try convince other jurisdictions to reject the Opinion Letter and apply the 20% Rule.

Given these circumstances, the safer course for employers appears to be to continue to abide by the 20% Rule and restrict time worked before or after serving guests to less than 20% of the workweek until the DOL or the courts further clarify this point. For more than 30 years, the 20% Rule had been the standard and considered reasonable by the DOL and/or the courts. The issuance of an Opinion Letter does not immediately change what courts will consider to be reasonable. Thus, even if shorter or longer times performing tasks before serving customers may be considered “reasonable,” abiding by the 20% Rule will likely give employers an additional defense to such claims.

It is possible that the new Opinion Letter may be applied on a going forward basis by another court but not retroactively as requested in Cope, but that is not certain. It is also possible that the new Opinion Letter may at least provide some defense against claims of “willful violations” of federal law, as at the very least it has caused legitimate confusion as to what the law actually says.

Given the above, restaurants must keep in mind that federal law is both uncertain and rapidly changing. Moreover, restaurants should be aware that they must also comply with the state’s minimum wage statutes and regulations, including the rules concerning the tip credit. Please keep in mind that is article is provided for information purposes only and is not advice, and businesses should always raise their questions or concerns about paying employee wages in compliance with federal law with their legal counsel.


| Attachments: Cope v. Lets Eat Out Inc..pdf