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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.
Employment Rules & Laws
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.
The other two categories are not as straightforward. Tip-producing work occurs when an employee is performing work directly providing services to customers for which the employee receives tips (e.g., taking orders from a customer). Directly supporting work includes work performed by the employee to assist with tip-produced work (e.g., a server cleaning tables). Under the 80/20 rule, employers can use a tip credit if 80 percent or more of the work is tip-generating and no more than 20 percent of the work is directly supporting work.
The recent final rule expanded on the traditional 80/20 rule with a “30-minute” rule that advises if an employee performs directly supporting work for more than 30 consecutive minutes, an employer cannot take a tip credit for the time in excess of 30 consecutive minutes and the employee must receive minimum wage for that time. While an employer can include the first 30 minutes of directly supporting work in its 80/20 calculation, anything beyond 30 consecutive minutes of directly supporting work cannot be included in the 80/20 calculation.
Industry groups have challenged the DOL’s reinstated 80/20 rule, arguing that it divides tip-producing work from directly supporting work in a confusing manner and “without factual or legal support.” In February 2022, the industry groups lost their bid to enjoin the 2021 rule, but the litigation remains pending.
Conclusion
Despite the continuing legal battle, the DOL’s revised final rule remains enforceable. For this reason, employers should ensure their policies and practices comply with the final rule. Employers should also ensure that both managers and tipped employees are properly trained on the importance of accurate time reporting. Employers who are not in compliance with the final rule may find themselves subject to collective actions under the Fair Labor Standards Act (FLSA). Moreover, the DOL may issue substantial penalties for each employee affected if it determines an employer is not in compliance with the rule. Finally, employers should be mindful that the DOL’s final rule only implements the FLSA and state laws may impose more stringent “tip credit” requirements.