Read time: 4 minutes
Background on tip credits
Per the U.S. Department of Labor (DOL), “a tipped employee engages in an occupation in which he or she customarily and regularly receives more than $30 per month in tips.” An employer is allowed to pay a tipped employee direct wages of $2.13 per hour, instead of the federal minimum wage (currently $7.25 per hour) if the tipped employee’s direct wages plus the tips received equals or surpasses the federal minimum wage. Employers’ ability to count an employee’s tips toward their obligation to pay tipped employees the federal minimum wage is known as a “tip credit.” Employers list the tip credits taken as a line item on tipped employees’ pay stubs. If a tipped employee’s tips combined with the employer’s direct wages of at least $2.13 per hour do not equal the federal minimum wage, the employer must make up the difference.
The DOL’s 2021 revised rule for tipped employees
In October 2021, the DOL announced a final rule reinstating the 80/20 rule (and more), effective December 28, 2021. Previously, the Trump administration had eliminated the 80/20 rule and replaced it with a rule allowing employers to take a tip credit if a tipped employee performed non-tipped work simultaneously with tipped work or for a reasonable time immediately before or after. Prior to the Trump administration’s rule, the 80/20 rule had been in effect since the 1980s. The DOL delayed implementation of the Trump administration’s rule and issued the recent final rule to minimize the likelihood that employers would improperly claim tip credits for side duties that do not qualify as tip-producing work.
Under the re-implemented 80/20 rule, there are three categories of work: (1) “tip-producing work,” (2) “directly supporting work” and (3) “work that is not part of the tipped occupation.” Work that is not part of the tipped occupation is work that does not provide any service to customers (e.g., a server preparing food). An employer cannot take a tip credit for any work that is not part of the employee’s tipped occupation, and the employee must be paid no less than minimum wage for that time.
- In 2021, the DOL revised Fair Labor Standards Act rules for tipped employees.
- The DOL reinstated the 80/20 rule for tip credits and imposed additional requirements.
- Legal challenges to the revised rule are pending, but employers still need to comply.