On June 23, 2021, the United States Department of Labor (DOL) published a notice of proposed rulemaking (NPRM) that would create greater limitations on an employer’s ability to take a tip credit under the federal Fair Labor Standards Act (FLSA).
The NPRM is reflective of the Biden administration’s fury of delaying, withdrawing, and revising guidance and authority issued during the Trump administration. With respect to tip credits, the Trump administration issued a final rule in December 2020, proposed in 2019, that permitted an employer to take a tip credit for any amount of time that a tipped employee performs work related to non-tipped duties contemporaneously with his or her tipped work, or for a reasonable time immediately before or after performing the tipped activities. The Trump administration’s final rule essentially codified the Trump DOL’s previous guidance eliminating the 80/20 rule, under which an employer could take a tip credit as long as tip-related, but non-tip-producing, duties did not exceed 20 percent of the employee’s working time. Although originally set to become fully effective in March 2021, the DOL delayed the effective date of this component of the 2020 tip regulations final rule.
The Biden administration’s proposed rule would restore the old 80/20 rule and would require employers to pay the full minimum wage when a tipped employee performs tip-supporting work for at least 30 consecutive minutes.
The Basics
The FLSA generally requires covered employers to pay employees at least the federal minimum wage, which is currently $7.25 per hour. Section 3(m) of the FLSA allows an employer that meets certain requirements to count a limited amount of the tips its tipped employees receive as a credit toward its federal minimum wage obligation (known as a “tip credit”). Currently, the maximum tip credit an employer may take is $5.12 per hour, and the lowest subminimum wage that an employer may pay is $2.13 per hour. Section 3(t) of the FLSA defines a “tipped employee” for whom an employer may take a tip credit under section 3(m) as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”
Current Regulation
The current regulation recognizes the common situation in which employees in a tipped occupation performs duties related to their tipped occupations that are not “themselves … directed toward producing tips,” such as, for example, a server “who spends part of her time” performing non-tipped duties, such as “cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.” In subregulatory guidance (at the Wage and Hour Division’s Field Operations Handbook 30d00(e), Revision 563), the DOL explained that an employer could continue to take a tip credit for the time an employee spent performing duties that are related to the employee’s tipped occupation but that do not produce tips, but only if that time did not exceed 20 percent of the employee’s workweek.
Under the Trump administration, in 2018, the DOL rescinded this 80/20 guidance and subsequently issued new subregulatory guidance, providing that the DOL would no longer prohibit an employer from taking a tip credit for the time a tipped employee performs related, nontipped duties, as long as those duties are performed contemporaneously with, or for a reasonable time immediately before or after, tipped duties. The DOL directed employers to look to the agency’s Occupational Information Network (O*NET) to determine whether a tipped employee’s non-tipped duties are related to his or her tipped occupations.
On December 30, 2020, the DOL published the 2020 tip regulations final rule, updating 29 C.F.R. §531.56(e), largely incorporating the 2018-2019 guidance addressing situations in which an employee performs both tipped and nontipped duties (i.e., the dual jobs portion of the 2020 tip regulations final rule). However, the Biden administration’s DOL delayed the effective date for portions of the rule, including the dual jobs portion, so that the DOL could review and revise portions of the Trump administration regulations.
Breaking Down the NPRM
Under the Biden administration’s new proposed rule, an employer can take a tip credit for the employee’s performance of work that (1) “produces tips” or (2) “directly supports” tip-producing work, provided “the directly supporting work is not performed for a “substantial amount of time.”
- Work that produces tips is any work for which tipped employees receive tips. The proposed rule provides specific examples of tip-producing work for a few specific occupations, which illustrate that tip-producing work in many instances is work that requires direct service to customers. For instance, a server’s tip-producing work includes waiting tables.
- Work that “directly supports” tip-producing work is work that assists a tipped employee to perform the work for which the employee receives tips. For example, the proposed rule explains that a server’s work that directly supports the server’s “tip-producing work includes cleaning the tables to prepare for the next customers.”
Under the proposed rule, an employee has performed work that directly supports tip-producing work for a substantial amount of time if the tipped employee’s directly supporting work either (1) exceeds, in the aggregate, 20 percent of the employee’s hours worked during the workweek [i.e., the 80/20 rule] or (2) is performed for a continuous period of time exceeding 30 minutes.
To this point, the DOL’s position is that “if a tipped employee engages in a substantial amount of such non-tipped work, that work is no longer incidental to the tipped work, and thus, the employee is no longer employed in a tipped occupation.” Work that is not part of the tipped occupation (and for which no tip credit may be taken) is “any work that does not generate tips and does not directly support tip-producing work.” For example, according to the NPRM, preparing food or cleaning bathrooms is not part of a server’s occupation.
The following hypotheticals illustrate the practical implications of the proposed rule:
- If a tipped employee performs 30 or more minutes of preshift work that directly supports tip-producing work, his or her employer must pay the full minimum wage for that segment of work.
- If the same tipped employee performs work during the work shift that directly supports tip-producing work (excluding 30 or more consecutive minutes paid at full minimum wage) and that amount of directly supporting work exceeds 20 percent of the employee’s hours worked during the workweek, the employer must pay the employee the full minimum wage for all time worked that workweek.
- If the same tipped employee instead performs work during the work shift that directly supports tip-producing work (excluding 30 or more consecutive minutes paid at full minimum wage) and that amount of directly supporting work is 20 percent or less of the employee’s hours worked during the workweek, the employee can be paid the tipped wage for all time worked that workweek (excluding the segment of 30 or more minutes that employees must pay at full minimum wage).
Next Steps
The deadline to submit comments regarding the proposed rule to the DOL is August 23, 2021. Once the comment period has ended, the DOL will review the comments and then will prepare a final rule that may or may not be identical to the proposed rule. Regardless of what the DOL ultimately does, there may be court challenges in response to the final rule.
Practical Takeaways
The back-and-forth shift from the Trump administration to the Biden administration creates a great deal of uncertainty for employers. Although the NPRM is not a final rule, employers that make use of the tip credit may take steps to prepare now in the event that the final rule mirrors the proposal. Examples of steps employers may want to take include:
- transferring any non-tip-supporting duties that tipped employees currently perform to employees for whom the employer does not take a tip credit;
- transferring any or most tip-supporting duties that tipped employees currently perform to employees for whom the employer does not take a tip credit;
- setting schedules that limit continuous tip-supporting work to less than 30 minutes;
- reviewing and adjusting timekeeping systems, policies, and procedures to account for and differentiate among non-tip-supporting, tip-supporting, and tipped work; and
- training tipped employees and their supervisors.
Employers also may want to keep in mind that many states and localities have their own rules regarding tip credits, and the FLSA does not trump or preempt more protective state and local laws. For example, some jurisdictions do not allow employers to take a tip credit, some have a higher sub-minimum wage for tipped employees and/or a higher minimum wage for non-tipped work, and some already require application of the 80/20 rule.
