In a Notice of Proposed Rulemaking published on October 8, 2019, the Wage and Hour Division of the United States Department of Labor (DOL) proposed regulations which, if and when promulgated, will require employers to reexamine and adjust their existing practices in the handling of the tip credit, management and assignment of work for tipped employees, implementation of tip pools, and recordkeeping practices relating to time and pay records for tipped employees.

Background

Under the Fair Labor Standards Act (the FLSA), employers are permitted to take a credit for tip wages received by tipped employees against the current federal minimum wage of $7.25. Employers are able to pay as little as $2.13 per hour in cash wages to employees who earn sufficient tip wages to cover the remaining $5.12 of the minimum wage rate. The FLSA further requires employers to make up the difference if the cash wages and tip wages received by employees total less than the federal minimum wage rate. Over the past two decades, there has been a considerable amount of litigation and regulatory actions regarding the “80/20” or “dual job” provisions within the DOL’s enforcement guidelines (e.g., the Field Operations Handbook) that limit employers’ ability to take the tip credit against the minimum wage obligations in connection with employees who spend more than 20 percent of their time performing non-tipped duties. Particularly, the plaintiffs’ bar has been active in seeking to claim that employers inappropriately took the tip credit for hours spent on duties that are related to the duties of the tipped workers but do not directly generate tip income. In November 2018, the DOL reinstated a Bush-era enforcement position and eliminated the limits placed by the Obama Administration against employers’ entitlement to take the tip credit against the minimum wage paid to employees who performed both direct tip generating and related non-direct tip generating work. Since that time, many courts have declined to grant deference to the DOL’s changed position on the tip credit, particularly on a retroactive basis that would affect the outcome of pending litigations that involve alleged violations of the “80/20” or “dual job” rule that occurred prior to the reissuance of the 2009 Opinion Letter.

Regulations concerning tip pooling promulgated during the Obama Administration prohibited employers from requiring workers to pool their tip wages and share such wages with non-tipped workers regardless of whether employers take a tip credit. In March 2019, pursuant to the Consolidated Appropriations Act of 2018 (the CAA), Congress amended the FLSA to prohibit an employer from keeping tips received by employees “for any purposes, including allowing managers or supervisors to keep any portion of the employees’ tips, regardless of whether or not the employer takes a tip credit.” This amendment essentially permitted employers to promulgate tip pooling practices that allowed tipped employees paid above the minimum wage to share tips with non-tipped employees (e.g., as long as supervisors, managers or the employer do not take any portion of the tips). 

Proposed New Regulation

The DOL’s proposed rule eliminates the “80/20 rule” by allowing employers to take a tip credit for all hours worked by their tipped employees on “related non-tipped duties, contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties.” According to the proposed rule, tasks constitute related to a tip-producing if they are listed as one of the tasks of a tip-producing occupation in the Occupational Information Network (O*NET). Examples of such tasks are cleaning glasses, making coffee and rolling silverware. The proposed rule essentially eliminates the impracticable task by task timekeeping requirement of the “80/20 rule” that was almost impossible for employers to satisfy.

The proposed rule also seeks to clarify the CAA amendment to the FLSA concerning permissible and prohibited tip pooling practices. Specifically, the proposed rule would confirm the FLSA’s prohibition against employers (including persons owning 20% or more of the business), managers, and supervisors keeping tip wages earned by employees, regardless of whether employers take a tip credit against the tipped employees’ minimum wage. The proposed rule provides that DOL would apply the duties test for “executive exemption” under the FLSA to determine whether an individual is a “manager or supervisor.” 

The proposed rule confirms that employers are able to implement tip pooling practices among their employees who “customarily and regularly receive tips,” such as bartenders and servers. The proposed rule would also allow employers who pay employees the full minimum wage or above (and thus, do not take a tip credit) to implement a tip pooling practice that mandates the participation of employees who “customarily and regularly receive tips” in tip pools with employees who do not customarily and regularly receive tip wages (e.g., back of the house employees such as kitchen staff). And it confirms the DOL’s longstanding enforcement position that allows employers to withhold paying cash and credit card tip wages until the next regularly scheduled payday. Finally, the proposed rule requires employers who maintain compulsory tip pools to maintain records of tips received even though these employers do not take the tip credit.  

Employers can submit comments on the proposed rule to the USDOL until December 9, 2019.

Bottom Line

While employers, particularly those in the hospitality industry, may find the proposed rule to be a welcoming development, we encourage employers to continue to evaluate their tip credit practices. We see three major takeaways from the new proposed rule:

  • Are you entitled to take tip credit? An important question that all employers should continue to ask is whether they are entitled to take the tip credit in the first place.  For example, the propose rule does not negate employers’ responsibility to provide advanced notice to tip employees regarding the employers’ intention to take the tip credit prior to any work is performed by these employees. 
  • Audit regularly.  Employers must still regularly audit tip workers’ wages to determine whether these workers receive adequate tip wages to cover the minimum wage.  Employers should also regularly audit their pay and time records to ensure that their records accurately, precisely and adequately record employees’ time worked, wages paid and deductions or allowances taken by the employer.
  • Review state requirements.  Employers should also consider the tip credit requirements of the states in which they operate to determine the best and most compliant practices.