One of the more complicated wage and hour issues we often advise on involves the tip credit that employers may take for the amount of time an employee engages in a tipped occupation. Recently, the U.S. Department of Labor issued a Notice of Proposed Rulemaking in order to implement changes to the tip credit provisions of the Fair Labor Standards Act.

Under the FLSA, an employer of tipped employees can satisfy its obligation to pay those employees the federal minimum wage by paying those employees a lower direct cash wage (no less than $2.13 an hour) and counting a limited amount of its employees’ tips (no more than $5.12 per hour) as a partial credit to satisfy the difference between the direct cash wage and the federal minimum wage. (Notably, many states have enacted higher minimum wage rates, including for tipped employees). This partial credit is known as the “tip credit.” Tipped employees are those who customarily and regularly receive more than $30 per month in tips. Tips do not include service charges, such as minimum gratuity amounts for large groups of customers, which are considered revenue to the employer.

29 U.S.C. § 203(m) of the FLSA provides that an employer who takes a tip credit may include only employees who customarily and regularly receive tips, such as restaurant servers and bartenders, in mandatory “tip pools” (i.e., the practice of requiring employees to contribute a certain amount of tips into a collective pool that is divided among employees). The DOL promulgated regulations in 2011 that applied this restriction on mandatory tip pools to all employers, whether or not those employers make use of the tip credit.

In March of 2018, as part of a budget compromise, Congress passed the Consolidated Appropriations Act of 2018 (the “CAA”) which amended the FLSA by reversing the DOL’s restriction on tip pooling practices of employers that did not utilize the tip credit. As a result, if the employer does not take the tip credit, tips may be shared with other employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs and janitors. Regardless of whether the employer takes the tip credit, the law prohibits owners, managers and supervisors from receiving any share of the tips. An employer who unlawfully keeps tips earned by employees is subject to a civil monetary penalty of up to $1,100 for each violation, pursuant to 29 U.S.C. § 16(e)(2).

The proposed regulations reflect the Department of Labor’s recent guidance that an employer may take a tip credit for any amount of time an employee in a tipped occupation performs related non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. The proposed regulation also addresses which non-tipped duties are related to a tip-producing occupation.

Previously, the Department took the position that an employer may not take a tip credit for time an employee spends on non-tip producing duties if the time spent on non-tip producing duties exceeded 20% of the employee’s workweek. This rule, known as the 80/20 rule, was difficult to administer for many employers because they lacked guidance to determine whether a non-tipped duty is “related” to the tip-producing occupation.

As noted in our November 2018 E-Update, the DOL issued an opinion letter that month rejecting the 80/20 rule. The DOL now takes the position that there is no limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties and all other requirements of the FLSA are met. The DOL states that “Duties listed as core or supplement for the appropriate tip-producing occupation in the Tasks section of the Details report in the Occupational Information Network (O*NET) http://online.onetcenter.org or 29 C.F.R. § 531.56(e) shall be considered directly related to the tip-producing duties of that occupation. For example, for waiters and waitresses, such tasks include preparing and clearing tables, sweeping and mopping floors, taking out trash, answering phones, rolling silverware, stocking service items, and filling condiment containers, among many others. If the task is not listed in O*NET, the employer may not take a tip credit for time spent performing that task – although such task may be deemed non-compensable under the de minimis rule (meaning that such little time is spent on the task that it need not be paid).

It is important to note, however, that many courts have rejected the DOL’s November 2018 opinion letter and continue to enforce the 80/20 rule.

In summary, the proposed regulations (which, to be clear, are not yet in effect):

  • Explicitly prohibit employers, managers, and supervisors from keeping tips received by employees;
  • Remove regulatory language imposing restrictions on an employer’s use of tips when the employer does not take a tip credit, making it clear that such employers may allow workers such as cooks or dishwashers, to share in a mandatory tip pool;
  • Incorporate in the regulations, as provided under the CAA, new civil money penalties, currently not to exceed $1,100, that may be imposed when employers unlawfully keep tips; and
  • Amend the regulations to reflect recent guidance explaining that an employer may take a tip credit for any amount of time that an employee in a tipped occupation performs related non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties.

The proposed regulations are open for public comment until December 9, 2019. Comments may be submitted here. Once the comment period has closed, the DOL will consider the comments received and will eventually issue final regulations.