Following months of political maneuvering, including a gubernatorial veto, Connecticut has enacted compromise legislation that attempts to clarify how restaurants and other hospitality industry employers must pay workers who receive tips in customer service jobs that also require untipped work. The new law, Public Act 19-1, directs the state’s Labor Commissioner to adopt regulations codifying the so-called “80/20 rule” and to conduct random wage and hour audits of restaurants to ensure wage and hour compliance. It also restricts the right of employees to bring future class actions against restaurants for alleged violation of wage rules.
Background on State and Federal Regulation of Tip Credits and “80/20 Rule”
Under the federal Fair Labor Standards Act (FLSA), restaurants can generally pay servers who receive tips a reduced minimum wage of $2.13 per hour if that amount, combined with $5.12 in gratuities1 that a server receives, equals the federal minimum wage of $7.25 per hour (the “tip credit” rule).
Connecticut’s state minimum wage is currently $11 per hour. Under the state’s tip credit rules, employees in the hotel and restaurant industries (other than bartenders) who “customarily and regularly receive gratuities” can be paid $6.38 per hour in direct wages.2 Bartenders must be paid at least $8.23 per hour.3 While the difference between these tipped employee minimums and the $11.00 state minimum wage can be satisfied by gratuities,4 for restaurants to employ the Connecticut tip credit in practice has proved complex, controversial and sometimes extremely costly.
Federal regulations recognize that an employee in a tipped occupation may perform some untipped work, such as a server who spends part of the time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses, without causing the employer to lose the tip credit.5 The “80/20 rule” concerning this situation was established in the U.S. Department of Labor’s Field Operations Handbook in 1988 and has since been followed by many courts. Under the 80/20 rule an employer may pay tipped employees the reduced “tip credit” hourly wage for all time they work in the restaurant if the employees spend at least 80% of their time performing tipped duties like waiting tables. Even if they spend up to 20% of their time on duties like setting tables, for which they do not receive tips, the lower hourly rate can be paid for those hours as well.
How the 80/20 rule should be applied to particular cases has been disputed, however, and the rule has been the subject of frequent litigation. In October 2019, the federal DOL proposed to eliminate the 80/20 formula in favor of a position it previously took in a 2018 opinion letter. If finally adopted by the federal DOL, this changed position would not impose any specific time limit on the untipped duties an otherwise tipped employee could perform so long as those tasks are performed contemporaneously with direct customer service duties or for a reasonable period of time immediately before or after performance of direct customer service duties. A final rule on the federal government’s approach to this issue is expected to be issued during 2020.
Former and New Connecticut Law
Hospitality employers in Connecticut that want to take the tip credit face more demanding hurdles. The basic requirements seem manageable: (1) The job must be one in which tips have customarily constituted part of the employee’s remuneration and the employee must be made aware of this when hired; (2) The amount of gratuities claimed by the employer as “tip credit” toward the state minimum wage must be recorded as a separate item in the employee’s wage record on a weekly basis; and (3) The employer must have and maintain substantial evidence, such as a statement signed by the employee, that the amount of tips claimed was in fact received by the employee.6
But in addition, Section 31-62-E4 of the state regulations makes compliance extremely difficult in the typical situation where a service employee performs both service and non-service duties. According to the regulation, the time spent by the server on each category of work must be segregated and documented in detail for each day worked. The reduced “tip credit” hourly rate may be applied only to the hours worked in the tipped service category. The regulation further provides that if the employer does not keep records in which the hours of such a service employee are definitively segregated, no tip credit may be applied at all.7 Hospitality employers generally found this requirement to segregate and record service and non-service tasks to be impractical if not completely impossible.
Acknowledging this problem, several years ago the Connecticut Department of Labor began instructing restaurant owners seeking guidance on the regulation that they would be permitted to pay the reduced tip credit rate if their servers’ division of work complied with the federal 80/20 rule.8 In November 2015, the Connecticut Department of Labor produced a guide on wage and hour laws in the restaurant industry that provided in part:
Since classifying specific duties (service versus non-service) for purposes of having the employee segregate them on a time record is often difficult, the division has initiated an enforcement policy which will make detailed classification largely moot. We will allow use of a tip credit if these non-service (and/or questionable service-related) duties comprise 20% or less of the service person’s total working time on a particular shift.9
The guide also includes a disclaimer, however, providing that “[n]othing contained herein has the force of law.”10
This well-meaning attempt by the department to ease compliance for the hospitality industry unfortunately resulted in substantial potential liability for employers that relied on its guidance about the 80/20 rule in a good-faith belief that they were complying with the law.11 In the last few years, Connecticut lawyers who focus on wage and hour class actions have brought numerous lawsuits against restaurant owners on behalf of employees who allege that they should have been paid the full state minimum wage for all hours worked, tipped and untipped, because their employers failed to track, segregate and record the different work categories as required by the regulation.12 In July 2019, Governor Ned Lamont vetoed legislation passed by the General Assembly that would have retroactively authorized restaurants to pay servers the “tip credit” wage for all hours worked.13 Unions and other employee advocates criticized the bill for negating the pending lawsuits and praised Lamont’s veto. Further negotiations among interested parties followed and eventually led to the compromise legislation that Lamont signed, Public Act 19-1.
Section 5 of Public Act 19-1 aims to provide clarity for both employers and employees by directing the Labor Commissioner to repeal the impractical Section 31-62-E4 of the state regulations and replace it with the 80/20 rule. Section 5 of the Act also directs the Labor Commissioner to consult with interested stakeholders, including restaurant employers and employees, and to post notice of the Department’s intent to adopt new regulations by April 1, 2020. Instead of authorizing the 80/20 rule retroactively, Section 6 of the Act creates a good-faith defense for employers that relied on written guidance from the Labor Department about the application of Section 31-62-E4.14 Employers that prove good-faith reliance on written guidance from the Labor Department will still be liable for unpaid wages and court costs, but not liable for a doubling penalty and attorneys’ fees that would otherwise be available under state law.15 Section 6 of the Act further creates heightened burdens for certification of class actions alleging violation of Section 31-62-E4.16
Notably, once the new Connecticut regulation becomes effective and codifies the 80/20 rule into state law, Connecticut employers will be required to comply with the 80/20 rule even if it is ultimately eliminated under federal law.
Wage and Hour Audits
Section 7 of Public Act 19-1 directs the Labor Commissioner to conduct “random wage and hour audits of tipped workers” in at least 75 restaurants in Connecticut each year. According to various local news sources, there are more than 8,000 restaurants in Connecticut,17 and the state’s food service industry employs approximately 119,000 to 160,000 individuals, including both tipped and non-tipped workers.18 Section 7 of the Act also requires that, within one year following adoption of the 80/20 regulation, the Labor Commissioner report to the General Assembly on the audited restaurants’ compliance with the new regulations. Section 8 of the Act appears19 to provide a budget for three wage and hour investigators, presumably to carry out the random audits mandated under Section 7.
It is not entirely clear when the regulation imposing the 80/20 rule will become effective in Connecticut. The Labor Department is expected to post its intent to adopt the proposed regulation on April 1, 2020, but the final regulation will not become effective until after a comment and hearing process, review by the state attorney general and approval by the Legislative Regulation Review Committee. While the time for these approvals varies from case to case, non-controversial Department of Labor regulations currently in the review process are expected to take effect about six months after initial posting. The best case scenario appears to be for the 80/20 regulation to take effect by October 1, 2020, but any glitches in the complex approval process could delay this estimate. Until supplanted by the new regulation, Section 31-62-E4 of the state regulations will continue in force. In light of the pending lawsuits, employers may reasonably be reluctant to rely upon contrary Labor Department guidance any further. The safer approach would be to make every effort to comply with the specific requirements of Section 31-62-E4 until the new regulation actually becomes effective.