The 20% Rule: An Emerging Theory of Liability Under the FLSA

By: Eric B. Moody

Employers are no doubt familiar with the Fair Labor Standards Act (“FLSA”), but may not be aware of an emerging theory of liability under the FLSA that affects employers with tipped employees.¹ This new cause of action is based on a United States Department of Labor handbook that states a tipped employee cannot spend in excess of 20% of their work time performing side work.² This article explores the origins in law of this emerging theory of liability, discusses the practical difficulty of the 20% Rule, and provides some analysis on how to minimize or resolve these claims.

Origins of the 20% Rule Claim

The FLSA requires that employers pay employees a minimum wage. However, the FLSA allows employers to pay tipped employees a reduced minimum wage, often referred to as a “tip rate.”³ Provided certain other conditions are met, an employer may count a tipped employee’s tips toward meeting the minimum wage requirement under the FLSA.⁴

In order to prevent employers from abusing the FLSA’s tip credit provisions, the regulations interpreting the FLSA place limits on when an employer may pay an employee at a tip rate. For instance, if an employee works in two or more separate jobs for an employer, with one job receiving tips and the other not receiving tips, then the employer can only pay the tip rate for the employee’s time spent in the job receiving tips.⁵ The FLSA refers to this working arrangement as a “dual job” occupation.⁶

The FLSA regulations distinguish an employee in a dual job from the typical job of a restaurant server. In addition to serving customers, restaurant servers often perform “side work.” Side work encapsulates a wide variety of tasks, depending on the restaurant, and includes such duties as balancing cash receipts, stocking, cleaning, inventory, and preparatory work.⁷ Many of the duties that constitute side work do not “directly” produce tips.⁸ However, the FLSA allows employers to require servers to perform side work even though it does not directly produce tips. The FLSA and interpreting regulations do not affix a specific time limit to the amount of time that a tipped employee can perform side work, other than stating a tipped employee can spend “part of her time” engaging in side work.⁹

Recently, the agency in charge of enforcing the FLSA, the United States Department of Labor Wage and Hour Division (“Wage and Hour Division”), added a restriction to the amount of time a tipped employee can spend performing duties that are not “tip producing.” Specifically, the Wage and Hour Division publishes a Field Operations Handbook for its investigators and staff to use in enforcing the FLSA.¹⁰ The Field Operations Handbook limits the percentage of time a tipped employee can spend performing side work to 20% of the employee’s shift.

Agency interpretations, such as the Field Operations Handbook, are not “automatically” law, such as a statute or a regulation.¹¹ But courts can give an agency’s interpretation deference, thus giving it the force of law.¹² Unfortunately for employers, many federal district courts have given the Field Operations Handbook deference and allowed claims based on the 20% Rule to proceed, including federal district courts in New York, South Carolina, Illinois, and Georgia.¹³

The Middle and Southern Districts of Florida have also allowed claims based on the 20% Rule to proceed.¹⁴ Moreover, there is limited authority contrary to the 20% Rule in the Eleventh Circuit, meaning employers with tipped employees can expect to see more of these claims in the future.¹⁵ Courts that have given the 20% Rule deference, however, may have failed to fully consider the practical difficulties the 20% Rule creates in workplaces such as restaurants.

Practical Difficulties of the 20% Rule

From a practical standpoint, maintaining records to show strict compliance with the 20% Rule is difficult due to the fluid nature of a server’s job. Analysis of a server’s shift under the 20% Rule requires dissection of each of a server’s shifts on a minute-by-minute basis to determine when the server performed tipped labor versus non-tipped labor. Often, 20% Rule claims involve an employee claiming he spent large percentages of his time performing side work, much of which will be intertwined with time serving customers. The employer will typically not have (and realistically may not be able to produce) the type of records that could disprove the employee’s testimony.

Moreover, while many duties are certainly tip producing activities, such as taking and serving orders, it is unclear whether other activities are tip producing activities or non-tip producing activities. For example, a customer requests new silverware from a server. The server is unable to locate clean silverware, so he washes silverware instead and takes it to the customer. An argument could be made that cleaning the silverware was an activity directed toward producing tips, while a counterargument could be made that cleaning the silverware was work incidental to tip producing activities and, therefore, should count toward the 20% calculation. These types of distinctions could be left to a jury, who may not understand the nuances of the FLSA or the realities of the restaurant business.¹⁶

In Pellon v. Business Representation Intern., Inc., a federal district court in Florida recognized the difficulty of proving compliance with the 20% Rule and the difficulty of litigating such a case, describing 20% Rule cases as infeasible.¹⁷ The Pellon court recognized that the 20% Rule creates an exception that could swallow the tip credit whole, resulting in a “discovery nightmare,” and may require “perpetual surveillance” of tipped employees during their shifts.¹⁸ Unfortunately for employers, other federal courts, including Florida’s federal courts, have ignored the Pellon court’s criticism for a number of reasons. Most notably, the Pellon case involved sky caps, not waiters, who had not even made a threshold showing that their non-skycap duties exceeded 20% of their workday.¹⁹

Practical Tips for Preventing and Resolving 20% Rule Claims

Employers with tipped employees can take several steps to attempt to prevent 20% Rule claims. First, employers can shift some tasks typically falling under the umbrella of side work to non-tipped employees.

Second, employers can attempt to limit side work to distinct periods, such as before the employee begins serving customers or after the employee finishes serving customers. This action should minimize the percentage of time an employee may later argue they spent performing non-tipped duties.

Third, an employer may also consider paying the employee minimum wage during these discrete periods while performing side work. While this may result in higher labor costs—always a critical consideration in the restaurant industry—the employer may offset some of these costs by more closely monitoring the number of servers working and cutting servers when demand dictates. In other words, if servers are not spending time performing side work while they serve customers, they should be able to serve additional tables.

When faced with a 20% Rule claim, an employer may consider early resolution due to the limited value of the claim. Damages are limited to the difference between tip wage and minimum wage for the percentage of time an employee spends performing non-tipped duties.²⁰ If an employee proves that he spent more than 20% of his time performing side work, then the employee can recover for all time spent performing side work. For example, if a tipped employee spends 30% of his work time performing non-tipped duties, he will only be able to recover the difference between tip wage and minimum wage for the 30% of work time performing non-tipped duties.

Early valuation of a 20% Rule claim can be difficult since employers typically do not keep the type of records that would allow the employer to ascertain a server’s time spent on side work duties. Moreover, plaintiffs may refrain from tipping their hand as to the amount of work time they allege exceeded the 20% Rule.

Employers can attempt to make some valuation of a 20% Rule claim by examining their tipped employees’ duties during “discrete time periods—such as before the restaurant opens to customers, after the restaurant is closed to customers, or between the lunch and dinner shifts.”²¹ In fact, the United States District Court for the Middle District of Florida ruled that the plaintiffs in a 20% Rule case were limited to these discrete periods in proving that their related non-tipped duties exceeded 20% of their shifts due to the difficulties of attempting a minute-by-minute examination of a typical server shift.²² Successfully making this argument early in a 20% Rule case can help cap the value of the claim.

Due to the limited value of a 20% Rule claim, the greatest source of exposure is typically the attorney’s fees. Under the FLSA, a prevailing plaintiff will likely be entitled to liquidated damages in the same amount as the unpaid minimum wages.²³ As with other FLSA claims, a prevailing plaintiff will also likely be entitled to his or her reasonable attorneys’ fees and costs, which can be substantial in disputed 20% Rule claims. Moreover, defending and litigating a 20% Rule claim can be expensive due to the factual questions involved. Accordingly, depending on the specific circumstances of the case, employers may want to consider early resolution in order to avoid potential exposure and to limit defense fees and costs.

Conclusion

With this new 20% Rule theory gaining steam, employers with tipped employees who perform side work will likely see more of these claims. Unfortunately, most federal courts in Florida have not recognized the difficulty this rule creates for employers. Therefore, employers should consider minimizing their exposure from such claims by reconsidering their side work assignments. When faced with a lawsuit, employers may ultimately want to consider early resolution of these claims to avoid exposure and significant defense costs.

(Endnotes)

1 29 U.S.C. § 201, et seq.
2 The cause of action is referred to as the “20% Rule” throughout this article, and the term “side work” is defined later in the article.
3 The FLSA defines tipped employees as employees “engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. § 203(t); 29 C.F.R. § 531.50.
4 29 U.S.C. § 203(m); see also 29 C.F.R. § 531.50 et seq.
5 29 C.F.R. § 531.56(e) (hereinafter “regulation 531.56(e)”).
6 An example of a dual job in the restaurant context would be an employee who works as a prep cook during some shifts, as a maintenance person during some shifts, and as a server during other shifts. The employer must pay the employee minimum wage while working as a prep cook or a maintenance person. The employer may pay the employee at a tip rate when working as a server. Id.
7 Regulation 531.56(e) permits a server to spend part of “her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.”
8 Courts have interpreted the applicable regulations to create three categories of duties for tipped employees: (1) tip producing activities, which can be compensated at the tip rate; (2) non-tip producing activities incidental to tip producing duties, the subject of the 20% Rule; and (3) non-tip producing activities unrelated to tip producing duties, such as time spent in the chef role described above. Fast v. Applebee’s Intern., Inc., 502 F. Supp. 2d 996, 1002 (W.D. Mo. 2007). Although outside of the scope of this article, plaintiffs bringing 20% Rule claims will often bring an alternative claim that some side work duties are unrelated to tip producing duties and claim compensation at minimum wage for time spent performing these duties.
9 29 C.F.R. § 531.56(e).
10 United States Department of Labor, Wage and Hour Division, Field Operations Handbook, § 30d00(e), available at: http://www.dol.gov/ whd/foh/ (last visited June 16, 2016). The Field Operations Handbook provides Wage and Hour Division investigators and staff with “interpretations of statutory provisions, procedures for conducting investigations, and general administrative guidance.” Id.
11 Instead, agency interpretations are “entitled to respect, but only to the extent that they are persuasive.” Christensen v. Harris Cnty., 529 U.S. 576, 578 (2000) (internal citations omitted).
12 Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984).
13 See, e.g., Flood v. Carlson Restaurants Inc., 94 F. Supp. 3d 572 (S.D.N.Y. 2015); Irvine v. Destination Wild Dunes Mgmt, Inc., 106 F. Supp. 3d 729 (D.S.C. 2015); Hart v. Crab Addison, Inc., No. 13-CV-6458 CJS, 2014 U.S. Dist. LEXIS 85916 (W.D.N.Y. June 24, 2014); Driver v. AppleIllinois, LLC, 890 F. Supp. 2d 1008, 1013 (N.D. Ill. 2012); Holder v. MJDE Venture, LLC, No. 1:08-CV-2218-TWT, 2009 U.S. Dist. LEXIS 111353 (N.D. Ga. Nov. 30, 2009).
14 Ash v. Sambodromo, LLC, 676 F. Supp. 2d 1360 (S.D. Fla. 2009); Crate v. Q’s Rest. Group LLC, No. 8:13-cv-2549-T-24 EAJ, 2014 U.S. Dist. LEXIS 61360 (M.D. Fla. May 2, 2014).
15 Some defendants outside of the Eleventh Circuit have successfully argued that the 20% Rule is not entitled to deference, resulting in dismissal of 20% Rule claims, but these decisions are limited to date. See Montijo v. Romulus Inc., No. CV-14-264-PHX-SMM, 2015 U.S. Dist. LEXIS 41848 (D. Ariz. Mar. 30, 2015); Richardson v. Mountain Range Restaurants LLC, No. CV-14- 1370-PHX-SMM, 2015 U.S. Dist. LEXIS 35008 (D. Ariz. Mar. 19, 2015).
16 Which “duties may prompt a customer to tip is a question of fact upon which reasonable finders of fact could disagree.” See Fast, 502 F. Supp. 2d at 1004.
17 528 F. Supp. 2d 1306 (S.D. Fla. 2007), aff’d, 291 F. App’x 31 (11th Cir. 2008).
18 Id. at 1314.
19 Crate v. Q’s Rest. Group LLC, 2014 U.S. Dist. LEXIS 61360. As another example, a Missouri District Court found that Pellon was “inconsistent with 29 C.F.R. § 785.13 and 29 C.F.R. § 516.18, which require the employer to exercise control over work performed by an employee and to keep records of work done in tipped and non-tipped occupations.” Fast v. Applebee’s Intern., Inc., 159 Lab. Cas. P 35714 (W.D. Mo. 2010), aff’d, 638 F.3d 872 (8th Cir. 2011); see also Flood, 94 F. Supp. 3d 572. 20 Fast, 502 F. Supp. 2d at 1002.
21 Crate v. Q’s Rest. Group LLC, 2014 U.S. Dist. LEXIS 61360.
22 Id.
23 29 U.S.C. § 216(b).