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

• Decision Date: 01 August 1988
• Docket Number: No. 19970-6-I,19970-6-I
• Citation: 52 Wn.App. 89,758 P.2d 503
• Court: Washington Court of Appeals
• Parties: , 28 Wage & Hour Cas. (BNA) 1301, 109 Lab.Cas. P 35,110 John B. WINANS, Jay A. Bailet, Paul Cottle, John Kelly, Craig Mullarky, and Randy Rupert, Respondents/Cross-Appellants, 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, Appellants/Cross-Respondents.

Page 89

52 Wn.App. 89

758 P.2d 503, 28 Wage & Hour Cas. (BNA) 1301,

109 Lab.Cas. P 35,110

John B. WINANS, Jay A. Bailet, Paul Cottle, John Kelly Craig Mullarky, and Randy Rupert Respondents/Cross-Appellants, 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, Appellants/Cross-Respondents.

No. 19970-6-I.

Court of Appeals of Washington, Division 1.

Aug. 1, 1988.

Reconsideration Denied Sept. 12, 1988.

Review Granted Jan. 10, 1989.

Culp, Dwyer, Guterson & Grader, Richard C. Yarmuth, Seattle, for W.A.S., inc.

Williams, Kastner & Gibbs, Scott B. Henrie, Elizabeth Christianson, Belleveue, for John B. Winans.

WINSOR, Judge.

W.A.S., Inc., d/b/a Henry's Off Broadway (Henry's), appeals from a judgment in which the court found that Henry's compensation method for its automobile parking valets violated the Fair Labor Standards Act. Henry's also appeals the award of attorneys' fees and costs. Winans and five other valets (hereafter valets) cross-appeal the denial of liquidated damages.

Henry's employed a number of valets in its restaurant business. Its employment contract with the valets included an agreement that designated all tips collected by valets as the property of Henry's. Henry's paid the valets an hourly wage of between $4.50 and $6.00, plus a bonus. The bonus (but not the wage) was based on the amount of tips collected.

The valets challenged the legitimacy of the agreement, claiming that it was illegal under the Fair Labor Standards Act of 1938 (FLSA) as amended, 29 U.S.C. § 201 et seq. (1986). They sought unpaid minimum wages, liquidated damages, attorneys' fees and costs.

Prior to the commencement of the trial, the court ruled as a matter of law that the agreement was illegal and unenforceable. A trial was then held on the statutory defense of whether Henry's had acted in good faith and with a reasonable belief that it was not violating the FLSA in entering into the agreement. See 29 U.S.C. § 260. The court found in Henry's favor and therefore denied the valets' claim for liquidated damages.

At a post trial motion the court awarded prejudgment interest, attorneys' fees, and costs.

Henry's appeals from the judgment, assigning error to the court's conclusion that the agreement was illegal, and to the award of costs and the amount of attorneys' fees. The valets cross-appeal the denial of liquidated damages and request attorneys' fees on appeal.

The first issue we address is whether the regulations authorizing agreements in which tips become property of the employer have been nullified by the 1974 amendment to section 3(m) of the FLSA.

Section 3(m) of the FLSA (29 U.S.C. § 203(m)), as amended in 1974, outlines a tip credit which employers may use against their obligation to pay minimum wages to their tipped employees. Section 3(m) provides that all tips must be retained by the employee and allows the employer to take up to a 40 percent credit against its minimum wage obligation on account of the tips. ¹ The Code of Federal Regulations reiterates the tip credit. 29 C.F.R. § 531.59. The regulations also sanction employment agreements in which all tips become the property of the employer. 29 C.F.R. §§ 531.52, .55(a).

Immediately after the 1974 amendment the Wage and Hour Division of the Department of Labor, which promulgated the regulations and is charged with enforcement of the FLSA, issued several opinion letters asserting that the 1974 amendment superseded segments of the regulations and rendered illegal any agreement that required an employee to turn over tips to the employer. Wage and Hour Op. Letter No. WH-310, February 18, 1975; Wage and Hour Op. Letter No. WH-321, April 30, 1975; see also WH Publication 1433 (January 1978). The letters also stated that the Department was in the process of revising its regulations to conform to the amendment. The regulations were never revised and are printed in the current Code of Federal Regulations.

Henry's argues that the 1974 amendment to section 3(m) of the FLSA concerned the tip credit but not tip agreements. According to Henry's, the amendment affected only "tipped employees," as defined in section 3(t) but limited by 29 C.F.R. § 531.55(a), which distinguishes tipped employees from employees who by prior agreement turn over their tips to the employer. Henry's maintains that section 3(m) does not apply to employees whose tips are subject to such agreements and that its agreement is permitted under the regulations. Henry's admits, however, that if the regulations are found to be invalid, then its wage method would be illegal.

The valets assert that the regulations are "mere interpretations" and are based on a statutory provision no longer in existence. They place great weight on the Department of Labor opinion letters that interpret the 1974 amendment as invalidating the regulations.

The regulations at issue, 29 C.F.R. §§ 351.52 and .55(a), are current regulations. They were properly promulgated by the Department of Labor in 1967 pursuant to the requirements of the Administrative Procedure Act (A.P.A.), 5 U.S.C. § 551 et seq. (1986), and as such are accorded the force of law, Chrysler Corp. v. Brown, 441 U.S. 281, 295, 99 S.Ct. 1705, 1714, 60 L.Ed.2d 208 (1979). However, a regulation is a nullity where it is inconsistent with a statute. E.g., Manhattan Gen. Equip. Co. v. Commissioner of Internal Rev., 297 U.S. 129, 134, 56 S.Ct. 397, 399, 80 L.Ed. 528 (1936); Pacific Gas & Elec. Co. v. United States, 664 F.2d 1133 (9th Cir.1981), on remand, 554 F.Supp. 345 (N.D.Cal.1983).

We hold that the regulations permitting tip agreements are nullities because they are inconsistent with section 3(m) of the FLSA, as amended. We recognize the section as amended is not clear as to whether tip agreements are permitted. It specifies the maximum credit from an employee's tips an employer may take against its obligation to pay minimum wages to the "tipped employee." Section 3(m) also provides that a tip credit may not be taken against the obligation to pay minimum wages "to any tipped employee unless ... all tips received by such employee have been retained by the employee". (Emphasis added). The amendment did not affect section 3(t) of the Act, which defines "tipped employee" as any employee engaged in an occupation in which he or she customarily and regularly receives more than $30 a month in tips. However, a regulation, 29 C.F.R. § 531.52, narrows the definition of tipped employees to exclude employees who turn over all their tips to their employer by prior agreement. This regulation states in part: 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. Only tips actually received by an employee as money belonging to him which he may use as he chooses free of any control by the employer, may be counted in determining whether he is a "tipped employee" within the meaning of the Act and in applying the provisions of section 3(m) which govern wage credits for tips.

See also 29 C.F.R. § 531.55(a). ² This court must determine whether the trial court correctly held that Congress intended that the amended section 3(m) would cover all employees to whom tips are paid, effectively nullifying regulations §§ 531.52 and .55(a) and tip agreements.

Few cases have addressed whether the 1974 amendment prohibited agreements in which tips are turned over to the employer, or have defined the term, "tipped employee." The court in Usery v. Emersons, Ltd., 22 Wage & Hour Cas. (BNA) 1437, 80 Lab.Cas. (CCH) p 33,478 (E.D.Va.1976), considered the validity of an employer's "tip back" compensation plan, under which the parties agreed that all tips were the property of the employer. The employees passed their tips to the employer who, in addition to paying minimum wages to its employees, deducted the minimum wage from the tips and returned the excess. Emerson, the employer, maintained that this compensation plan was permitted under 29 C.F.R. §§ 531.52 and .55. Usery, an employee, argued that the 1974 amendment to section 3(m) outlawed such a plan.

The court held that the 1974 amendment rendered the tip back compensation plan a violation of section 3(m) to the extent that the plan allowed Emerson to meet its minimum wage obligation from employees' tips. Portions of the court's analysis are troubling. The court acknowledged that section 3(m) as amended is unclear as to whether the compensation plan is permitted. The court appropriately considered the legislative history of the 1974 amendment. ³ The quoted history concerned the "tips" of a "tipped employee." The court, however, failed to provide a definition of these terms. The opinion used these terms without acknowledging that, if the regulations apply to distinguish tips retained by the employee from tips passed by agreement to the employer, the quoted legislative history does not indicate congressional intent to nullify the regulations or to prohibit tip agreements like those used by Emerson and Henry's. The court found the agreement and the tip back plan illegal. Its rationale was that the 1974 amendment would be turned "on its head" if the regulations were still valid.

Richard v. Marriott Corp., 549 F.2d 303 (4th Cir.), cert. denied, 433 U.S. 915, 97 S.Ct. 2988, 53 L.Ed.2d 1100 (1977), held that a compensation plan whereby the employer paid its employees only the amount of the deficiency when the employees' tips fell short of the minimum wage was illegal. The court ruled without discussion or citation to authority that an opinion letter issued by the Wage and Hour Administrator that purported to repudiate the regulations in fact had that effect. ⁴ 549 F.2d at 304-05.

Several recent cases presumed the continuing validity of the regulations. In Mechmet v. Four Seasons Hotels,...