Since November 2018, the Department of Labor has toggled back and forth on its guidance for tipped employees and when an employer can claim the tip credit. However, as of October 29, 2021, there is a new final rule, which goes into effect on December 28, 2021. The new rule maintains the 80/20 limit on non-tipped duties from the past but changes some key definitions and adds a new "30 Minute Rule." Here's what you need to know to make sure that you're in compliance.
What is a tip credit and how does it work?
Under the Fair Labor Standards Act (FLSA) employers with tipped workers (i.e., those who regularly make at least $30 a month in tips) can pay as little as $2.13 per hour. By taking the tip credit, these employers are permitted to apply the tips that an employee receives to make up the balance necessary to reach the current federal minimum wage of $7.25.
What is different about the new rule?
The rule most employers will be familiar with is the 80/20 Rule, which first appeared in 1988. This rule required employers to pay employees the full minimum wage (i.e., $7.25), rather than the lower tipped wage (i.e., $2.13) whenever an employee spent more than 20% of their time in a week performing non-tipped duties like preparing food or cleaning bathrooms.
Under the Trump administration, the DOL withdrew the 80/20 Rule and substituted something akin to a reasonableness standard. However, before this rule could become effective, the Biden administration determined that it needed further consideration and delayed the rule's effective date.
After reconsidering, the DOL has chosen to keep the 80/20 Rule, with some new twists – namely sorting work into three distinct categories and introducing the so-called 30-Minute Rule.
What are the three categories of work and how does the tip credit apply to each?
The three categories of work are "tip-producing work," work that "directly supports" tip-producing work, and "work that is not part of the tipped occupation."
Tip-producing work is defined broadly and encompasses any work performed by a tipped employee that provides service to customers for which the employee receives tips. For a server, tasks like taking orders, making recommendations, serving food and drink, processing payments, and clearing plates and glasses would all fall into this category. When a task falls into this category, an employer may take the tip credit without any limitation.
Directly supporting work is done to prepare for or assist with tip-producing work but does not provide service to customers. This includes preparatory and other tasks like refilling salt and pepper shakers, rolling silverware, folding napkins, cleaning under tables, and setting and bussing tables. When a task falls into this category, an employer cannot take a tip credit if the work is performed for a "substantial amount of time." Substantial is defined as (a) more than 20% of the hours in the workweek for which the employer took a tip credit or (b) a consecutive period of time exceeding 30 minutes (i.e., the "30-Minute Rule").
Note that the line between tip-producing work and supporting work is very fine. If a server slices lemons as part of their side work at the beginning or end of their shift, that is supporting work. If a customer requests a lemon in their drink and the employee then slices a lemon, that is tip-producing work. In other terms, if an employee does a task in anticipation of future customers, it is directly supporting. If the same task is done for an existing customer, it is tip-producing work.
Work that is not part of the tipped occupation is a catch-all category for anything that is not tip-producing work or directly supporting work. It includes tasks like preparing food, cleaning bathrooms, or sweeping the parking lot. If a task falls into this category, the employer is not permitted to take a tip credit for any of this time.
The DOL also provides specific examples of different tasks and the buckets they fall into for bartenders, bussers, nail technicians, parking attendants, housekeepers, and bellhops.
Can you give an example?
Sally Server works 40 hours a week. During the week, she spends 5 hours cleaning the kitchen (a task that is not part of her tipped occupation as a server) and is paid $7.25 per hour (i.e., full minimum wage). Sally also rolls silverware (a non-tipped directly supporting task) for 18 minutes, twice a day, for a total of 3 hours a week. Her employer may take a tip credit for all the time she spends rolling silverware, because this time does not exceed 20% of the 40-hour workweek. Because Sally was paid the full minimum wage for 5 hours a week, she may perform up to 7 hours of directly supporting work (35 hours × 20% = 7 hours) without exceeding the 20% allowance. Even though she spent a total of 36 minutes each day rolling silverware, that is also permitted under the 30-Minute Rule because the time was not consecutive.
What happens once the 20% limit or 30 minutes of consecutive work is reached?
Once an employee exceeds 20% or more of their workweek on directly supporting work, the employer cannot claim the tip credit for any additional time spent on those tasks within the same workweek. Instead, the employer "must pay a direct cash wage equal to the full minimum wage for that time."
Similarly, once the 30-minute limit is reached, an employer must pay the employee the full minimum wage for the time in excess. So, if Sally Server rolls silverware for 45 minutes, her employer must pay the full minimum wage for those additional 15 minutes.
Be aware of the effect of differing state laws
As a rule, the FLSA sets the wage and hour law regulatory floor, not the ceiling. Seven states (Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) prohibit the use of a tip credit altogether. Other states and locales (including Illinois, Maryland, Missouri, Ohio, and Wisconsin) allow the use of a tip credit but require employers to pay more than the $2.13 minimum set by federal law. Thus in the aforementioned states, or states with a higher minimum wage, such as New York, New Jersey, Connecticut, Colorado, Massachusetts, Maine, and Arizona, as well as the District of Columbia, employers may need to raise their employee's base pay from $2.13 an hour in order to comply with their state's minimum wage laws. In addition, employers should remember that both the DOL and certain states require that employees be notified that the employer will be taking a tip credit toward their wages.
What should I do now?
Violations of the FLSA carry civil money penalties (CMPs) of up to $1,162 (or up to $2,074 per violation where the conduct is repeated or willful); therefore it is crucial that employers understand the new guidance and make appropriate changes immediately. In addition, employers may be liable for failing to pay tipped employees properly, including for overtime, under federal and state law. Employers may consider altering their time-keeping systems to track time spent on different tasks or may want to reconsider their reliance on the tip credit altogether.
If your organization has any questions about the FLSA's requirements, please feel free to contact the authors of this article or any other attorney in Venable's Labor and Employment Group.
* The authors of this article thank Page Kim, law clerk, for her assistance in preparing this article.