The Fair Labor Standards Act of 1938 (“FLSA”) establishes minimum wage, overtime pay, record keeping requirements and child labor standards.  It also allows employers to take a “tip credit,” in certain tipped occupations, such as a server, in order to offset the employer’s obligation to pay hourly minimum wage.  Employers can pay as little as $2.13 per hour to tipped employees, but if the employee’s wages and tips combined do not meet the minimum wage, the employer must make up the difference.

In Marsh v. J. Alexander’s LLC, 950 F. 3d 610 (9th Cir. 2018), an 11-member en banc panel of the Ninth Circuit Court of Appeals ruled that tip credits cannot be used when a server or bartender is performing non-tip credit tasks at least 20% of the time the employee works.  For example, if the employee spends over 20% of his time doing non-tip related work, such as cleaning bathrooms or maintaining soft drink dispensers, the employee must be paid at full wage for those hours worked.

The Court’s reasoning was based on two public policy considerations. First, customers pay tips as a gift to the server, as opposed to a cost-saving benefit to the employer.  Second, if an employer could pay a bartender $2.13 per hour to clean bathrooms, there is no need to hire janitors at minimum wage. 

This is a major change for employers who are accustomed to paying tipped employees a consistent wage assuming the majority of their time is spent doing tipped work.  Employers should review job descriptions, job duties and pay rates for tipped employees and consult with an attorney for specific guidance and questions.