Winans v. W.A.S., Inc.

• Decision Date: 11 May 1989
• Docket Number: No. 55611-3,55611-3
• Citation: 112 Wn.2d 529,772 P.2d 1001
• Court: Washington Supreme Court
• Parties: , 29 Wage & Hour Cas. (BNA) 480, 112 Lab.Cas. P 35,232 John B. WINANS, Jay A. Bailet, Paul Cottle, John Kelly, Craig Mullarky, and Randy Rupert, Respondents, v. W.A.S., INC., a Washington corporation; Sono Industries, Inc., a Washington corporation; and John W. Schwartz, an individual, d/b/a Henry's Off Broadway, a restaurant, Petitioners.

Page 529

112 Wn.2d 529

772 P.2d 1001, 29 Wage & Hour Cas. (BNA) 480,

112 Lab.Cas. P 35,232

John B. WINANS, Jay A. Bailet, Paul Cottle, John Kelly Craig Mullarky, and Randy Rupert, Respondents, v. W.A.S., INC., a Washington corporation; Sono Industries Inc., a Washington corporation; and John W Schwartz, an individual, d/b/a Henry's Off Broadway, a restaurant, Petitioners.

No. 55611-3.

Supreme Court of Washington,

En Banc.

May 11, 1989.

Culp, Dwyer, Guterson & Grader, Richard C. Yarmuth, Robert M. Sulkin, Seattle, for petitioners.

Williams, Kastner & Gibbs, Scott B. Henrie, Elizabeth A. Christianson, Seattle, for respondents.

UTTER, Justice.

W.A.S., Inc., d/b/a Henry's Off Broadway Restaurant (Henry's), seeks review of a Court of Appeals decision affecting the payment method for their parking valets. The Court of Appeals upheld the Superior Court which ruled that the 1974 amendments to the federal Fair Labor Standards Act (FLSA) render illegal a payment scheme in which the tips received by the valets become the employer's property and are used to fulfill the employer's minimum wage obligations. Winans v. W.A.S., Inc., 52 Wash.App. 89, 758 P.2d 503 (1988). We granted discretionary review and now affirm the Court of Appeals.

Henry's is located in Seattle's Capitol Hill neighborhood. Because parking in Capitol Hill is rather difficult, Henry's employs a number of valets to handle the customers' search for a parking spot. During the course of their work, the valets receive tips from the customers. Under an agreement between Henry's and the valets, which is a condition for the valets' employment, all of these tips become the property of Henry's. Henry's uses this tip money to pay the valets at rates of $4.50 to $6 per hour. In addition to fulfilling these wage obligations, the tip money is also used to cover payroll tax, insurance deductibles, and other expenses. Any surplus is given back to the valets as a bonus.

On June 15, 1983, John B. Winans, Jay A. Bailet, Paul Cottle, John Kelly, Craig Mullarky, and Randy Rupert, all valets at Henry's, filed an action against the restaurant in King County Superior Court. They alleged that the payment agreement described above violated federal and state minimum wage laws. In particular, they argued that the 1974 amendments to the FLSA made such arrangements illegal. The valets also sought liquidated damages under the FLSA--which would effectively double the amount of their award--and attorney fees and costs. The case initially went to arbitration; the arbitrator held in favor of the valets. Henry's then requested a bench trial.

Judge Robert M. Elston of the Superior Court for King County held as a matter of law that the payment agreement was illegal. Record of Proceedings (12/12/86), at 1-7. Nonetheless, because the court found Henry's had not created the payment scheme in bad faith, the valets were not entitled to liquidated damages. The court did, however, award attorney fees and costs to the plaintiffs.

Henry's appealed the trial court decision to the Court of Appeals. The valets cross-appealed on the issue of liquidated damages. The Court of Appeals affirmed the trial court, including its award of fees and costs, with one judge dissenting. In addition, the majority awarded further fees and costs to the plaintiffs for the appeal. A concurring/dissenting opinion found that liquidated damages would have been appropriate. A third judge, in dissent, would have reversed the trial court, arguing that the FLSA amendments did not clearly render the payment agreement illegal.

At this court, Henry's raises the same issues as it did below; it does not, however, raise any issues regarding state minimum wage laws. The valets again seek review of the liquidated damages issue.

I

In arguing that the Court of Appeals was incorrect, petitioners contend that the FLSA "expressly permits" two kinds of employee payment schemes when the employees receive tips: the "tip credit method" and the "hourly wage method." Under the former system, the employees keep all the tips they receive but the employer may deduct up to 40 percent of the employees' hourly minimum wage. Under the latter, the tips received by the employees are the property of the employer, who must pay the full minimum wage. The employees turn over the tips they receive to the employer, who uses them to pay wages and other expenses. Henry's used this latter system to pay the valets.

Henry's argues that provisions in the Code of Federal Regulations promulgated in 1967 specifically provide for the "hourly wage method." The relevant portions of these provisions are as follows:

In the absence of an agreement to the contrary between the recipient and a third party, a tip becomes the property of the person in recognition of whose service it is presented by the customer.

29 C.F.R. § 531.52.

[W]here the employment agreement is such that amounts presented by customers as tips belong to the employer and must be credited or turned over to him, the employee is in effect collecting for his employer additional income from the operations of the latter's establishment.... [T]he employee is not receiving tips within the meaning of section 3(m) and 3(t). The amounts received from customers are the employer's property, not his, and do not constitute tip income to the employee.

29 C.F.R. § 531.55(a).

As indicated in § 531.51, the tip credit may be taken only for hours worked by the employee in an occupation in which he qualifies as a "tipped employee." Under employment agreements requiring tips to be turned over or credited to the employer to be treated by him as part of his gross receipts, it is clear from the legislative history that the employer must pay the employee the full minimum hourly wage, since for all practical purposes the employee is not receiving tip income.

29 C.F.R. § 531.59.

The parties concede that prior to 1974 the type of arrangement used by Henry's was legal. Such agreements were upheld in Williams v. Jacksonville Terminal Co., 315 U.S. 386, 62 S.Ct. 659, 86 L.Ed. 914 (1942), and Hodgson v. Bern's Steak House, Inc., 20 Wage & Hour Cases 261 (M.D.Fla.1971). Respondents contend, however, that the amendments made to the FLSA in 1974 render the aboveregulations invalid and the "hourly wage method" along with it. The relevant statute, as amended, reads in part:

In determining the wage of a tipped employee, the amount paid such employee by his employer shall be deemed to be increased on account of tips by an amount determined by the employer, but not by an amount in excess of 40 per centum ¹ of the applicable minimum wage rate, except that the amount of the increase on account of tips determined by the employer may not exceed the value of tips actually received by the employee. The previous sentence shall not apply with respect to any tipped employee unless (1) such employee has been informed by the employer of the provisions of this subsection, and (2) all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.[ ²

(Italics ours.) 29 U.S.C.A. § 203(m) (Supp.1988). The statute further defines "tipped employee" as "any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips." 29 U.S.C.A. § 203(t). Congress added this definition to the statute in 1966, originally with $20 as the determinative amount. Pub.L. No. 89-601, 80 Stat. 830 (1966).

Essentially, the valets argue that the definition of "tipped employee" in § 203(t) in conjunction with the requirement that "all tips received by such [tipped] employee have been retained by the employee" nullify the prior legality of the "hourly wage method." Under their reasoning, any employee who receives over $30 per month in tips must, under the statute, keep the tips and receive at least 60 percent of the minimum wage. Further, if the notice requirements of § 203(m) are not met, then the employer must pay all of the minimum wage. The "hourly wage method" takes the tips away from the employees and, by denominating them as the employer's property, allows the employer to pay less out of his own pocket to meet the minimum wage requirement. Thus, the employer gains a greater "tip credit" than otherwise allowed by § 203(m). ³

Petitioners, on the other hand, maintain that § 203(m) applies only to the possible tip credit allowed to employers of "tipped employees." They claim that, under the regulations, employees under a tip agreement like the one here are not "tipped," therefore, § 203(m) does not apply to the valets at all. In essence, they argue that the 1974 amendments did not change the arrangements recognized by the regulations because the amendments did not explicitly overrule the regulations. Thus, the regulations' exception to "tipped employee" remains.

The central issue in this case, then, is whether or not the regulations cited by the petitioners are still valid. The valets argue for their invalidity because they are inconsistent with the 1974 amendments. They cite two administrative decisions of Department of Labor Wage-Hour Administrators which explicitly find the regulations invalid. In Wage and Hour Op. Letter WH-310 (Feb. 18, 1975), Administrator Murphy found: The interpretations prescribed in 29 CFR 531.50 through 531.60 were issued pursuant to the Act as it was before the 1974 amendments, and have no effect to the extent that they are in conflict with the amended Act. Revisions of these CFR sections are being prepared which will incorporate the changes resulting from the 1974 amendments.

The new regulations never came out. See also Wage and Hour Op. Letter WH-321 (Apr. 30, 1975).

The valets also point to the legislative history of the 1974 amendments as evidence of Congress's intent to make the "hourly wage method" illegal. In particular, the valets...