11th Circuit Court of Appeals Vacates Employer’s Tip Credit Summary Judgment Victory in Rafferty v. Denny’s

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The 11th Circuit clarified that employers, not employees, bear the burden of proving compliance with the 80-20 rule for employees subject to the tip credit under the FLSA.

Tip Credits under the Fair Labor Standards Act

The Fair Labor Standards Act (“FLSA”) generally permits employers to pay tipped employees less than the minimum hourly wage, provided that the tips the employee receives are at least equal to the difference between the required cash wage (which must be at least $2.13 per hour) and the federal minimum wage and the employee is given appropriate notice.  This is known as the “tip credit” rule.  The U.S. Department of Labor (“DOL”) has also established what is known as the “80-20 rule,” which provides that employers may not take a tip credit for time employees spend performing non-tipped work that takes up more than 20% of the employee’s hours worked during the work week.  The 80-20 rule was recently scrutinized by the Eleventh Circuit Court of Appeals in Rafferty v. Denny’s, Inc., Case No. 20-13715 (11th Cir. Sept. 15, 2021).

What Happened in the 11th Circuit?

In Rafferty, a former server at Denny’s restaurant filed an FLSA collective action alleging Denny’s violated the tip credit rule by making servers spend more than 20% of their time performing non-tipped “side work” such as cleaning, food preparation, taking out trash, bussing tables, preparing delivery orders, and hosting, in addition to not informing servers of the tip credit rules as required by FLSA regulations.  The District Court denied the plaintiff’s motion for conditional certification of a class of current and former Denny’s servers that would have included an estimated 8,400 employees.

Following denial of collective action certification, Denny’s filed a motion for summary judgment, which the District Court granted based in part on a 2018 DOL opinion letter that relaxed the requirements of the traditional 80-20 rule, holding that Rafferty’s claims failed because she did not prove she performed any alleged “side work” that was not contemporaneous with her tip-related activities.

On September 15, 2021, the Eleventh Circuit Court of Appeals reversed the District Court and held that it was not required to defer to the 2018 DOL opinion letter because it was an unreasonable interpretation of the DOL’s long-standing regulations and it was inconsistent with the FLSA’s policy of promoting fair conditions for workers.

The Eleventh Circuit also held the District Court erred in granting summary judgment for Denny’s because Rafferty presented a genuine dispute of material fact as to whether and how often she performed work unrelated to her tipped occupation as a server.  The Court clarified that Denny’s had the duty to keep track of wages, hours, duties, and other conditions of employment for its servers; therefore, Rafferty was not required to demonstrate to the Court the weeks in which she spent more than 20 percent of her time performing non-tipped duties.  Instead, Rafferty was only required to show that she performed work for which she was not properly compensated.  Denny’s would then be required to present evidence to negate her allegations.

Despite its revival of Rafferty’s tip credit claims related to the 80-20 rule, the Eleventh Circuit affirmed summary judgment for Denny’s on the tip credit notification portion of the case.  Although Rafferty claimed Denny’s never notified her in writing that she would be paid on a tip credit basis, testimony from a Denny’s manager that she advised Rafferty that servers would be paid on a tip credit basis in accordance with the information that all servers received in orientation and onboarding was considered sufficient notice.

Proposed DOL Regulations Resurrect the 80/20 Rule

Although the Department of Labor previously promulgated proposed FLSA regulations based on the 2018 opinion letter at issue in Rafferty in December 2020, their enactment was repeatedly delayed until the proposed regulations were eventually abandoned.  In June 2021, the DOL submitted a new Notice of Proposed Rulemaking, which officially withdrew the 2020 proposed rule that allowed employers to take the tip credit for tipped employees performing “dual jobs” of both tipped and non-tipped duties, and returned to the traditional view of the 80-20 rule under which an employer can only take a tip credit on work that directly supports tip-producing work if it is less than 20 percent of all hours worked during the work week.  The DOL’s new proposed rule also requires that work that directly supports tip-producing work must be less than 30 continuous minutes to qualify for the tip credit, as well as clarifying what is considered tip work, work that directly supports tip-producing work, and non-tipped work.  The comment period for the proposed DOL tip credit regulations ended on August 23, 2021.

Employers should continue to follow the traditional 80-20 rule for employees subject to the tip credit until new regulations are released.  Employers should also be prepared to keep track of wages, hours, duties, and other conditions of employment for tipped servers in the event that they claim unpaid wages under the FLSA.

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