In November 2018, the Wage and Hour Division of the United States Department of Labor issued an Opinion Letter that rolled back its 80/20 Rule and reinstated a 2009 policy that provides businesses that employ tipped workers with greater flexibility to take tip credit for time that their employees engage in side work. The 80/20 Rule limited an employer's ability to take tip credit if an employee spent more than 20 percent of his or her time engaging in non-tip-generating jobs that were incidental to the employee's core job. The new guidance provides employers with relief from the demanding requirements under the now-withdrawn 80/20 Rule to adequately monitor and document employees' daily activities to comply with the FLSA's minimum wage and tip credit regulations.
The FLSA's Tip Credit Regulation
Under the Fair Labor Standards Act (FLSA), an employer is permitted to take a tip credit toward its minimum wage obligation to a tipped employee. Rather than paying an employee the full minimum wage, an employer can pay a tipped employee a smaller amount though not less than $2.13 and make up the difference by factoring in the employee's tips. Thus, for example, if an employer pays a tipped employee $2.13, the employer is permitted to take $5.12 in tip credit to reach the federal minimum wage of $7.25. Through this method, an employer fulfills its obligations under the law, while a tipped employee still takes home at least the minimum wage. A tipped employee, meanwhile, is an employee that is engaged in an occupation in which he or she "customarily and regularly" receives more than $30 in monthly tips, such as a restaurant server or a bartender.
The 80/20 Rule arose from guidance in the Wage and Hour Division's Field Operations Handbook (FOH) regarding an employer's ability to take tip credit for the time that an employee spends participating in activities that are incidental to a tipped occupation but are not tip-generating themselves (i.e., side work).
The FLSA regulations recognize that on a daily basis an employee often carries out a variety of activities. An employee might engage in both tipgenerating activities and non-tip-generating activities, including, for example, where a maintenance worker in a hotel also serves as a waiter in the hotel's restaurant. According to the regulations, under these circumstances, the employee is engaging in "dual jobs" and he or she is only a tipped employee with respect to the tipgenerating position. As a result, an employer cannot take a tip credit for the employee's hours of employment in the non-tip-generating activity.9 Rather, the employer must pay the employee the full minimum wage for his or her time.
The regulations also recognize, though, that even when an employee engages in a strictly tip-generating job, such as working as a server for an entire day, the role often necessitates engaging in "related duties" to the tipped occupation that are not, in and of themselves, directed toward producing tips. For example, when a server spends part of his or her time cleaning tables, making coffee, or washing dishes, the activities are not customer-facing and generally are not directed toward tip generation. In this latter scenario, where an employee engages in side work, the regulations permit an employer to take a tip credit for the employee's time.
The 80/20 Rule, which was originally issued by the Department of Labor in 1988, limited an employer's ability to take tip credit for a tipped employee's "related duties." According to the Rule, employers could take tip credit for the time that an employee spent carrying out side work, but if an employee spent more than 20 percent of his or her time performing such work, the employer could not take a tip credit for that time.
In January 2009, the Department of Labor under the Bush Administration issued an Opinion Letter, which eliminated the 80/20 Rule. Less than two months later, however, that Letter was rescinded by the Obama Administration, which effectively reinstated the 80/20 Rule.
Confusion, Litigation, and Inconsistent Application
According to the November 2018 Opinion Letter, the 80/20 Rule produced "confusion and inconsistent application." The Rule left many employers to speculate about which of its employees' activities were considered side work that was subject to the 20 percent cap. In addition, many employers were compelled to spend time and resources surveilling and meticulously documenting all of their employees' daily activities.
The Rule also spurred widespread litigation. Employers faced allegations that their employees were spending a substantial amount of time participating in non-tipped duties and therefore should have been paid the full minimum wage.20 Adding to the confusion, courts did not always apply the 80/20 Rule consistently. For example, while some courts endorsed the Rule's 20 percent cap, others strongly cautioned against the feasibility of the Rule because the compliance requirements were "impractical or impossible."
The New Guidance
Recognizing the challenges that employers faced implementing the 80/20 Rule, the Wage and Hour Division's November 2018 Opinion Letter eliminates the restriction on the amount of time that a tipped worker can spend engaging in side work. Under the new guidance, an employer may take tip credit for side work as long as it is "performed contemporaneously with direct customer-service duties" or for a reasonable time immediately before or after performing such direct-service duties. Thus, for example, a waitperson's time spent vacuuming after a restaurant closes is now likely subject to a tip credit, although the inquiry is fact-specific and may be affected by an employer's particular policies and practices.
The new guidance recognizes, however, that there are limits to activities that may be considered "related duties" that might cross the line into the "dual jobs" scenario described above, where an employer cannot take a tip credit. For example, while the vacuuming example above is likely subject to a tip credit, a hotel maintenance worker who also serves as a waiter in the hotel's restaurant is undertaking dual jobs. The Letter suggests that for purposes of taking a tip credit, employers should consult the Tasks section of the Details report in the Occupational Information Network (O*NET) to help them determine which of their employees' responsibilities constitute core duties as opposed to side work.
The new guidance supersedes any inconsistent provisions in the existing FOH related to tip credit. The Opinion Letter states that a revised FOH statement will be forthcoming.
The reinstated policy and the elimination of the 80/20 Rule should benefit employers because they no longer need to undertake the same types of calculations or closely monitor their employees' movement between core duties and side work to ensure that they comply with the FLSA. The policy also provides to employers and employees greater clarity, which will allow employers to more easily comply with the FLSA, ensure that workers receive the FLSA's protections, and, possibly, reduce litigation.
Nonetheless, there are outstanding questions related to the reinstated policy. For example, the November 2018 Opinion Letter states that employers may not take tip credit for time spent performing tasks that are not listed in the O*NET task list. However, the Letter clarifies that some time spent performing tasks that are not on the task list could be subject to the de minimis rule contained in the FLSA's general regulations. Employers, therefore, might still have to make judgment calls about their employees' duties for compliance purposes.
Similarly, the Letter outlines a new standard for side work; namely, as noted above, that it must occur contemporaneously or within a reasonable time immediately before or after performing tip-producing activities. Moving forward, employers may have to make decisions regarding their employees' job responsibilities and whether they fall within the new standard.
Recommendations for Employers
With the Wage and Hour Division's issuance of the new Opinion Letter and elimination of the 80/20 Rule, employers would be prudent to reevaluate their tipped positions to determine whether they all qualify for a tip credit under the FLSA. In doing so, employers should keep in mind that the Opinion Letter does not carry
the force of law, but it is simply the Wage and Hour Division's interpretation of the law, which has not yet been tested in the courts. Additionally, employers should continue to monitor developments in both federal and state labor and employment law. Many states have wage and hour laws that are more restrictive than the FLSA and therefore employers may have additional compliance responsibilities beyond those described in this article. Lastly, as the repeated changes to the validity of the 80/20 Rule demonstrate, the FLSA, its implementing regulations, and government agencies' interpretive documents are subject to change. Thus, employers should regularly review all of their policies to ensure that they are compliant with all aspects of the law.