By Abigail Cahak and Noah Finkel

Seyfarth Synopsis: The DOL has reissued a long-awaited opinion letter withdrawing its previous 20% tip credit rule and making clear that “no limit is placed on the amount of [related but non-tipped] duties that may be performed,” so long as they are performed “contemporaneously with the duties involving direct service or for a reasonable time immediately before or after” direct service.

For about a decade, restaurant employers have faced the daunting prospect of collective and class action litigation by their servers and bartenders paid under the tip credit claiming that they spent more than 20% of their time on so-called side work that didn’t directly produce tips Without incredibly detailed time records showing exactly when each server engaged in each of their various duties, restaurants have had a hard time rebutting such claims. Further, because servers and bartenders at restaurants usually are asked to perform somewhat similar duties, restaurateurs usually have not fared well in defeating certification efforts in such cases.

Those collective and class actions all stem from DOL guidance that the tip credit may not be used to the extent an employee spends more than 20% of their time on non-tip producing work.

Late last week, however, the DOL’s Wage-Hour Division issued a long-awaited opinion letter intended to clear up “confusion and inconsistent application” stemming from guidance contained in its Field Operations Handbook (“FOH”) regarding use of the tip credit to pay regularly tipped employees. The opinion letter provides clarity as to when and how often a tipped employee may perform non-tipped tasks and is welcome guidance to many employers.

Under the FLSA regulations, an individual employed in dual occupations–one tipped and one not–cannot be paid using the tip credit for hours worked in the non-tipped occupation. The regulations clarify, however, that “[s]uch a situation is distinguishable from that of a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee[,] and occasionally washing dishes or glasses. . . . Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.” Yet, DOL guidance interpreting the regulations, contained first in the DOL’s FOH and then set forth in an amicus brief, imposed time and duty-based limitations not present in the regulations themselves: the tip credit may not be used if an employee spends over 20% of hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating. Deference to the DOL’s guidance and enforceability of the 20% rule has caused a circuit split, with the Eighth and Ninth Circuit Court of Appeals following the rule, and the Eleventh Circuit refusing. (We previously blogged on the Eighth and Ninth Circuit decisions.)

On November 8, the DOL reissued an opinion letter it had previously handed down in the final days of the Bush Administration, but subsequently withdrew in the first months of President Obama’s first term. The letter provides clarity as to the DOL’s position on the 20% rule, stating that “no limit is placed on the amount of [related but non-tipped] duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.” (emphasis added)

With respect to whether a particular duty is related to the tipped occupation, the opinion letter refers readers to O*NET, an occupational database created under the sponsorship of the DOL. O*NET provides reports of the tasks involved for various occupations, including servers and bartenders. O*NET’s task list is often very detailed and includes, for example, many tasks plaintiffs’ counsel regularly argue are completely outside a server’s occupation (e.g., “[p]erform cleaning duties, such as sweeping and mopping floors, vacuuming carpet, tidying up server station, taking out trash, or checking and cleaning bathroom”). The opinion letter further states, however, that if a task is not on the O*NET list, an employer may not take the tip credit for time spent performing the duty (while nonetheless acknowledging that such time may be subject to the FLSA’s de minimis rule).

The reasoning of those courts that followed the 20% rule was deference to the DOL’s expertise in interpreting its own dual jobs regulation. Now, however, that rule is gone (indeed, the opinion letter states that a revised FOH is “forthcoming”), leaving it unlikely (but not impossible) that courts will continue to follow the FOH. And although state laws may differ, because many court interpretations of state wage and hours laws have depended on analogy to the federal FLSA, it also is unlikely that the 20% rule will continue to apply to such claims under the majority of state minimum wage laws.

Of course, it is possible that the rule could reemerge under a future Democratic administration, but even so, courts may no longer defer to a re-instituted 20% rule because they often reject administrative agency guidance that changes with the political winds.

By Robert Whitman

Seyfarth Synopsis: The Department of Labor has scrapped its 2010 Fact Sheet on internship status and adopted the more flexible and employer-friendly test devised by Second Circuit.

In a decision that surprised no one who has followed the litigation of wage hour claims by interns, the US Department of Labor has abandoned its ill-fated six-part test for intern status in for-profit companies and replaced it with a more nuanced set of factors first articulated by the Second Circuit in 2015. The move officially eliminates agency guidance that several appellate courts had explicitly rejected as inconsistent with the FLSA.

The DOL announced the move with little fanfare. In a brief statement posted on its website on January 5, it said:

On Dec. 19, 2017, the U.S. Court of Appeals for the Ninth Circuit became the fourth federal appellate court to expressly reject the U.S. Department of Labor’s six-part test for determining whether interns and students are employees under the Fair Labor Standards Act (FLSA).

The Department of Labor today clarified that going forward, the Department will conform to these appellate court rulings by using the same “primary beneficiary” test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the Division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.

The DOL rolled out the six-part test in 2010 in a Fact Sheet issued by the Wage and Hour Division. The test provided that an unpaid intern at a for-profit company would be deemed an employee under the FLSA unless all six factors—requiring in essence that the internship mirror the type of instruction received in a classroom setting and that the employer “derive[] no immediate advantage from the activities of the intern”—were met. The upshot of the test was that if the company received any economic benefit from the intern’s services, the intern was an employee and therefore entitled to minimum wage, overtime, and other protections of the FLSA.

Spurred by the DOL’s guidance, plaintiffs filed a flurry of lawsuits, especially in the Southern and Eastern Districts of New York. But despite some initial success, their claims were not well received. The critical blow came in 2015 from the Second Circuit, which in Glatt v. Fox Searchlight Picture Searchlight emphatically rejected the DOL’s test, stating, “[W]e do not find it persuasive, and we will not defer to it.” Instead, it said, courts should examine the internship relationship as a whole and determine the “primary beneficiary.” It crafted its own list of seven non-exhaustive factors designed to answer that question. Other courts soon followed the Second Circuit’s lead, capped off by the Ninth Circuit’s ruling in late December.

For the new leadership at the DOL, that was the final blow. In the wake of the Ninth Circuit’s decision, the agency not only scrapped the six-factor test entirely, but adopted the seven-factor Glatt test verbatim in a new Fact Sheet.

While the DOL’s action marks the official end of the short-lived six factors, the history books will note that the Glatt decision itself was the more significant event in the brief shelf-life of internship litigation. As we have noted previously in this space, the Glatt court not only adopted a more employer-friendly test than the DOL and the plaintiffs’ bar had advocated; it also expressed grave doubts about whether lawsuits by interns would be suitable for class or collective action treatment. The DOL’s new Fact Sheet reiterates those doubts, stating, “Courts have described the ‘primary beneficiary test’ as a flexible test, and no single factor is determinative. Accordingly, whether an intern or student is an employee under the FLSA necessarily depends on the unique circumstances of each case.”

That aspect of the ruling, more than its resolution of the merits, was likely the beginning of the end for internship lawsuits. In the months and years since Glatt was decided, the number of internship lawsuits has dropped precipitously.

At this point, only the college student depicted recently in The Onion  seems to be holding out hope. But as we’ve advised many times, employers should not get complacent. Unpaid interns, no matter how willing they are to work for free, are not a substitute for paid employees and should not be treated as glorified volunteer coffee-fetchers. As the new DOL factors make clear, internship experiences still must be predominantly educational in character. If not, it will be the interns (and their lawyers) giving employers a harsh lesson in wage and hour compliance.