Seyfarth Synopsis: Last week, the U.S. DOL issued a final rule limiting when employers may take a tip credit for tipped employees who sometimes perform non-tipped work. Declining a more flexible approach advocated by many employers in response to the proposed rule, the final rule reinstates a weekly 20% limitation on non-tipped work and adds a daily 30-minute constraint, as well. The rule, which takes effect on December 28, 2021, commands attention from hospitality employers utilizing the tip credit.

A Dive Into the New Menu: 80/20 Rule

In December of 2020, the DOL under the Trump administration took the so-called “80/20” rule off the menu. That rule provided that employers were required to pay employees minimum wage if more than 20% of their time in a workweek was spent performing non-tip producing work. This was viewed as a positive development by many employers, who viewed the 20% limitation as an impractical rubric in the context of a fast-paced restaurant or other traditional hospitality settings.

The employer community’s relief was short-lived.

Pursuant to a final rule published last week and effective by year end, a new 80/20 rule is back in full force and this time with modification. The new rule effectively requires employers to examine segment a tip-credit employee’s daily job duties into three buckets:

Bucket 1 (tip credit is acceptable). Duties that directly produce tips (e.g., serving, bartending, bussing);

Bucket 2 (tip credit may be acceptable depending on time). Duties that directly support tip-producing work (e.g., for servers, clearing the table; for bartenders, slicing fruit garnishments for drinks; for bussers, pre/post-table service prep work); and

Bucket 3 (tip credit is not acceptable). A catch-all bucket of any other duties.

An employer, the new rule provides, is entitled to take a tip credit for work that falls into bucket #1, but not bucket #3. Examples of work that fall into the latter group include, for example: for servers, preparing food and cleaning the kitchen or bathrooms; for bartenders and service bartenders, cleaning the dining room or bathroom; for bussers, cleaning the kitchen or bathrooms.

So, where does all of that leave bucket #2, i.e., job duties that support tip-producing work? Here, the new rule provides that an employer may take a tip credit if the employee’s work “is not performed for a substantial amount of time.” A “substantial amount of time” is defined as: (a) work that exceeds 20% of the employee’s workweek; or (b) work that is performed “for a continuous period of time exceeding 30 minutes.”

At a time when so many hospitality businesses are struggling to survive the pandemic’s fast-shifting currents, reintroduction of the 80/20 rule is likely not welcome news by many employers who view it as an arbitrary and impractical standard that effectively asks them to monitor, assess, and categorize each tipped employee’s tasks on a minute-to-minute, day-to-day basis.

The 30-Minute Recipe

If the 80/20 rule does not cause employers heartburn, the new 30-minute standard may do the trick. That said, the Department’s clarification of the 30-minute rule in its final standard (as compared to the proposed rule) helps to soften the rule’s impact and clarify its application.

As explained above, an employer may not take the tip credit for time spent on “directly supporting” work that exceeds (a) exceeds 20% of the employee’s hours in a workweek (excluding any hours for which the employer doesn’t take the tip credit); or (b) a continuous period of 30 minutes. Time excluded under (b) is excluded in calculating the 20% threshold in (a). The final rule provides that when an employer assigns an employee to perform non-tipped directly supporting work for more than 30 minutes, the employer must pay a direct cash wage equal to the full federal minimum wage for the time that exceeds 30 minutes, not for the full 30 minutes.

As Seyfarth noted in its commentary to the DOL, “[o]ver time, and multiplied by hundreds of employees,” such “inadvertent violations” of the 30-minute tolerance “by just a minute or two” might “yield substantial liability. The DOL acknowledged Seyfarth’s comments, as well as comments by others in the employer community, that the 30-minute limitation would impose immense compliance and monitoring challenges. The DOL noted that, “in light of these concerns,” it decided to soften the 30-minute rule so that it acts as a “tolerance for the first 30 minutes of non-tipped, directly supporting work.”

Further, after considering comments about the vagueness of what is “tip-producing work,” the DOL clarified in the final rule that the definition of tip-producing work is work that provides service to customers—including all aspects of that service—for which the tipped employee receives tips, and directly supporting work is performed in preparation for that work. By way of example, the Department agreed with Seyfarth’s comment that:

in the hospitality industry, tip-producing work for servers, bartenders, and nail technicians is broader than simply serving food and drinks, or performing manicures. Thus, the Department agrees with the assessment that a bartender’s tip-producing work of preparing drinks may include generally talking to the customer seated at the bar and ensuring that a patron’s favorite game is shown on the bar television, [and] a servers’ tip-producing work includes bringing a highchair and coloring book for an infant seated at their table. …

What’s Left For Employers to Digest

Employers need to comply with the new rule. Unfortunately, notwithstanding the DOL’s clarification of certain aspects of the rule, the rule introduces compliance challenges that will command time and attention. Employers will need to consider what steps they can take to ensure that tip credit employees are not performing non-tipped work, or at least to ensure a clear process for tracking and recording time on such work. Here are a few tips to consider:

  • Due to the 30-minute rule, employers may want to avoid having a tip credit employees come in more than 30 minutes before opening or stay 30 minutes after close. If employers cannot practically run the business without having tip credit employees do so, they will need to establish a system to ensure that these employees are paid directly at the full minimum wage for time exceeding 30 minutes.
  • Alternatively, to the extent an employer schedules tipped employees to work before the establishment opens or after it closes, it should consider paying them at full minimum wage for the pre-opening and post-closing time. This will be required if the employees are not performing tip-producing or tip-supporting work during that time.
  • Given the grey area in these rules, employers should carefully document their compliance efforts. Employers are well-advised to train their managers and document their training sessions. Employers should also notify employees and instruct them to inform management if they do work outside of their tipped role that they did not record properly in the timekeeping system.
  • To that end, employers should also evaluate their timekeeping system. Employers should ensure that its system can separately track employees’ tip-producing (and non-tipped work, if applicable) in multiple jobs, assign the right rates to each, and combine hours for overtime purposes. Employers should also ensure that their staff members are aware of how to use the software (particularly if there will be different designations for tip-producing and non-tipped work that will apply to them) and provide reference materials for employees to consult if they have questions about the same.
  • If there are certain tasks that employers feel clearly constitute non-tipped work, employers may direct employees not to perform those tasks at all. Documentation that direction via posted or distributed guidance will combat employee’s claims that they were required to perform and not paid correctly for non-tipped work.

There’s no one-size-fits-all approach for complying with the new rules. Best practices will vary by business depending on the nature of the enterprise, its personnel, its time-tracking capabilities, and the like.

With an effective date for these rules of December 28, 2021, hospitality employers will need to act quickly to chart their best course. Unfortunately, they will need to do so during the holiday period, in the face of a labor shortage, and amidst the COVID-19 pandemic.