Seyfarth Synopsis: Just before the holidays, the Department of Labor’s Wage-Hour Division issued its final pay regulations governing tipped employees. The final regulations, which were published December 22, 2020 and will be effective March 1, 2021, provide a ray of hope in what was an otherwise miserable 2020 for hospitality employers. The regulations codify the abolition of the 80/20 tip credit rule and guide the circumstances in which “back-of-the-house” employees can be included in tip pools. The regulations explicitly exclude managers and supervisors from taking a share of employee’s tips. In 2021, hospitality employers will have to watch how the courts interpret these regulations.

The End Of The 80/20 Rule?

The main course in the DOL’s regulations, and one for which hospitality employers have grown hungry, is the end of the 80/20 rule – at least from the DOL. The 80/20 rule has had a somewhat complicated recipe. As those familiar with the tip credit know, an employer can pay certain employees who receive tips from customers a wage below the minimum wage. This practice is permitted on the theory that the tips employees receive from customers will more than make up the difference. But doing so requires an employer to meet some technicalities, including that this tip credit can be taken only for the hours the employee spends working in a tipped occupation. So, for example, a server at a hotel’s restaurant can be paid the tip credit for the hours they spend as a server, but not for the hours they spend at the hotel as a maintenance employee. More difficult questions emerge, however, when the server spends part of their time on duties related to server duties, but that do not produce tips, such as cleaning or setting tables. Under DOL regulations, tipped employees are allowed to perform “related duties” “occasionally,” but the DOL’s regulations have never defined those two terms.

To fill the plate, the DOL issued some opinion letters and then in 1988 the DOL’s Field Operations Handbook – an operations manual made available to investigators – ultimately determined that a tipped employee could spend no more than 20% of their time on “related duties” (which remained undefined) and remain eligible to be paid under the tip credit. In other words, an employee would have to spend 80% of their time performing tipped job duties. The 80/20 dual jobs rule remained a little-known side dish until more than a dozen years ago, just after wage-hour collective and class litigation began its boom. As can be imagined, tip credit litigation blew up as well, with many cases generating seven-figure settlements centering on whether restaurant servers’ side work is a “related duty” and what percentage of time servers spend performing those duties.

In November 2018, the DOL sought to abolish the 80/20 rule through an opinion letter and a field assistance bulletin. In its place, the DOL explained that an employer may take a tip credit for time when an employee in a tipped occupation performs related non-tipped duties either contemporaneously with or for a reasonable time immediately before or after performing tipped duties. Under this rule, the DOL explained, when a tipped employee engages in a substantial amount of separate, non-tipped-related duties, such that they have effectively ceased to be engaged in a tipped occupation, the tip credit is no longer available. Further, the DOL defined related duties by stating that a non-tipped duty is presumed to be related to a tip-producing occupation if it is listed as a task of the tip-producing occupation in the Occupational Information Network O*NET.

Beginning in early 2019, however, as Seyfarth previously reported, district courts largely have refused to give it deference and have clung to the 80/20 rule. Several of them reasoned that the opinion letter and field assistance bulletin did not provide persuasive reasons for an abrupt change in position after decades of the 80/20 rule. Strangely, these district courts instead have chosen to defer to the no-longer-effective 80/20 rule, or have imposed it as a matter of judicial fiat.

Therefore, in the late 2019, the DOL issued a proposed regulation and then, last week, published final regulations that hopefully will be the death blow to the 80/20 rule. In doing so, the DOL largely restated, with some minor tweaks, the guidance from its November 2018 opinion letter and field assistance bulletin. Perhaps responding to some of the criticism of district courts, the DOL in these regulations sought to explain why it was abandoning the 80/20 rule. For example, among other reasons, it stated:

An employer of an employee who has significant non-tipped related duties which are inextricably intertwined with their tipped duties should not be forced to account for the time that employee spends doing those intertwined duties. Rather, such duties are generally properly considered a part of the employee’s tipped occupation, as is consistent with the statute.

It remains to be seen if district courts will defer to this guidance now that the DOL has officially codified the rule. They should, as this guidance is reasonable and went through lengthy notice-and-comment rulemaking. Further, employers must be mindful that some states (e.g, Connecticut, New Jersey) have enacted their own versions of the 80/20 rule, in which employers in those states will need to follow regardless of the DOL’s new rule.

Back-of-House Staff May Collect Tips In Mandatory “Nontraditional” Tip Pools

In addition, the DOL’s regulations also address amendments to the FLSA made in the Consolidated Appropriations Act of 2018. The new regulations do not change longstanding regulations that apply to employers that take a tip credit under the FLSA. Employers that claim a tip credit must ensure that a mandatory “traditional” tip pool includes only workers who customarily and regularly receive tips. Under the new regulations, however, employers that do not claim a tip credit may now implement mandatory, “nontraditional” tip pools. In this scenario, tip pools may include employee who do not customarily and regularly receive tips, including “back-of-house” employees that may not be customer-facing, such as cooks and dishwashers.

Managers and Supervisors: Keep Your Hands Off Employees’ Tips!

The new regulations also explicitly prohibit managers and supervisors from keeping employees’ tips for any purpose—even in a nontraditional tip pool situation during which the employer does not take a tip credit and back-of-house employees are permitted to take a share of tips. In order to prevent employers from “keep[ing]” tips, the new regulations require employers who collect tips and redistribute them through a mandatory tip pool to redistribute the tips no less often than when it pays wages to avoid penalties. The regulations also require employers who collect tips and redistribute them through a mandatory tip pool to keep records of the same even if the employer does not take a tip credit.