The proposed rule provides that an employer may take a tip credit for any amount of time an employee in a tipped position performs related non-tipped duties.

On October 7, 2019, the U.S. Department of Labor (DOL) announced a proposed rule to revise the tip regulations of the Fair Labor Standards Act (FLSA). The proposed rule would make three primary changes to the tip regulations: (1) eliminate the DOL’s so-called “80-20 rule”; (2) expand the scope of employees who may participate in a mandatory tip pool under certain circumstances; and (3) expressly prohibit employers, managers and supervisors from retaining tips received by employees. The notice of proposed rulemaking was published in the Federal Register on October 8, 2019.

Background

The FLSA generally requires employers to pay non-exempt employees at least the federal minimum wage, currently $7.25 per hour. However, employers can pay tipped employees a lower direct cash wage (no less than $2.13 per hour) and count up to $5.12 per hour of an employee’s tips toward the minimum wage requirement. This is known as taking a “tip credit” and is executed through a mandatory tip pool.

Under DOL guidance adopted in 2011, commonly referred to as the 80-20 rule, employers could not take the tip credit for an employee if the employee’s non-tipped tasks (e.g., cleaning tables, folding napkins) take up 20 percent or more of their work time. The 80-20 rule was subject to multiple court challenges in recent years, resulting in a circuit split on the rule’s enforceability. In November 2018, however, the DOL issued an opinion letter removing the 20 percent limit on the amount of time that an employee for whom an employer takes a tip credit can perform related, non-tipped duties, and ceased enforcing the 80-20 rule.

Similarly, current regulations only permit employers to include employees who customarily receive tips (such as servers, bartenders and bussers) in mandatory tip pools, regardless of whether the employer takes advantage of the tip credit.

In December 2017, the DOL issued a notice of proposed rulemaking that would have loosened restrictions on the participation of non-tipped employees in mandatory tip pools so long as the employer was not taking the tip credit. However, the DOL’s December 2017 proposal also would have allowed businesses, managers and supervisors to retain employee tips as long as the employer was not taking the tip credit. In response to the DOL’s proposal, the 2018 Consolidated Appropriations Act (CAA) amended the FLSA to prohibit employers from keeping employee tips for any purposes, including sharing them with managers or supervisors.

Proposed Rule

Elimination of the 80-20 Rule

As noted above, in 2011 the DOL issued guidance stating that employers cannot take the tip credit for an employee if the employee’s non-tipped tasks take up 20 percent or more of their work time. However, the DOL recently ceased enforcing the 80-20 rule, and the proposed rule reflects that enforcement position. The proposed rule provides that an employer may take a tip credit for any amount of time an employee in a tipped position performs related non-tipped duties, as along as those duties are performed contemporaneously with, or within a reasonable time immediately before or after, the employee’s tipped duties. In addition to the examples of non-tipped duties in the current regulation (such as a server “cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses”), the proposed rule provides that a non-tipped duty is related to a tip-producing occupation if the duty is listed as a task of the tip-producing occupation in the Occupational Information Network.

Expansion of Employees Eligible to Participate in Mandatory Tip Pools

The proposed rule would allow employers that pay tipped employees at least the full federal minimum wage and do not claim a tip credit to include non-tipped workers, such as cooks or dishwashers, in mandatory tip pools. Employers who do claim a tip credit must continue to ensure that mandatory tip pools only include workers who customarily and regularly receive tips (e.g., servers, bartenders and bussers). As noted above, this provision was included in the DOL’s December 2017 proposal, which the new proposed rule replaces.

Prohibition on Employers, Managers and Supervisors Retaining Tips

The proposed rule explicitly prohibits employers, including managers and supervisors, from keeping any portion of employees’ tips, including from a tip pool. This is a notable shift from the December 2017 proposal, and implements the CAA’s amendment to the FLSA. The proposed rule uses the duties test under the FLSA’s executive employee exemption to determine whether an employee is a manager or supervisor. An employee who owns at least a 20 percent equity interest in an enterprise and who is actively engaged in its management would be considered a manager or supervisor for purposes of this prohibition.

The proposed rule also would permit an employer to control employees’ tips only by: distributing tips to employees who received them; instituting mandatory tip pools in compliance with the FLSA regulations; or distributing tips to employees in a tip pool. Employers that utilize a mandatory tip pool would be required to fully distribute the tips no less often than when the employer pays wages.

What This Means for Employers

The proposed rule would provide significant clarity and flexibility to employers of tipped employees, both in the use and structure of tip pools as well as the use of tipped employees to perform non-tipped duties related to their tip-producing occupation. In addition, the proposed rule makes clear that employers cannot retain any portion of employees’ tips, whether in a tip pool or not, and cannot distribute employees’ tips to managers or supervisors.

Employers also should be mindful that even under the proposed rule, employers of tipped employees must keep records of employees that receive tips and the tip amount. This is particularly important for employers taking the tip credit.

Finally, employers may submit comments on the proposed rule by visiting regulations.gov. In order to be considered, comments must be made by December 7, 2019.