ALEC MARSH v. J. ALEXANDER‘S LLC; CRYSTAL SHEEHAN v. ROMULUS INCORPORATED, DBA International House of Pancakes; SILVIA ALARCON v. ARRIBA ENTERPRISES INCORPORATED, DBA Arriba Mexican Grill; SAROSHA HOGAN; NICHOLAS JACKSON; SKYLAR VAZQUEZ; THOMAS ARMSTRONG; PHILIP TODD; MARIA HURKMANS v. AMERICAN MULTI-CINEMA, INC., DBA AMC Theatres Esplanade 14; NATHAN LLANOS v. P.F. CHANG‘S CHINA BISTRO, INC.; KRISTEN ROMERO v. P.F. CHANG‘S CHINA BISTRO, INC.; ANDREW FIELDS v. P.F. CHANG‘S CHINA BISTRO, INC.; ALTO WILLIAMS v. AMERICAN BLUE RIBBON HOLDINGS, LLC; STEPHANIE R. FAUSNACHT v. LION‘S DEN MANAGEMENT LLC, DBA Denny‘s
No. 15-15791, 15-15794, 15-16561, 15-16659, 16-15003, 16-15004, 16-15005, 16-15118, 16-16033
United States Court of Appeals for the Ninth Circuit
September 18, 2018
FOR PUBLICATION. D.C. Nos. 2:14-cv-01038-SMM, 2:14-cv-00464-SMM, 2:14-cv-00465-SMM, 2:14-cv-00051-SMM, 2:14-cv-00766-SMM, 2:14-cv-00768-SMM, 2:14-cv-00769-SMM, 2:14-cv-01243-SMM, 2:14-cv-01244-SMM, 2:14-cv-00261-SMM, 2:14-cv-00262-SMM, 2:14-cv-00263-SMM, 2:14-cv-01467-SMM, 2:15-cv-01561-SMM. Argued and Submitted En Banc March 20, 2018, San Francisco, California.
OPINION
Appeals from the United States District Court for the District of Arizona
Stephen M. McNamee, Senior District Judge, Presiding
Argued and Submitted En Banc March 20, 2018
San Francisco, California
Filed September 18, 2018
Before: Sidney R. Thomas, Chief Judge, and Susan P. Graber, M. Margaret McKeown, Kim McLane Wardlaw, William A. Fletcher, Richard A. Paez, Johnnie
Opinion by Judge Paez;
Partial Concurrence and Partial Dissent by Judge Graber;
Dissent by Judge Ikuta
SUMMARY*
Labor Law
The en banc court reversed district courts’ dismissals of actions under the Fair Labor Standards Act concerning tip credits toward servers’ and bartenders’ wages.
The FLSA permits employers to take a tip credit for employees in tipped occupations. Plaintiffs alleged that their employers abused the tip credit provision by paying them a reduced tip credit wage and treating them as tipped employees when they were engaged in either (1) non-tipped tasks unrelated to serving and bartending, such as cleaning toilets; or (2) non-incidental tasks related to serving or bartending, such as hours spent cleaning and maintaining soft drink dispensers in excess of 20% of the workweek.
The en banc court held that the Department of Labor foreclosed an employer‘s ability to engage in this practice by promulgating a dual jobs regulation,
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.
court reversed the district courts’ judgments and remanded for further proceedings.
Concurring in part and dissenting in part, Judge Graber wrote that plaintiffs stated a claim that their employers failed to pay them appropriate wages for non-tipped work unrelated to their jobs. Judge Graber wrote that she would affirm in part on the ground that plaintiffs failed to state a claim regarding wages for non-tipped work related to their jobs.
Dissenting, Judge Ikuta, joined by Judge Callahan, wrote that deference to the agency was improper because the agency‘s purported interpretation effectively eliminated an employer‘s statutory right to take a tip credit. Judge Ikuta wrote that this legislative act was accomplished without compliance with the Administrative Procedure Act, resulting in an unfair and unexpected imposition of liability on employers.
COUNSEL
Jahan C. Sagafi (argued), Outten & Golden LLP, San Francisco, California; Clifford P. Bendau II, The Bendau Law Firm, Phoenix, Arizona; Jamie G. Sypulski, Law Office of Jamie Golden Sypulski, Chicago, Illinois; Douglas M. Werman, Werman Salas P.C., Chicago, Illinois; for Plaintiffs-Appellants.
Paul DeCamp (argued), Jackson Lewis P.C., Reston, Virginia; Stephanie M. Cerasano, Jackson Lewis P.C., Phoenix, Arizona; for Defendant-Appellee P.F. Chang‘s China Bistro.
David A. Selden, Julie A. Pace, and Heidi Nunn-Gilman, The Cavanagh Law Firm, Phoenix, Arizona, for Defendant-Appellee Romulus, Inc.
Robert W. Horton and Mary Leigh Pirtle, Bass Berry & Sims PLC, Nashville, Tennessee; Eric M. Fraser, Osborn Maledon P.A., Phoenix, Arizona; for Defendant-Appellee J. Alexander‘s LLC.
Karen L. Karr, K. Leone Karr Law Office, Scottsdale, Arizona, for Defendants-Appellees Arriba Enterprises Inc. and Lion‘s Den Management LLC.
Tracy A. Miller and Alexandra J. Gill, Ogletree Deakins Nash Smoak & Stewart
Caroline Larsen and Alexandra J. Gill, Ogletree Deakins Nash Smoak & Stewart P.C., Phoenix, Arizona, for Defendant-Appellee American Blue Ribbon Holdings LLC.
Sarah K. Marcus (argued), Senior Attorney; Paul L. Frieden, Counsel for Appellate Litigation; Jennifer S. Brand, Associate Solicitor; M. Patricia Smith, Solicitor of Labor; Office of the Solicitor, United States Department of Labor, Washington, D.C., for Amicus Curiae Secretary of Labor.
OPINION
PAEZ, Circuit Judge:
Congress enacted the Fair Labor Standards Act (“FLSA“) in 1938 in response to a national concern that the price of American development was the exploitation of an entire class of low-income workers. President Roosevelt, who pushed for fair labor legislation, famously declared: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little.” S. Rep. No. 93-690, at 4 (1974). The FLSA thus safeguards workers from poverty by preventing employers from paying substandard wages in order to compete with one another on the market. See id. And yet, the plaintiffs in these consolidated cases allege that the defendant employers have done exactly that.
The FLSA permits employers to take a tip credit for employees in tipped occupations. See
Alec Marsh and thirteen other former servers and bartenders1 allege that their employers abused the tip credit
provision by paying them the reduced tip credit wage and treating them as tipped employees when they were engaged in either (1) non-tipped tasks unrelated to serving or bartending, such as cleaning toilets; or (2) non-incidental tasks related to serving or bartending, such as hours spent cleaning and maintaining soft drink dispensers in excess of 20% of the workweek. Using the tip credit in such a manner effectively makes tips—intended as gifts to servers for their service—payments to employers instead, who use these tips to minimize their obligations to pay employees the full
J. Alexander‘s, the other defendants include the International House of Pancakes (No. 15-15794); Arriba Mexican Grill (No. 15-16561); AMC Theatres Esplanade 14 (No. 15-16659); P.F. Chang‘s China Bistro, Inc. (Nos. 16-15003/04/05); American Blue Ribbon Holdings, LLC (No. 16-15118); and Denny‘s (No. 16-16033). These cases have been consolidated on appeal. Because Marsh‘s suit is the lead case, we refer to the plaintiffs collectively as “Marsh.” We refer to the defendants collectively as “Defendants.”
bussers, janitors, and cooks, employers can allegedly eliminate or significantly reduce their need to hire full-time janitors and cooks, who—as non-tipped workers—are entitled to the full minimum hourly wage and therefore cost more to employ.
We conclude today that the Department of Labor (“DOL“) foreclosed an employer‘s ability to engage in this practice by promulgating a dual jobs regulation in 1967,
I.
Alec Marsh worked as a server at J. Alexander‘s, a chain restaurant with at least one location in Phoenix, Arizona, from November 2012 to April 2013.3 Marsh typically worked around thirty-two hours per week, but spent almost half his time on tasks that did not produce tips, such as cutting and stocking fruit, cleaning the soft drink dispenser
may use an employee‘s tips to cover their own obligation to pay full minimum wage for time an employee spends in a non-tipped occupation.
and nozzles, replacing soft drink syrups, stocking ice, taking out the trash, scrubbing the walls, and cleaning the restrooms. These tasks often took place out of customer view, either before the restaurant had opened or after it had closed. For example, Marsh was required to stock ice, brew tea, and cut and stock fruit every opening shift and to wipe down tables and collect and take out the trash every closing shift. In return for his labor, J. Alexander‘s paid Marsh an hourly tip credit wage of $4.65 per hour in 2012 and $4.80 per hour in 2013 pursuant to Arizona law. See
Marsh filed suit, alleging that J. Alexander‘s use of the tip credit wage violated the FLSA‘s minimum wage requirements. See
Under this theory, J. Alexander‘s violated the FLSA‘s minimum wage requirements when it failed to pay Marsh the full hourly minimum wage for time spent working in an untipped occupation. Marsh requested compensation equal to the difference between the wages he was paid and Arizona‘s minimum wage.
A few months after filing his complaint, Marsh moved for leave to file a first amended complaint. The proposed first amended complaint detailed how much time Marsh spent completing each untipped task in a given workweek and estimated his compensation for time engaged in a non-tipped second occupation at $3.00 per hour. As the original complaint, the amended complaint alleged two violations of the FLSA and the dual jobs regulation: the first for failing to pay Marsh the full minimum wage for time spent in excess of 20% of his workweek on non-tipped, related duties; and the second for failing to pay Marsh full minimum wage for time spent on unrelated duties.
J. Alexander‘s moved to dismiss the original complaint. The district court granted the motion, denied Marsh‘s motion to file an amended complaint, and dismissed Marsh‘s suit with prejudice. The court concluded that Marsh failed to state an FLSA claim as a matter of law for three reasons: (1) Marsh could not state a minimum wage violation pursuant to United States v. Klinghoffer Bros. Realty Corp., 285 F.2d 487 (2d Cir. 1960), as long as he was paid minimum wage per workweek, irrespective of how much he was actually paid per hour; (2) the dual jobs regulation,
Marsh timely appealed. A divided panel of this court agreed with the district court that the DOL‘s interpretation
of its dual jobs regulation was not entitled to deference. See Marsh v. J. Alexander‘s LLC, 869 F.3d 1108 (9th Cir. 2017). The panel majority concluded that the Guidance‘s focus on duties and tasks was inconsistent with the dual jobs regulation‘s focus on jobs and characterized the Guidance as less an interpretation entitled to Auer deference than a de facto new regulation masquerading as an interpretation. See id. at 1121–24. The panel majority, however, vacated the district court‘s dismissal of the suit and remanded to give Marsh an opportunity to file an amended complaint. See id. at 1127.
A majority of the non-recused active judges voted to grant Marsh‘s petition for rehearing en banc. See Marsh v. J. Alexander‘s LLC, 882 F.3d 777 (9th Cir. 2018). We reverse the district court‘s judgments and conclude, as the Eighth Circuit did in Fast v. Applebee‘s Int‘l, Inc., 638 F.3d 872 (8th Cir. 2011), that the Guidance is entitled to Auer deference.
II.
We have jurisdiction pursuant to
Pension Tr. Fund, 332 F.3d 1198, 1201 (9th Cir. 2003) (motion to dismiss).
III.
This case revolves around several statutory and regulatory provisions and agency guidance governing the payment of wages to tipped employees: the FLSA, the dual jobs regulation, and the Guidance. Although the FLSA guarantees all workers a federal minimum wage of $7.25 per hour, see
wages so long as the employee‘s tips bring him or her up to minimum wage.6 See Fast, 638 F.3d at 874–75. If, however, a server‘s tips fall short of covering the minimum wage, the employer must increase the employee‘s cash wage to make up the difference. See Cumbie v. Woody Woo, Inc., 596 F.3d 577, 580 (9th Cir. 2010).
Seeking to clarify the meaning of a “tipped employee” under the statute—including what constitutes an “occupation” that “customarily and regularly” receives tips—the DOL promulgated several regulations in 1967. One of these regulations,
Dual jobs. In some situations an employee is employed in a dual job, as for example, where a maintenance man in a hotel also serves as a waiter. In such a situation the employee, if he customarily and regularly receives at least $30 a month in tips for his work as a waiter, is a tipped employee only with respect to his employment as a waiter. He is employed in
two occupations, and no tip credit can be taken for his hours of employment in his occupation of maintenance man. Such 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. It is likewise distinguishable from the counterman who also prepares his own short orders or who, as part of a group of countermen, takes a turn as a short order cook for the group. Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.
The dual jobs regulation initially generated some confusion among employers, who were unsure whether their tipped employees qualified as dual job employees. The DOL consequently issued several opinion letters in an attempt to delineate the boundaries of the dual jobs regulation. The DOL ultimately released a guidance addressing the dual jobs regulation in its Wage and Hour Division‘s Field Operations Handbook (“FOH“) in 1988, which the DOL revised in 2012. See FOH § 30d00(e) (1988) (the “Guidance“). Judge Ikuta calls the Guidance a new rule promulgated by the DOL, but it is clearly an interpretation in line with that of the DOL‘s prior opinion letters. The most recent version of the Guidance states:
(1) When an individual is employed in a tipped occupation and a non-tipped occupation, for example, as a server and
janitor (dual jobs), the tip credit is available only for the hours spent in the tipped occupation, provided such employee customarily and regularly receives more than $30.00 a month in tips. See
29 CFR 531.56(e) .(2)
29 CFR 531.56(e) permits the employer to take a tip credit for time spent in duties related to the tipped occupation of an employee, even though such duties are not by themselves directed toward producing tips, provided such related duties are incidental to the regular duties of the tipped employees and are generally assigned to the tipped employee. For example, duties related to the tipped occupation may include a server who does preparatory or closing activities, rolls silverware and fills salt and pepper shakers while the restaurant is open, cleans and sets tables, makes coffee, and occasionally washes dishes or glasses.(3) However, where the facts indicate that tipped employees spend a substantial amount of time (i.e., in excess of 20 percent of the hours worked in the tipped occupation in the workweek) performing such related duties, no tip credit may be taken for the time spent in those duties. All related duties count toward the 20 percent tolerance.
(4) Likewise, an employer may not take a tip credit for the time that a tipped employee spends on work that is not related to the
tipped occupation. For example, maintenance work (e.g., cleaning bathrooms and washing windows) are not related to the tipped occupation of a server; such jobs are non-tipped
occupations. In this case, the employee is effectively employed in dual jobs.
FOH § 30d00(f) (2016) (emphases added).7
The Guidance thus clearly contemplates that a server who performs unrelated tasks, such as cleaning restrooms, is a dual job employee entitled to the full minimum hourly wage for her unrelated work. The Guidance also clearly lays out that a server is a dual job employee if her related tasks occupy more than 20% of her hours in a workweek.
The dissent takes issue with the 2012 update to the Guidance and asserts that this was the first time the agency “provided that employers could not take a tip credit for any time employees spent on tasks that did not directly relate to serving customers.” Dissent at 61-62. This presumes, of course, that prior to 2012, the DOL would have permitted employers to take a tip credit even for hours a server spent on tasks unrelated to their tipped occupation. As we discuss infra, the dual jobs regulation squarely forecloses that line of argument by distinguishing between a tipped employee who spends some time completing related, but untipped work, and a dual job employee who works as a maintenance man part of the time and a server the rest.
facts sufficient to make out an FLSA minimum wage violation claim. We turn to those questions.9
Defendants first contend that the dual jobs regulation is not entitled to deference under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). We disagree.
1.
As an initial matter, it is beyond question that the DOL promulgated the dual jobs regulation,
Defendants nonetheless urge us to conclude that Chevron deference is inapplicable in this instance because the dual jobs regulation was promulgated without adequate notice and an opportunity to comment. This argument, however, is decades too late. See Perez-Guzman v. Lynch, 835 F.3d 1066, 1077 (9th Cir. 2016), cert. denied, 138 S. Ct. 737 (2018) (“Procedural challenges to agency rules under the Administrative Procedure Act are subject to the general six-year limitations period in the U.S. Code.“); see also
2.
Applying the Chevron framework, we next ask whether “Congress has directly spoken to the precise question at issue.” 467 U.S. at 842. We conclude that it has not.
Section 203(t) defines a tipped employee as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”
Contrary to Defendants’ assertions, the FLSA‘s legislative history does not “evince an unambiguous congressional intention” to treat all employees as tipped employees, regardless of their tasks or time spent on untipped tasks. Chem. Mfrs. Ass‘n v. Nat. Res. Def. Council, Inc., 470 U.S. 116, 129 (1985). At most, Congress suggested in a Senate report—published seven years after the DOL promulgated its dual jobs regulation—that “[i]n establishments where the employee performs a variety of different jobs, the employee‘s status as one who ‘customarily and regularly receives tips’ will be determined on the basis of the employee‘s activities over the entire workweek.” S. Rep. No. 93-690, at 43 (1974). Under Defendants’ view, this sentence indicates that section 203(t) unambiguously allows employers to take a tip credit for every hour an employee spends working, as long as the employee‘s total tips exceed $30 per month—even if the employee engages in tipped work only 10% of the time. See United States Court of Appeals for the Ninth Circuit, 15-15791 Alec Marsh v. J. Alexander‘s LLC, YouTube (Mar. 20, 2018) at 34:43-35:45.
But this sentence does not bear the weight Defendants put on it. Critically, the legislation accompanying the 1974 report did not make any changes to section 203(t). Further, the report expressly recognized “the ethical question involved in crediting tips toward the minimum wage” and emphasized that tipped employees “should have stronger protection to ensure the fair operation” of the tip credit provision. S. Rep. No. 93-690 at 42-43. Neither the plain language of the statute nor its legislative history suggest—much less clearly demonstrate—that section 203(t) is ambiguous.
3.
Having concluded that the FLSA “is silent or ambiguous” with respect to the treatment of employees who make more than $30 a month in tips but who may be engaged in multiple occupations, we consider “whether the agency‘s answer is based on a permissible construction of the statute.” Chevron, 467 U.S. at 843. We conclude that it is.
The 1966 amendments to the FLSA were intended to “improve living standards by eliminating substandard working conditions in employment” and to bring the law up to date with the “advancing economy,” which had outpaced the FLSA‘s worker protections. H.R. Rep. No. 89-1366, at 10 (1966). Later amendments to the FLSA stressed the importance of guaranteeing “a fair day‘s pay for a fair day‘s work.” H.R. Rep. No. 93-913, at 8 (1974). The dual jobs regulation, which was promulgated to give effect to new statutory provisions addressing tipped employees, was neither an arbitrary reversal of a prior agency position nor “manifestly contrary to the statute.” Chevron, 467 U.S. at 844. Confronted with a gap in the FLSA‘s coverage of dual job employees, the DOL reasonably exercised its authority to fill that gap by ensuring that employees working in tipped and untipped occupations would not be shortchanged by their employers.
Defendants concede that under the FLSA, if some of an employee‘s tasks were outside the scope of a tipped occupation, the employee would be engaging in non-tipped
The dual jobs regulation establishes that an employee is entitled to the full minimum wage for any time spent in a non-tipped occupation. See
B.
Our inquiry, however, does not end with the dual jobs regulation. For Marsh to state a claim under the FLSA, we must also conclude that the Guidance—which establishes the 20% related duties benchmark and separates occupations by duties—is entitled to judicial deference under either Auer v. Robbins, 519 U.S. 452 (1997), or Skidmore v. Swift & Co., 323 U.S. 134 (1944). See Indep. Training & Apprenticeship Program v. Cal. Dep‘t of Indus. Relations, 730 F.3d 1024, 1035 (9th Cir. 2013). Because the dual jobs regulation is ambiguous and the Guidance‘s interpretation is both reasonable and consistent with the regulation, we agree with the Eighth Circuit that the Guidance is entitled to Auer deference.11 See Fast, 638 F.3d at 880-81.
1.
“[W]here an agency interprets its own regulation, even if through an informal process, its interpretation of an ambiguous regulation is controlling under Auer unless ‘plainly erroneous or inconsistent with the regulation.‘” Bassiri v. Xerox Corp., 463 F.3d 927, 930 (9th Cir. 2006) (quoting Auer, 519 U.S. at 461). “Under this standard, we defer to the agency‘s interpretation of its [ambiguous] regulation unless an ‘alternative reading is compelled by the regulation‘s plain language or by other indications of the [agency‘s] intent at the time of the regulation‘s promulgation.‘” Id. at 391 (emphasis and second alteration in original) (quoting Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994)). Interpretations that “do[] not reflect the agency‘s fair and considered judgment of the matter in question” or unfairly surprise regulated parties are not entitled to Auer deference. Christopher v. SmithKline, 567 U.S. 142, 155-56 (2012) (quoting Auer, 519 U.S. at 462).
[S]We agree with Marsh that the dual jobs regulation is ambiguous.12 The dual jobs regulation, like the FLSA, does 12
not offer a precise definition for “occupation.” Instead, the regulation relies on a series of examples to illustrate the difference between a tipped employee and a dual job employee engaged in both a tipped and an untipped occupation. See
The second half of the dual jobs regulation suggests that the DOL likely intended to tie a person‘s occupation to his or her duties. See
who regularly do.14 What the regulation leaves undefined is the point at which this transformation occurs.
The same is true of the regulation‘s reference to “related duties,”
2.
Having concluded that the dual jobs regulation is ambiguous, we next consider whether the Guidance is “plainly erroneous or inconsistent with the regulation.” Auer, 519 U.S. at 461 (internal quotation marks omitted). The DOL‘s interpretation is consistent with nearly four decades of interpretive guidance and with the statute and the regulation itself. Together, these factors strongly
The dual jobs regulation relies on two undefined factors to determine whether an employee is a dual-job employee: (1) the relatedness of an employee‘s duties to a tipped occupation and (2) the amount of time an employee spends on completing related but untipped duties. See
45, at 16 (hereinafter “DOL Amicus Brief“) (“The FOH interpretation was based on, and is consistent with, the prior opinion letters.“).
The Guidance attempts to address the regulation‘s ambiguity by establishing three definitions, each of which builds on an interpretation of the regulation. First, the Guidance limits “related duties” to those that are “incidental to the regular duties of the tipped employees and are generally assigned to the tipped employees.” FOH § 30d00(f)(2) (2016). Second, the Guidance establishes that a tipped employee who spends a “substantial amount of time,” defined as “in excess of 20 percent of the hours worked in the tipped occupation in the workweek,” on such related duties may not be paid the reduced tip credit wage. Id. § 30d00(f)(3). “All related duties count toward the 20 percent tolerance,” meaning that a server need not spend all of that time on one related task, such as washing dishes, to qualify as a dual job employee. Id. Third, the Guidance makes explicit the regulation‘s suggestion that occupations are defined by their tasks. See id. § 30d00(f)(4) (“For example, maintenance work (e.g., cleaning bathrooms and washing windows) are not related to the tipped occupation of a server; such jobs are non-tipped occupations.“). Accordingly, the Guidance recognizes that a server is no longer engaged in a tipped occupation once she starts cleaning bathrooms and washing windows, because those tasks fall within the purview of a separate, non-tipped occupation.16 See id.
We similarly reject as unpersuasive Defendants’ brief argument that the Guidance is not entitled to Auer deference because employers in this country did not have “notice that they must pay an employee . . . based on an agency‘s internal advice given to its field investigators.” Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 155-56 (2012), held that Auer deference is not warranted when an agency‘s interpretation would “impose potentially massive liability” without first providing regulated parties “fair warning of the [prohibited] conduct.” Id. at 155-56. There, the Court recognized that preventing “unfair surprise[s]” outweighed the “general merits of Auer deference,” particularly where the agency‘s interpretation postdated the regulated parties’ conduct. Id. at 156, 159; see also Indep. Training & Apprenticeship Program v. Cal. Dep‘t of Indus. Relations, 730 F.3d 1024, 1035 (9th Cir. 2013) (“[T]he Court has deemed Auer deference unsuitable when such deference would result in ‘unfair surprise’ to one of the litigants.“).
Here, in contrast, the Guidance has been in place since 1988 and was published to the Internet pursuant to the Electronic Freedom of Information Act Amendments of 1996. See Wage & Hour Div., Dep‘t of Labor, Field Operations Handbook (Aug. 31, 2017), available at
Defendants next contend that the Guidance is not entitled to deference because its 20% limitation on related duties is inconsistent with the dual jobs regulation itself.19 We disagree. As the Eighth Circuit recognized in Fast, “[b]y using the terms ‘part of the time’ and ‘occasionally,’ the 19
regulation clearly places a temporal limit on the amount of related duties an employee can perform and still be considered to be engaged in the tip-producing occupation.” 638 F.3d at 879 (internal alterations omitted); see also Knox v. Jones Grp., 201 F. Supp. 3d 951, 961 (S.D. Ind. 2016) (applying Auer deference because “[t]hrough its use of the terms ‘part of the time’ and ‘occasionally,’ the dual-jobs regulation embodies temporal limitations regarding the performance of related, non-tipped
The dual jobs regulation states that a server who occasionally washes dishes is not a dual job employee. See
Furthermore, the DOL‘s 20% threshold is consistent with its treatment of other temporal limitations. This, too, counsels in favor of applying Auer deference. See Fast, 638 F.3d at 881 (deferring to the Guidance in part because the 20% threshold draws from numerous other FLSA provisions); cf. Friedman v. Sebelius, 686 F.3d 813, 825 (D.C. Cir. 2012) (granting the agency‘s interpretation Auer deference even though “the regulations elsewhere distinguish between ‘acts’ and ‘omissions,‘” and the agency interpreted a regulation‘s use of only “acts” to include both acts and omissions). The DOL adopted the 20% rule in order to ensure conformity with “various other FLSA provisions, interpretations, and enforcement positions setting a 20 percent tolerance for work that is incidental to but distinct from the type of work to which an exemption applies.”20 DOL Amicus Brief at 19 n.6. Because the DOL has consistently utilized the 20% threshold to distinguish between substantial and incidental or occasional work in a variety of contexts, it is especially appropriate to defer to the Guidance.
We find similarly unpersuasive Defendants’ contention that the Guidance‘s focus on duties is “patently inconsistent” with the dual jobs regulation‘s “occupation-based analysis.” Defendants’ argument rests on an artificial distinction 20
between occupations and duties. One cannot define the former without some reference to the latter.21 See Occupation, Black‘s Law Dictionary (10th ed. 2014) (defining “occupation” to mean “an activity or pursuit in which a person engages” (emphasis added)). The tip credit regulation states that
The dual jobs regulation therefore contemplates a difference between tipped and untipped occupations, as defined by an employee‘s duties. The Guidance makes that distinction explicit by sorting the duties accordingly: (1) an employee who engages in duties “directed toward producing tips” or spends 20% of her workweek or less on duties related to “the regular duties of the tipped employees” works in a tipped occupation and may receive the reduced tip credit cash wage; (2) on the other hand, an employee who engages in untipped “work that is not related to the tipped occupation” or spends more than 20% of her workweek on related duties that are not themselves directed toward producing tips must be treated as working in an untipped occupation and paid the full hourly minimum wage. FOH § 30d00(f) (emphasis added). The Guidance, far from
creating a de facto new rule, closely hews to the framework suggested by the dual jobs regulation.We also reject Defendants’ argument that Auer deference is inappropriate here because the DOL‘s position has changed throughout the years. Before adopting the Guidance in 1988, the DOL issued a number of opinion letters to employers elaborating on the dual jobs regulation. Those opinion letters consistently emphasized the temporal nature of the dual jobs regulation. For instance, although the DOL explained in a 1980 opinion letter22 that servers who spent part of their time cleaning the salad bar and vacuuming the dining room carpet after closing time could be considered tipped employees, the agency was careful to note that it “might have a different opinion if the facts indicated that specific employees were routinely assigned, for example, maintenance-type work such as floor vacuuming.”
As a last-ditch attempt to dismantle the Guidance, Defendants protest that the 20% limitation is not entitled to Auer deference because it is “unworkable.” But, the DOL could have reasonably concluded otherwise. Employers are ultimately responsible for assigning duties and responsibilities. The allegations that would trigger a FLSA wage violation claim require more than de minimis claims based on seconds or minutes spent rolling silverware or sweeping a customer‘s shattered glass. See Schaefer v. Walker Bros. Enters., Inc., 829 F.3d 551, 555 (7th Cir. 2016) (“[T]he possibility that a few minutes a day were devoted to keeping the restaurant tidy does not require the restaurants to pay the normal minimum wage rather than the tip-credit rate for those minutes.“). Marsh has alleged far more than the occasional request to tend to related but untipped tasks: he has alleged a continuous practice of assigning him tasks such as cutting lemons and limes, cleaning soft drink dispensers, wiping tables, and taking out the trash. Moreover, Marsh was able to provide information on when he was expected to complete each task: “every opening shift,” “after most closing shifts,” or “after each shift.” The scheduled nature of these tasks makes them all the more easy to track.
As several district courts have concluded, it is not impracticable for an employer to keep track of time spent on related tasks by requiring employees to clock in any time spent rolling silverware or cleaning the restaurant before and after the restaurant closes or when business is slow. See, e.g., Irvine v. Destination Wild Dunes Mgmt., Inc., 106 F. Supp. 3d 729, 734 (D.S.C. 2015) (“In any case, since employers, in order to manage employees, must assign them duties and assess completion of those duties, it is not a real burden on an employer to require that they be aware of how employees are spending their time before reducing their wages by 71%.“); Barnhart v. Chesapeake Bay Seafood House Assocs., LLC, Civil No. JFM-16-01277, 2017 WL 1196580, at *6 (D. Md. Mar. 31, 2017). Unlike the Plaintiffs in Pellon v. Bus. Representation Int‘l, Inc., 528 F. Supp. 2d 1306 (S.D. Fla. 2007), Marsh does not concede that it is “impractical or impossible” to track his tasks. Id. at 1313-14. To the contrary, he asserts, consistent with several district court decisions, that “[s]egregating duties is simple,” because employers already have the ability to input codes for employees to clock in and out at different pay rates, see Driver v. AppleIllinois, LLC, 890 F. Supp. 2d 1008, 1033 (N.D. Ill. 2012), and because employers
In short, the DOL‘s opinion letters, Guidance, and amicus brief positions have long established that discerning whether a person is employed in both a tipped and untipped occupation under the dual jobs regulation requires some consideration of both the time an employee spends on a given task and the type of task involved. Because the interpretation that the DOL advances in its Guidance and amicus brief is “entirely consistent with its past views,” Auer deference is warranted. Chase Bank USA, N.A. v. McCoy, 562 U.S. 195, 210 (2011).
IV.
We also decline to affirm the district court‘s flawed application of United States v. Klinghoffer Bros. Realty Corp., 285 F.2d 487 (2d Cir. 1960). Klinghoffer held that requiring workers to work overtime without pay does not violate the FLSA‘s minimum wage requirements as long as the average hourly pay for the week is equivalent to the minimum wage. See id. at 490 (concluding that the requirements of
Marsh, however, has not brought a claim based on failure to pay overtime. To the contrary, he has alleged that he was paid the tip credit cash wage—an amount significantly below minimum wage—for each hour he spent engaged in a non-tipped occupation. His claim is functionally no different than that alleged by an employee who works as a server for one employer and a janitor for another, but sues only the second employer for paying him the tip credit wage every week. Klinghoffer is thus inapplicable.
V.
Contrary to the dissent‘s suggestions, the DOL did not embark on a fifty-year undercover mission spanning multiple administrations to erode the FLSA‘s tip credit provision.25 Dissent at 63-64. There are no rogue agencies or tales of intrigue to be found in this case. The reality is much less exciting: confronted with an undefined reference to “tipped employees” in the FLSA, the DOL promulgated the dual jobs regulation to clarify that dual job employees do not count as tipped employees in certain circumstances. Employers had six years to challenge this regulation. See
Congress did not intend to give employers a blank check when it enacted the FLSA‘s tip credit provision. Recognizing this and foreseeing the possibility that employers could misuse this provision to withhold wages from dual job employees like Marsh, who are titled “servers” or “bartenders,” but who function in actuality as bussers, janitors, and chefs at least part of the time, the DOL promulgated the dual jobs regulation and issued an interpretative guidance. Together, these two provisions clarify the boundaries of acceptable tip credit use and ensure that a server‘s tips serve as a gift to the server, as opposed to a cost-saving benefit to the employer. Although the agency had a number of options available to resolve this issue, it is neither appropriate nor reasonable for us to override the DOL‘s dual jobs regulation and its Guidance where, as here, the latter is consistent with the former and both are consistent with the purpose of the FLSA.
We therefore conclude that Marsh has stated two claims for relief under the FLSA: first, that he is entitled to the full hourly minimum wage for the substantial time he spent completing related but untipped tasks, defined as more than 20% of his workweek; and second, that he is entitled to the same for time he spent on unrelated tasks.26
REVERSED AND REMANDED.
GRABER, Circuit Judge, concurring in part and dissenting in part:
Plaintiff Alec Marsh claims that Defendant J. Alexander‘s LLC failed to pay him appropriate wages both for non-tipped work related to his job as a server and for non-tipped work unrelated to his job as a server. The majority opinion concludes that both claims are cognizable and that the district court thus erred in dismissing Plaintiff‘s case. In my view, though, only the latter claim—that Defendant denied Plaintiff wages for work unrelated to his tipped occupation—should survive. Accordingly, I would affirm in part and reverse in part.
I agree with the majority opinion that Defendant‘s procedural challenge to
Importantly, the Field Operations Handbook (“FOH“) provides two methods for determining when an employee is engaged in “dual jobs” for purposes of the regulation. FOH § 30d00(f) (2016) (the “Guidance“). The first looks to the amount of time that an employee spends doing work that relates to the employee‘s tipped work but that does not produce tips. Under this
Plaintiff‘s two claims track those two methods. That is, he claims that he was denied wages both for work related to his job as a server and for work unrelated to his job as a server. If both of the DOL‘s interpretations of what constitutes a “dual job” under the regulation were entitled to deference, then both of Plaintiff‘s claims would be cognizable.
The majority opinion concludes that both interpretations do, indeed, warrant deference and that, as a result, both claims survive. But, in my view, only one interpretation comports with the regulation—the interpretation that focuses on work unrelated to an employee‘s tipped occupation. The other interpretation contained in the Guidance—the one that focuses on the amount of time spent engaged in related but non-tipped work—is not entitled to Auer deference. Plaintiff has thus stated a claim only insofar as he asserts that Defendant denied him wages for work unrelated to his job as a server. I would affirm the dismissal of Plaintiff‘s claim that Defendant denied him wages for non-tipped work related to his occupation as a server, but I would reverse the dismissal of Plaintiff‘s claim that Defendant denied him appropriate wages for non-tipped work unrelated to his job as a server.
A. Auer governs this case.
This case requires us to do something that we have done for decades: determine whether an agency, in interpreting its own regulation, exceeded the bounds of its authority. We have a two-step test for making that determination. Auer, 519 U.S. at 461. We first ask whether the regulation in question is ambiguous. Id. If so, at the second step, we defer to the agency‘s interpretation of its regulation so long as the interpretation is not “plainly erroneous or inconsistent with the regulation.” Id. (internal quotation marks omitted).
That test makes good sense. Agencies know the purpose of their own regulations. Martin v. Occupational Safety & Health Review Comm‘n, 499 U.S. 144, 151 (1991). And because “applying an agency‘s regulation to complex or changing circumstances calls upon the agency‘s unique expertise and policymaking prerogatives,” the Supreme Court presumes that agencies’ delegated lawmaking powers include the power to interpret their own regulations. Id. It is thus entirely reasonable to defer to an agency‘s interpretation of its own words—given, of course, that we diligently examine agency action for plain error or inconsistency with the regulation.
Auer provides an appropriate and sufficient mechanism for accomplishing that task. Its two steps ensure that agencies stay within the confines of their own regulations—regulations that must, themselves, fill gaps that Congress meant to leave for the agencies to fill. Chevron, 467 U.S. at 842-43. Our job, which Auer helps us do, is to ensure that—like nesting dolls—every agency interpretation fits neatly within an agency regulation that fits neatly within the authority that Congress has granted to the agency. So long as we faithfully apply Auer (and its companion, Chevron), we perform that function and avoid the separation of powers concerns that the dissenting opinion describes.
The “dual jobs” regulation is no model of clarity. But it plainly forecloses the DOL‘s interpretation that an employee spending a certain amount of time doing related, but non-tipped, work qualifies as working a dual job. The regulation provides in full:
Dual jobs. In some situations an employee is employed in a dual job, as for example, where a maintenance man in a hotel also serves as a waiter. In such a situation the employee, if he customarily and regularly receives at least $30 a month in tips for his work as a waiter, is a tipped employee only with respect to his employment as a waiter. He is employed in two occupations, and no tip credit can be taken for his hours of employment in his occupation of maintenance man. Such 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. It is likewise distinguishable from the counterman who also prepares his own short orders or who, as part of a group of countermen, takes a turn as a short order cook for the group. Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.
Viewing that regulation as a whole, it determines whether an employee performs “dual jobs” by looking to whether the employee performs tasks unrelated to his or her tipped occupation. That is, the regulation has nothing to do with the amount of time that an employee spends engaged in non-tipped tasks related to the tipped occupation.
The regulation‘s first example—on which the remainder of the regulation is premised—makes that focus clear. It describes a situation in which an employee performs two different functions: that of a “maintenance man” and that of “waiter.” The example says nothing about the amount of time that the employee spends doing each kind of work. That is, the given employee would qualify as having “dual jobs” (only one of which is a tipped occupation) no matter how he split his time between the two jobs. We know, then, that he qualifies as having “dual jobs” not because he spends a certain amount of time as a maintenance man and a certain amount of time as a waiter, but because he performs tasks that are unrelated to one another.
The other two examples—the “counterman” and the “waitress” examples—confirm the regulation‘s focus on that distinction. Importantly, the regulation presents those two examples as foils to the first example. See
Read in context, the waitress example does not permit the conclusion that a waitress might work “dual jobs” because she
The regulation‘s final sentence puts to rest any ambiguity. That sentence states, in reference to the counterexamples and in clear terms, that “[s]uch related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.”
To defeat that reading, the majority opinion comes up with a hypothetical employee of its own. The majority opinion argues that, if one reads the regulation as focused exclusively on work unrelated to a tipped occupation, the regulation would wrongly categorize a “server who spends 90% of her time wiping down tables . . . and the remaining 10% of her time assisting customers” as working in a single, tipped job. Maj. op. at 31 n.14. That hypothetical, even if it points out a poor policy choice, does not change the focus of the “dual jobs” regulation itself. Congress has set requirements that must be met before an employer may take the tip credit. The employee must be a “tipped employee,”
In conclusion, the regulation, in its current form, conflicts with the Guidance‘s interpretation with respect to work related to a tipped occupation, FOH § 30d00(f)(3). Accordingly, the Guidance does not warrant Auer deference on that point. Plaintiff thus cannot state a claim that Defendant wrongly denied him appropriate wages for the time that he spent doing work related to his role as a server, and the district court correctly dismissed that claim.
C. The Guidance‘s interpretation focusing on unrelated work warrants Auer deference.
Because the DOL‘s other interpretation of what constitutes a “dual job” is entitled to deference, Plaintiff‘s other claim—that Defendant denied him wages for work unrelated to his job as a server—passes muster. The Guidance‘s interpretation that an
At Auer‘s first step, the dual jobs regulation is ambiguous on the point that the Guidance attempts to address. The regulation, even with its clear focus on whether work is related or unrelated to tipped work, is unclear as to how “unrelated” an employee‘s duties must be to qualify the employee as working “dual jobs.” Must the employee perform entirely different functions? Or does performing any duty unrelated to a tipped occupation count as working a dual, non-tipped job? Must the employee perform the duties at different times of day—maintenance work in the morning, and waiter work in the afternoon—to qualify as having “dual jobs“? Or is it enough to perform unrelated duties at any time?
The Guidance answers those questions by explaining that an employee who performs any “work that is not related to [the employee‘s] tipped occupation . . . is effectively employed in dual jobs.” FOH § 30d00(f)(4) (emphasis added). Although that interpretation is not the only one that the regulation would permit, it is not plainly erroneous or inconsistent with the regulation. The regulation‘s focus on whether an employee performs non-tipped “related duties” permits the DOL to determine at what point “related duties” rise to the level of unrelatedness to constitute a separate job. The Guidance‘s interpretation to that effect thus deserves Auer deference, and Plaintiff should have been allowed to move forward with his case, arguing that he was denied wages for work unrelated to his job as a server.
The counterman example does not, as the dissenting opinion suggests, plainly foreclose the Guidance‘s “unrelated work” test. True, as the dissenting opinion notes, if the Guidance categorized the counterman‘s work as a short order cook as unrelated to his work as a counterman, the Guidance would stand at odds with the regulation. But the Guidance does not provide a definition of “unrelated work” that conflicts with the counterman example.1 That example thus does nothing to discredit the Guidance‘s test.
In summary, I would affirm the district court‘s dismissal of Plaintiff‘s claim that Defendant denied him wages for non-tipped work related to his occupation as a server, but I would reverse the district court with respect to Plaintiff‘s claim that Defendant denied him appropriate wages for non-tipped work unrelated to his job as a server.
IKUTA, Circuit Judge, joined by CALLAHAN, Circuit Judge, dissenting:
In the guise of interpreting a regulation (that itself is far afield from the statute at issue), the Department of Labor (DOL) created detailed and specific legislation that effectively eliminated an employer‘s statutory right to take a tip credit. This legislative act was accomplished without compliance with the Administrative Procedure Act (APA)—indeed without any notice to the regulated community at all, resulting in an unfair and unexpected imposition of staggering liability on employers. By deferring to the agency, and thus letting it improperly assume legislative authority,
I
In order to understand what the DOL has accomplished by means of its undercover legislative enactment,
erroneously upheld by the majority as an interpretation of a regulation, it is necessary to understand a bit of historical background.The Fair Labor Standards Act of 1938 (FLSA) generally requires employers to pay a cash wage of $7.25 per hour to their employees.
Among other changes, the 1966 amendments added § 203(m) and § 203(t). See Fair Labor Standards Amendments of 1966, Pub. L. No. 89-601, § 101, 80 Stat. 830, 830. Section 203(m) allows employers to take a tip credit against the minimum wage requirement for tipped employees.
(t) “Tipped employee” means any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.
After Congress amended FLSA to include employees in tipped occupations, the DOL promulgated, via notice and comment, regulations that basically tracked
But after circulating these proposed regulations for public comment, and months after the notice-and-comment period ended, the DOL unexpectedly added the “dual jobs” regulation. See 32 Fed. Reg. 13,575, 13,580 (Sept. 28, 1967), currently promulgated at
(e) Dual jobs. In some situations an employee is employed in a dual job, as for example, where a maintenance man in a hotel also serves as a waiter. In such a situation the employee, if he customarily and regularly receives at least $30 a month in tips for his work as a waiter, is a tipped employee only with respect to his employment as a waiter. He is employed in two occupations, and no tip credit can be taken for his hours of employment in his occupation of maintenance man. Such 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. It is likewise distinguishable from the counterman who also prepares his own short orders or who, as part of a group of countermen, takes a turn as a short order cook for the group. Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips.
The eleventh-hour addition of § 531.56(e) in the final rule was not the sort of deviation from the proposed rule that is allowed under the APA as a “logical outgrowth of the proposals on which the public had the opportunity to comment.” Hall v. EPA, 273 F.3d 1146, 1163 (9th Cir. 2001) (quoting Health Ins. Ass‘n of Am., Inc. v. Shalala, 23 F.3d 412, 421 (D.C. Cir. 1994)). Rather, the proposed regulation never hinted at the idea of dual jobs. See 32 Fed. Reg. 222-1227 (Jan 10, 1967); Envtl. Integrity Project v. EPA, 425 F.3d 992, 996 (D.C. Cir. 2005) (“The ‘logical outgrowth’ doctrine does not extend to a final rule that finds no roots in the agency‘s proposal because ‘[s]omething is not a logical outgrowth of nothing[.]‘“) (first alteration in original) (quoting Kooritzky v. Reich, 17 F.3d 1509, 1513 (D.C. Cir. 1994)). Instead, § 531.56(e) was the first sign of a slow but certain erosion of the tip credit rule.
In the years following the regulation, the DOL issued several opinion letters addressing the dual jobs regulation. These letters provided case-by-case guidance as to when there is a “clear dividing line” between the types of duties performed by tipped and non-tipped employees such that an employee should be deemed to hold two distinct jobs.3
to take a tip credit. Therefore, in 1988, the DOL promulgated a new rule in its internal and unpublished Field Operations Handbook (FOH).4 See
In 2012, the DOL added a new subsection to its rule (in addition to the 20-percent cap) which further limited the availability of a tip credit. See
(1) When an individual is employed in a tipped occupation and a non-tipped occupation, for example, as a server and janitor (dual jobs), the tip credit is available only for the hours spent in the tipped occupation, provided such employee customarily and regularly receives more than $30.00 a month in tips. See
29 CFR 531.56(e) .(2)
29 CFR 531.56(e) permits the employer to take a tip credit for time spent in duties related to the tipped occupation of an employee, even though such duties are not by themselves directed toward producing tips, provided such relatedduties are incidental to the regular duties of the tipped employee and are generally assigned to the tipped employee. For example, duties related to the tipped occupation may include a server who does preparatory or closing activities, rolls silverware and fills salt and pepper shakers while the restaurant is open, cleans and sets tables, makes coffee, and occasionally washes dishes or glasses. (3) However, where the facts indicate that tipped employees spend a substantial amount of time (i.e., in excess of 20 percent of the hours worked in the tipped occupation in the workweek) performing such related duties, no tip credit may be taken for the time spent in those duties. All related duties count toward the 20 percent tolerance.
(4) Likewise, an employer may not take a tip credit for the time that a tipped employee spends on work that is not related to the tipped occupation. For example, maintenance work (e.g., cleaning bathrooms and washing windows) are not related to the tipped occupation of a server; such jobs are non-tipped occupations. In this case, the employee is effectively employed in dual jobs.
In a nutshell, rather than interpreting the dual jobs regulation, the DOL Time-Tracking Rule effectively replaces the concept of a tipped occupation with a new regulatory framework. The Rule requires the employer to count the number of minutes the employee spends on: (1) serving customers; (2) performing duties related to serving customers; and (3) performing duties not directly related to serving customers. The Rule then allows an employer to take a tip credit for the minutes an employee spends on tasks in the first category, but not for the tasks in the second category if they take more than 20 percent of the employee‘s time on the job, and never for tasks in the third category. Clearly, this guidance does not constitute an interpretation of the dual jobs regulation; it is a completely different approach to the tip credit.
II
Given the undercover nature of the DOL‘s approach, we should first consider a threshold question: Is the Time-Tracking Rule actually an interpretation of the dual jobs regulation to which Auer deference applies? Or is it a legislative rule, not entitled to such deference? In failing to address this issue, the majority misses a key element of the necessary analysis. See Christensen v. Harris County., 529 U.S. 576, 588 (2000) (holding that it is improper to defer to an agency‘s position if doing so would “permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation“).
A
Under Seminole Rock, an agency‘s interpretation of its own regulation is generally controlling “unless it is plainly erroneous or inconsistent with the regulation.” 325 U.S. at 414; see also Auer, 519 U.S. at 461. But by its own terms, this deference applies only when an agency proffers an interpretation of its own regulation. Id. Deferential review under Auer is not appropriate “when the disputed administrative action does not represent an actual interpretation of the agency‘s own regulations.” Mission Grp. Kansas, Inc. v. Riley, 146 F.3d 775, 781 (10th Cir. 1998); see also Dir., Office of Workers’ Comp. Programs, U.S. Dep‘t of Labor v. Mangifest, 826 F.2d 1318, 1324 n.12 (3d Cir. 1987) (“We therefore believe that even in the case of interpretations of regulations, we must distinguish between a
Courts have made clear that an agency‘s substantive pronouncements are not entitled to Auer deference, even if they purport to be interpretations of a regulation. In Gonzales v. Oregon, for instance, the Supreme Court declined to defer to the Attorney General‘s pronouncement that using controlled substances to assist suicide was not a legitimate medical practice, even though the Attorney General claimed this pronouncement was an “interpretive rule” interpreting a 1971 regulation. 546 U.S. 243, 254-58 (2006). The Court reasoned that the relevant statute did not decide the assisted suicide issue, the 1971 regulation merely restated the statutory language, and “[s]ince the regulation gives no indication how to decide [the assisted suicide] issue, the Attorney General‘s effort to decide it now cannot be considered an interpretation of the regulation.” Id. at 257. Because the Attorney General‘s pronouncement was not an interpretation of the regulation, it was owed no deference.7 Id. at 257-58.
For the same reason, a court may not defer to a substantive rule masquerading as an interpretation even when the rule is consistent in some way with the regulation. “[M]ere linguistic consistency between the rule and the regulations cannot establish that the former is within the interpretive scope of the latter.” Mission Grp., 146 F.3d at 781. For instance, where a regulation uses open-ended language (such as a regulation requiring regulated entities to comply with “any additional conditions” specified by the agency), the agency may not subsequently issue a rule imposing substantive conditions on those entities “and claim authorization for that action under the plain terms of the regulation. Id. at 778, 781-82. “Such a practice would make a mockery of Chevron, the APA, and judicial review.” Id. at 782.
The reason for requiring courts to determine, in the first instance, whether an agency‘s pronouncement is a legitimate interpretation or merely a disguised substantive rule is clear. Under the APA, a substantive rule must be promulgated pursuant to notice-and-comment rulemaking.
Instead of giving careful consideration to the significant concerns raised by an agency‘s promulgation of substantive rules in the guise of interpretation — concerns that have been noted by both the Supreme Court and our sister circuits — the majority asserts it has no obligation to do so because the Court has not enunciated a rule directly on point or created a “mandatory” threshold question. Maj. Op. at 28-29 n.12. But appellate courts do not just excerpt language from Supreme Court decisions and apply it by rote; rather, we must strive to understand the Court‘s theory and reasoning, and work out how its jurisprudence applies in new contexts. By avoiding that duty here, the majority mistakenly fails to address the threshold question whether the Time-Tracking Rule qualifies as an interpretation.8
B
Because a court must analyze whether an agency is interpreting an existing regulation or creating a new substantive rule in order to determine whether Auer deference applies, it is necessary to understand the difference between interpretive and substantive rules.9
“[T]he critical feature of interpretive rules is that they are ‘issued by an agency to advise the public of the agency‘s construction of the statutes and rules which it administers.‘” Perez v. Mortg. Bankers Ass‘n, 135 S. Ct. 1199, 1204 (2015) (quoting Shalala v. Guernsey Mem‘l Hosp., 514 U.S. 87, 99 (1995)). “[I]nterpretive rules merely explain, but do not add to, the substantive law that already exists in the form of a statute or legislative rule.” Hemp, 333 F.3d at 1087. This means that the substance of the interpretive rule “must flow fairly from the substance” of the existing law. Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 494 (D.C. Cir. 2010) (quoting Robert A. Anthony,
By contrast, legislative rules “create rights, impose obligations, or effect a change in existing law pursuant to authority delegated by Congress.” Hemp, 333 F.3d at 1087. Such a rule has several hallmarks. First, it has the “force of law,” meaning that “in the absence of the rule, there would not be an adequate legislative basis for enforcement action.” Id. (internal quotation marks omitted). Second, a rule is legislative if it does not afford an agency any significant discretion over enforcement. See Barahona-Gomez v. Reno, 167 F.3d 1228, 1235 (9th Cir. 1999); Mada-Luna v. Fitzpatrick, 813 F.2d 1006, 1013-14 (9th Cir. 1987). If an agency issues a directive that “establishes a binding norm that so fills out the statutory scheme that upon application one need only determine whether a given case is within the rule‘s criterion, it effectively replaces agency discretion with a new binding rule of substantive law.” Mada-Luna, 813 F.2d at 1014 (emphasis and internal quotation marks omitted). Another indicator of a legislative rule is that it states a principle “in numerical terms, that cannot be derived from a particular record.” Catholic Health, 617 F.3d at 495 (internal quotation marks omitted). This is because “[a] rule that turns on a number is likely to be arbitrary” and “[w]hen agencies base rules on arbitrary choices they are legislating.” Id. (quoting Hoctor v. U.S. Dep‘t of Agric., 82 F.3d 165, 170-71 (7th Cir. 1996) (alteration in original)). For example, a rule requiring that an enclosure for dangerous animals be surrounded by an eight-foot high perimeter fence is legislative when the underlying regulation merely requires structurally sound containment of dangerous animals. Hoctor, 82 F.3d at 171.
C
In deciding whether a rule interprets an existing regulation or creates a new regulation, Christensen, 529 U.S. at 587-88, it is necessary to first examine the existing regulation at issue.
1
Here, the underlying dual jobs regulation merely requires employers to discern whether an employee is working in two distinct jobs, based on a common-sense understanding of what it means to have two jobs. The regulation gives one example of a person in a dual job: a maintenance man in a hotel who also serves as a waiter.
Next, the regulation gives two examples of a person in a single tipped occupation: a waitress who “spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses,” and a counterman who “as part of a group of countermen, takes a turn as a short order cook for the group.”
2
There is no reasonable view of the Time-Tracking Rule that permits the conclusion that it is an interpretation of the dual jobs regulation.
First, the Rule does not attempt to explain or derive a general principle from the regulation‘s example of what constitutes two distinct jobs — a maintenance man and a waiter. Instead, the Rule effectively disregards this example and takes a different approach, holding that an employee is engaged in dual jobs: (1) if the employee has spent any time at all on tasks not related to obtaining tips; or (2) if the employee has spent time on tasks related to obtaining tips (but not directly serving customers), and this time in the aggregate accounts for 20 percent or more of the hours worked. Obviously, this description of time spent in different tasks over the course of the day is not a description of distinct jobs. There is no job that can be described as more-than-20-percent-of-time-spent-on-untipped-related tasks, nor is there a job that can be described as the five or ten minutes spent here and there on unrelated tasks.
The Rule also effectively disregards the regulation‘s examples of when an employee is engaged in a single job, despite being involved in a multitude of tasks. Under the dual jobs regulation, a waitress doing typical waitress duties remains a waitress, even if (in five-minute increments throughout her workweek) she spends 60 percent of her time waiting tables, 10 percent cleaning tables, 10 percent toasting bread, 10 percent making coffee, and 10 percent washing dishes. See
Similarly, the dual jobs regulation contemplates that an employee who has a job as a counterman, which may include both serving customers at the counter and working as a chef preparing short orders, is engaged in a single tipped occupation. See
Despite this clear disjunction between the Rule and the regulation, the majority argues that the Rule must be upheld because the dual jobs regulation is ambiguous, and the Rule is not “plainly erroneous or inconsistent with the regulation.” Maj. Op. at 32 (quoting Auer, 519 U.S. at 461). The majority errs, however, because the Rule could qualify as a permissible interpretation of the dual jobs regulation only if the Rule could be fairly derived from the regulation. The majority fails to show how the Rule‘s specific time-tracking requirements “flow fairly” from the dual jobs regulation, Catholic Health, 617 F.3d at 494, rather than being “a mere position about what the regulations require,” Mangifest, 826 F.2d at 1324.
First, the Rule fails to clarify any of the phrases in the dual job regulation that the majority claims are ambiguous. The majority states that the dual jobs regulation is ambiguous because it “does not offer a precise definition for ‘occupation‘” and only provides examples. Maj. Op. at 28-29. But the Rule does not clarify this supposed ambiguity. Rather than construe the word “occupation,” the Rule uses the undefined term “tipped occupation” and focuses on the time employees spend in specified duties related or unrelated to the “tipped occupation.”
Second, the majority states that the dual job regulation is ambiguous because it does not explain what it means by the phrases “part of her time” and “occasionally” in the sentence explaining that a waitress does not have a dual job if she “spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.” Maj. Op. at 29-30;
The majority attempts to camouflage this failure of interpretation by arguing that “an agency need not explicitly identify in its guidance each ambiguous word it is defining in order to provide a valid interpretation of an ambiguous regulation.” Maj. Op. at 33 n.16. But this is contrary to the very nature of an interpretation: if the purported interpretation does not address some ambiguity in the regulation, what is the interpretation interpreting? It is not enough for an agency‘s statement to be consistent with a regulation or express the agency‘s position about what the regulation requires; rather, it must be a reasoned interpretation of the regulatory language. Mangifest, 826 F.2d at 72-74 & n.12.
Finally, the majority points out that the dual jobs regulation states that “related
The majority not only fails to show that the Rule construes ambiguous terms, it also fails to justify the Rule‘s time-tracking framework as a fair interpretation of the dual jobs regulation as a whole. First, the regulation‘s example of a waitress “who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses,”
Similarly, the dual jobs regulation‘s example of a counterman “who also prepares his own short orders or who, as part of a group of countermen, takes a turn as a short order cook for the group” establishes that an employee is not engaged in dual jobs merely because the employee takes a turn as a short order cook.
Rather than being an interpretation of the dual jobs regulation, the Time-Tracking Rule has all the indicia of a legislative rule. See supra at 68-69. Without the Rule and its time-tracking requirements “there would not be an adequate legislative basis for enforcement action,” Hemp, 333 F.3d at 1087 (internal quotation marks omitted), merely because an employer takes a tip credit when an employee spends time on a range of duties typically included in a tipped occupation. Nor does the Rule give the DOL any discretion in enforcement. See Barahona-Gomez, 167 F.3d at 1235. An employer would be subject to liability whenever a minute-by-minute calculation of how employees spend their time during the course of the day shows that, per the Time-Tracking Rule, an employee was not paid minimum wages for minutes spent on related duties exceeding the 20-percent cap or for minutes spent on duties not related to tips.
Further, the DOL‘s derivation of a 20-percent cap on related duties is precisely the type of arbitrary, numerical choice that should have been made through notice and comment. Catholic Health, 617 F.3d at 495; Hoctor, 82 F.3d at 170-71. The majority argues that the DOL had the authority to establish a 20-percent cap, because it is “consistent with its treatment of other temporal limitations,” in regulations it previously promulgated. Maj. Op. at 38. But the majority‘s examples of the DOL‘s prior temporal limitations were either legislatively enacted or promulgated through notice-and-comment rulemaking. See Maj. Op. at 39 n.20;
In short, the Time-Tracking Rule is purely a legislative rule: “under the guise of interpreting a regulation,” the DOL has created ”de facto a new regulation.” Christensen, 529 U.S. at 587-88. As such, the Rule is not entitled to Auer deference. Moreover, because the DOL did not issue it through notice-and-comment rulemaking, it is invalid.
III
By mistakenly upholding the DOL‘s legislative rule as an interpretation that is owed Auer deference, the majority runs squarely into the problems that the APA was enacted to prevent.
A
First, the DOL failed to get necessary input from the regulated public. “[T]he point of notice-and-comment rulemaking is that public comment will be considered by an agency and the agency may alter its action in light of those comments.” Hall v. U.S. Envtl. Prot. Agency, 273 F.3d 1146, 1163 (9th Cir. 2001). The APA‘s notice requirement is intended to “improve[] the quality of agency rulemaking by ensuring that agency regulations will be tested by exposure to diverse public comment.” Small Refiner Lead Phase-Down Task Force v. EPA, 705 F.2d 506, 547 (D.C. Cir. 1983) (internal quotations omitted).
Because it never sought or received such input, the DOL promulgated a Rule that not only eviscerates the statutory tip credit, but is unworkable as a practical matter. The facts of this case illustrate why the complexity of the time-tracking requirement makes it unreasonable. Here, Marsh claims that he brewed tea during every opening shift and as needed, which took about ten minutes to complete each time, for a total of forty minutes over the course of any given workweek. He also brewed coffee for each customer who ordered it, which took about five minutes to complete each time, and added up to approximately eighty minutes of any given workweek. Marsh cut, arranged, and stocked lemons and limes during every opening shift and throughout his shifts, each session taking approximately five minutes, for a total of forty minutes in any given workweek. Marsh cleaned the soft drink dispensers and their nozzles, replaced soft drink syrups, and stocked ice. Each task took about five minutes to complete, and over the course of a workweek these tasks respectively took twenty, ten, and forty minutes. J. Alexander‘s also assigned Marsh cleaning duties, such as wiping tables (five to twenty minutes each time, for a total of one hour and forty minutes over the course of a week), taking out trash (ten minutes each time, for a total of twenty minutes over the course of a week), scrubbing walls when the restaurant was slow (one hour over the course of the week), sweeping floors (about ten minutes each time, for a total of forty minutes over the course of a week), and cleaning restrooms (ten minutes each time, for a total of thirty minutes over the course of a week). Given this distribution of multiple varied tasks over the course of a day, “nearly every person employed in a tipped occupation could claim a cause of action against his employer if the employer did not keep the employee under perpetual surveillance or require them to maintain precise time logs accounting for every minute of their shifts.” Pellon v. Bus. Representation Int‘l, Inc., 528 F. Supp. 2d 1306, 1314 (S.D. Fla. 2007), aff‘d, 291 F. App‘x 310 (11th Cir. 2008).
The majority claims that the Rule is not unworkable in this context, Maj. Op. at 42-44, but each of its arguments fails. First, the majority argues that defendants’ concerns are misplaced because “[t]he allegations that would trigger a FLSA wage violation claim require more than de minimis claims based on seconds or minutes spent rolling silverware or sweeping a customer‘s shattered glass.” Maj. Op. at 42-43. But Marsh and the other plaintiffs base their damages claims on exactly these sorts of allegations: minutes spent performing various tasks throughout the work day. And Marsh‘s claims are exactly the sort addressed by the Rule, which insists that an employer must aggregate all “related duties” as part of “the 20 percent tolerance” and pay minimum wage for all time spent on such duties if over 20 percent, as well as pay minimum wage for all time spent on work “not related to the tipped occupation.”
The majority next argues that it is not impracticable for an employer to keep track of time spent on various duties, because an employee could clock in and out, using different input codes, when engaged in different tasks, such as before and after the restaurant closes or when business is slow. Maj. Op. at 42-43. This assertion is belied by Marsh‘s claims, which are primarily based on five and ten minute tasks performed throughout his shifts. Contrary to the majority‘s argument, many of these tasks were not “scheduled,” Maj. Op. at 43, but occurred “as needed.” The variable nature of such duties further increases the difficulty of tracking Marsh‘s time spent on each task.
Finally, the majority also claims that the Rule is not impracticable, “because employers are already required to maintain records of each hour an employee receives tips and each hour she does not, see
B
Second, the DOL‘s creation of a legislative rule without notice and comment — indeed, without any notice at all — imposed an unfair surprise on the regulated community. The Supreme Court has made clear that an agency cannot “impose potentially massive liability” on the regulated community without giving fair notice and forewarning. Christopher v. SmithKline Beecham Corp., 567 U.S. 142, 155 (2012).
In Christopher, the Court considered an action in which pharmaceutical sales representatives sued their employers for overtime wages based on their claim they were not exempt “outside salesmen.” Id. While the case was pending before the Supreme Court, the DOL reinterpreted an ambiguous regulation to further support the employees’ claims. Id. at 154. The Court concluded that such interpretation was not entitled to Auer deference for several reasons, all of which apply here. Id. at 155-59.
For one, Christopher noted that the employees “invoke[d] the DOL‘s interpretation of ambiguous regulations to impose potentially massive liability on respondent for conduct that occurred well before that interpretation was announced.” Id. at 155-56; see also Auer, 519 U.S. at 461-63. The same concern applies here. As noted above, the DOL announced its 20-percent rule in an amicus brief in 2010, and did not announce the full Time-Tracking Rule until this appeal.13
An analogous concern expressed by Christopher is that misplaced Auer deference “would seriously undermine the principle that agencies should provide regulated parties fair warning of the conduct [a regulation] prohibits or requires” and “result in precisely the kind of unfair surprise against which our cases have long warned.” Christopher, 567 U.S. at 156 (alteration in original) (internal quotation marks omitted); see also Indep. Training & Apprenticeship Program v. Cal. Dep‘t of Indus. Relations, 730 F.3d 1024, 1035 (9th Cir. 2013) (declining to defer to agency interpretations “where an agency pulls the rug out from under litigants that have relied on a long-established, prior interpretation of a regulation“). In Christopher, the fact that “the DOL never initiated any enforcement actions” or “otherwise suggested that it thought the industry was acting unlawfully,” highlighted the lack of notice. 567 U.S. at 157.
Again, the same factors apply here. As it has done on many earlier occasions, the DOL issued its Time-Tracking Rule through an unpublished internal manual, and then sought controlling deference via an amicus brief. See E.I. Du Pont De Nemours & Co. v. Smiley, No. 16-1189, 2018 WL 3148557, at *1 (U.S. June 28, 2018) (Gorsuch, J., respecting the denial of certiorari) (noting the DOL‘s “aggressive” attempts to establish policy via amicus briefs in private litigation); Deborah Thompson Eisenberg, Regulation by Amicus: The Department of Labor‘s Policy Making in the Courts, 65 Fla. L. Rev. 1223, 1243-50 (2013) (summarizing the
In short, the DOL‘s failure to engage in notice and comment before issuing the Time-Tracking Rule as its authoritative interpretation of the dual jobs regulation, raises the precise concerns that led the Supreme Court to reject Auer deference to stealth DOL rulemaking. Id. at 158-59. The majority errs in failing to do likewise.
IV
In recent years, a number of Supreme Court justices have noted grave concerns about the propriety and constitutionality of deferring to agency interpretations. See, e.g., Perez, 135 S. Ct. at 1210-11 (Alito, J., concurring in part and concurring in judgment); id. at 1211-13 (Scalia, J., concurring in the judgment); id. at 1213-25 (Thomas, J., concurring in the judgment); Decker v. Nw. Envtl. Def. Ctr., 568 U.S. 597, 615-16 (2013) (Roberts, C.J., concurring); Talk Am., Inc. v. Mich. Bell Tel. Co., 564 U.S. 50, 67-69 (2011) (Scalia, J., concurring). As Justice Scalia observed, “[i]t seems contrary to fundamental principles of separation of powers to permit the person who promulgates a law to interpret it as well.”15 Talk America, 564 U.S. at 68 (Scalia, J., concurring).
The majority‘s mistaken willingness to give Auer deference to the DOL‘s legislative rulemaking in the guise of deferring to an “interpretation” highlights these concerns. By taking a hands-off approach to the DOL‘s arrogation of power, the majority allows the DOL to promulgate what essentially amounts to secret legislation that eliminates the benefit conferred on employers by Congress and then enforce the rule via surprise amicus filings in private litigation — all without political accountability, input from the regulated community via notice and comment, or independent judicial review. See Gutierrez-Brizuela v. Lynch, 834 F.3d 1142, 1152 (Gorsuch, J., concurring) (“[W]hen unchecked by independent courts exercising the job of declaring the law‘s meaning, executives throughout history [have] sought to exploit ambiguous laws as license for their
Allowing agencies to invent rules without notice “frustrates the notice and predictability purposes of rulemaking, and promotes arbitrary government.” Talk America, Inc., 564 U.S. at 69 (Scalia, J., concurring). Here the DOL did just that, issuing a legislative rule that eviscerates a benefit conferred by Congress and results in a nightmare for the regulated community. Because there is no basis to defer to the DOL‘s promulgation of this rule under Auer or any other theory, I dissent.
Notes
In determining the wage an employer is required to pay a tipped employee, the amount paid such employee by the employee‘s employer shall be an amount equal to—
(1) the cash wage paid such employee which for purposes of such determination shall be not less than the cash wage required to be paid such an employee on August 20, 1996; and
(2) an additional amount on account of the tips received by such employee which amount is equal to the difference between the wage specified in paragraph (1) and the wage in effect under section 206(a)(1) of this title. In the amicus brief filed in this appeal, the DOL states that it published the 20-percent cap rule in the 2010 amicus brief. Given the DOL‘s failure to identify any earlier publication of this rule, the majority‘s statement that “[i]t is therefore impossible to say” whether the FOH was made public at an earlier date, Maj. Op. at 36 n.17, is disingenuous.
Reg 531.56(e) permits the taking of the tip credit for time spent in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips (i.e. maintenance and preparatory or closing activities). For example a waiter/waitress, who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses may continue to be engaged in a tipped occupation even though these duties are not tip producing, provided such duties are incidental to the regular duties of the server (waiter/waitress) and are generally assigned to the servers. However, where the facts indicate that specific employees are routinely assigned to maintenance, or that tipped employees spend a substantial amount of time (in excess of 20 percent) performing preparation work or maintenance, no tip credit may be taken for the time spent in such duties.
Brief for the Secretary of Labor as Amicus Curiae in Support of Plaintiffs-Appellees at 13, Fast v. Applebee‘s Int‘l, Inc., 638 F.3d 872 The majority attempts to limit Gonzales to its facts, arguing that because the DOL‘s dual jobs regulation does not merely parrot the language of the FLSA, Gonzales does not apply. Maj. Op. at 28-29 n.12. But this dismissive approach fails to engage with the Supreme Court‘s reasoning regarding when an agency‘s pronouncements are not entitled to deference.
This is not an interpretation of the dual jobs regulation because, like subsection (3), subsection (4) adopts a minute-by-minute approach that contradicts the regulation‘s occupation-based analysis. While the regulation applies only when an employee holds two distinct jobs, such as a maintenance man and a waiter, subsection (4) classifies the minutes an employee spends on tasks that are “not related to the tipped occupation” as a distinct job, regardless of the nature of the tasks or the amount of time spent performing them. The regulation‘s assurance that a waitress may perform multiple tasks (including washing dishes or glasses and cleaning tables) and still be employed in a single waitress job, is at odds with subsection (4)‘s statement that a server who spends any time washing windows is “effectively employed in dual jobs.” Nor does subsection (4) clarify any ambiguous terms in the dual jobs regulation; rather, it adds to the confusion by failing to explain why time spent washing windows, but not time spent washing dishes, is “not related” to the tipped occupation. Because subsection (4) merely presents the agency‘s position, rather than an interpretation of the regulation, it is not entitled to deference.Likewise, an employer may not take a tip credit for the time that a tipped employee spends on work that is not related to the tipped occupation. For example, maintenance work (e.g., cleaning bathrooms and washing windows) are not related to the tipped occupation of a server; such jobs are non-tipped occupations. In this case, the employee is effectively employed in dual jobs.