New DOL Rules Regarding Tips and Joint Employment Face Uncertainty In Courts

By Robert G. Chadwick, Jr., Seltzer, Chadwick, Soefje & Ladik, PLLC.

The Fair Labor Standards Act (“FLSA”), which governs minimum wage, overtime pay, equal pay and child labor, expressly authorizes the Secretary of Labor to promulgate rules interpreting the Act. Historically, such rules have received deference in court if the statutory language is ambiguous and the interpretation is reasonable.

In 2016, however, the U.S. Supreme Court determined in Encino Motorcars, LLC v. Navarro that a rule recently promulgated by the U.S. Department of Labor (“DOL”) was not entitled to deference. At issue was a 2011 rule interpreting an FLSA exemption from the overtime  pay requirement for “any salesman, partsman, or mechanic primarily engaged in selling or servicing automobiles” at a covered dealership. In justifying its decision, the Court explained the DOL had not given adequate reasons for the new rule which was a substantial departure from an earlier rule.

Tips

On October 8, 2019, the DOL published a Notice of Proposed Rulemaking. regarding the FLSA’s tip credit. 29 U.S.C. 203(m). Under the proposed rule, the 20% limitation on non-tip producing work, which has historically been followed by the agency in determining the availability of the tip credit, will be replaced by a task-based limitation. The proposed rule follows a 2018 opinion letter from the Wage & Hour Administrator offering a similar interpretation.

So, will this new rule, if implemented, be afforded deference by the courts or suffer the same fate as the 2011 rule at issue in Navarro? Recent court cases indicate a brewing battle regarding this question.

Several courts have already rejected the interpretation offered by the 2018 opinion letter, instead opting to enforce the 20% limitation. See Cope v. Let’s Eat Out, Inc.354 F.Supp.3d 976 (W.D.Mo. 2019); Esry v. P.F. Chang’s China Bistro, 373 F.Supp.3d 1205 (E.D.Ark. 2019); Spencer v. Macado’s, Inc., 399 F.Supp.3d 545 (W.D.Va. 2019); Belt v. P.F. Chang’s China Bistro, Inc., 401 F.Supp.3d 512 (E.D.Pa. 2019); Flores v. HMS Host Corp., 2019 WL 5454647 (D.Md. Oct. 23, 2019); Berger v. Perry’s Steakhouse of Illinois, LLC, 2019 WL 7049925 (N.D.Ill. Dec. 23, 2019).

Other courts have already accepted the interpretation offered by the 2018 opinion letter. See Matusky v. Avalon Holdings Corp., 379 F.Supp.3d 657 (N.D.Ohio March 29, 2019); Shaffer v. Perry’s Restaurants, Ltd., 2019 WL 2117639 (W.D.Tex. April 3, 2019).

To be sure, an opinion letter is entitled to less deference than a DOL rule.  Still, the proposed rule is a substantial departure from the 20% limitation historically used by the DOL and courts. Employers should thus expect the cases above to be a precursor of the challenges to the proposed rule, if implemented.

Joint Employment

On January 16, 2020, the DOL published a new rule purporting to update and revise the agency’s interpretation of joint employer status under the FLSA; the rule is scheduled to be effective March 16, 2020. In the rule, the DOL provides a four-factor balancing test for determining FLSA joint employer status.

Many courts, however, have already developed their own tests in determining joint employer status under the FLSA. Indeed, there is a notable split amongst circuit courts after the Fourth Circuit in Hall v. DirecTV, LLC, 846 F.3d 757 (4th Cir. 2017) set a low bar for establishing joint employment.

Many courts, therefore, will be faced with the choice of following their own precedent regarding joint employment or deferring to the new DOL rule.  Only time will tell which choice courts will make.

Takeaway For Employers

DOL rules often provide reliable guidance to employers for compliance with the FLSA. As to the issues of tip credits and joint employment, however, it is advised employers consult legal counsel rather than the DOL rules. As to these two issues, following DOL rules may actually be a risky option.

Robert G. Chadwick, Jr. frequently speaks to non-profit organizations regarding labor and employment law issues. To contact him for a speaking engagement please e-mail him at rchadwick@realclearcounsel.com.

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