Where Tips End and Wages Begin

One year ago, this blog featured a post that outlined various reasons why the restaurant industry’s use of tips in lieu of guaranteed wages had come to provoke, in the author’s words, “a firestorm of criticism”: that reliance on tips as a significant component of server take-home pay 1) destined many servers to earning a sub-minimum wage; 2) encouraged female servers to tolerate sexual harassment by their customers; and 3) resulted in pay discrimination unrelated to the quality of servers’ work, a consequence of customer biases and their impacts on the amounts tipped.

Since the post’s publication, this firestorm has continued unabated. In fact, Uber even pointed to customer bias as a reason not to add a tipping function to its ride-sharing app, as its competitor Lyft has done. Moreover, recent modeling by FiveThirtyEight illustrates the volatility of tip-based incomes in the restaurant industry, as well as divisions between different classes of restaurants vis-à-vis the tipped amounts that their servers typically earn, which further underscores the question whether tipping can serve as a reliable substitute for set pay.

In this vein, a recent opinion out of the U.S. Court of Appeals for the Tenth Circuit sheds new light on the shortcomings of tipping as a reliable form of compensation, highlighting the dangers posed to employees by the liminal space between “tips” and “wages” under the Fair Labor Standards Act (FLSA).

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New DOL Guidance on Employee Status: News for Uber or Lyft?

The U.S. Department of Labor has issued a new Interpretation of the Fair Labor Standards Act’s definition of “employ.” The Interpretation will be broadly relevant to disputes over whether workers are correctly classified as employees or independent contractors for purposes of the FLSA (and other statutes, including the Family and Medical Leave Act). Given the intense focus on the “employment” question in the on-demand sector, here is a quick analysis of how the Interpretation may figure in those particular debates.

At the most general level, the Interpretation – issued by the Administrator of the DOL’s Wage and Hour Division – emphasizes what the DOL views as the sweeping breadth of the FLSA’s definition. Thus, the Interpretation states that the FLSA “was specifically designed to ensure as broad of a scope of statutory coverage as possible.”  Now, that can’t quite be true: the FLSA could have covered “everyone who performs work for another,” a definition that would have been substantially broader and would have eliminated the independent contractor category.  The statute doesn’t do that.  But, clearly, “suffer or permit” provides broad coverage, and – more to the point – it’s the Administrator’s intent in this document to stress breadth of coverage.  This comes across clearly in the introductory section, for example, where the Interpretation states flatly, “most workers are employees under the FLSA.”

The Interpretation also cautions that the common law “control” test is too narrow for FLSA purposes, and it reiterates what numerous courts have long held: that employee status under the FLSA is to be determined according to an “economic realities” test.  With respect to the economic realities test, moreover, the Interpretation emphasizes that the test turns on a determination of whether the worker is “economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor).”  [NB: The notion of “economic dependence” can be confusing and distracting, for reasons that Judge Easterbrook (among others) has pointed out.  But that discussion is a bit beside the point here.]

The heart of the guidance comes with the discussion of the six factors meant to flesh out whether a worker is dependent or “really in business for him or herself,” and it is here that there may be some news for Uber, Lyft and other on-demand firms. The six factors are well known and long-established; it is the focus and emphases contained in the Interpretation’s discussion of the factors that matter.

“What is the Nature and Degree of the Employer’s Control”  Control is the last factor in the six-prong test, and it’s the last one the Interpretation discusses, but it may be the most relevant for Uber and Lyft.  Why? Because the Interpretation takes up, and then dispenses with, two of the most common views about why on-demand workers ought to be considered independent contractors. First, the Interpretation states that the lack of direct supervision over how work is carried out is “largely insignificant” when workers work offsite. And, second, the Interpretation states that workers’ ability to determine when they work is also “not indicative of independent contractor status.”  Citing the Third Circuit’s DialAmerica Marketing decision, the Interpretation thus concludes that “the fact that the workers could control the hours during which they worked and that they were subject to little direct supervision was unsurprising given that such facts are typical of homeworkers and thus largely insignificant in determining their status.”  In other words, you can be an employee even if you set your own hours and are never directly supervised.  This is a conclusion with unmistakable relevance to the on-demand debate.

“Is the Work an Integral Part of the Employer’s Business?”  Here, the Interpretation states that if the work is “integral” to the putative employer’s business, it is more likely that the worker is economically dependent on the employer and thus more likely that the worker is an employee.  The Interpretation also highlights the fact that courts have held the “integral” factor to be controlling, and that work can be integral within the meaning of the test even if it is performed by “hundreds of thousands of [] workers.”  Are drivers “integral” to Uber and Lyft’s business?   Continue reading