Department of Labor Proposes Limits to Tip Credit for Work "Directly Supporting" Tipped Work

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Executive Summary: On Monday, June 21, 2021, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) proposing limits on the tip credit employers can take during workweeks when tipped employees perform work that “directly supports” tipped work (“directly supporting work”) but does not itself produce tips. If adopted, the proposal would cap the use of the tip credit for “directly supporting work” at 20 percent of an employee’s total hours worked during a particular workweek. In addition, if an employee’s “directly supporting work” exceeds 30 minutes for any continuous period of time, the proposed regulation would prohibit employers from applying the tip credit to any portion of the continuous period. This latter prohibition would apply regardless of the total amount of “directly supporting work” during any workweek.

Background: Section 3(m) of the Fair Labor Standards Act (FLSA) allows employers who meet certain requirements to credit a limited portion of the tips its tipped employees receive towards payment of those employees’ required minimum wage. The FLSA currently allows qualifying employers to claim a $5.12 “tip credit” towards the current $7.25 federal minimum wage of tipped employees. If an employee’s tips are sufficient to cover this tip credit, employers only need to pay tipped employees cash wages of $2.13 per hour to satisfy the minimum wage.

The FLSA defines a “tipped employee” as an employee who customarily and regularly receives more than $30 per month in tips. Often, however, tipped employees perform duties that, while related to their jobs, do not produce tips. For example, in addition to taking customers’ orders and delivering meals to their tables, restaurant servers often clean and set tables for the next customer or prepare items for tables so the servers can access the items more easily when serving customers.

Over the years, DOL had developed a non-regulatory enforcement policy known as the 80/20 rule. This allowed employers to apply the tip credit to time spent performing tasks related to a tipped employee’s non-tip producing duties, but only if that time did not exceed 20 percent of the employee’s total hours worked for the workweek.

During the Trump Administration, DOL discarded the 80/20 rule, first in a 2018 Wage opinion letter, followed by a February 15, 2019 Field Assistance Bulletin. DOL then codified this in a December 30, 2020 final rule (“the 2020 Tip final rule”) that amended several sections of the tip credit regulations. This included adding § 531.56(e)(2) to the regulations to allow employers to take a tip credit for “any hours that [a tipped] employee performs related, non-tipped duties contemporaneous with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties.”

Initially, the 2020 Tip final rule was to become effective March 1, 2021. The Biden Administration, however, extended the effective date, first to April 30, 2021 and then to December 31, 2021, to consider whether to withdraw and re-propose revisions to the 2020 Tip final rule’s limits on application of the tip credit to non-tip producing work.

The Proposed New Rule: The NPRM proposes replacing § 531.56(e)(2) of the 2020 Tip final rule with a new § 531.56(f). Section 531.56(f), as proposed, would allow a tip credit only for work performed by a tipped employee that is “part of the tipped occupation.” Proposed § 531.56(f)(1) would define “work that is part of the tipped occupation” to include work that (a) produces tips as part of the tipped occupation, and (b) “directly supports” the tip-producing work, provided the “directly supporting work” is not performed for a “substantial amount of time.”

Proposed § 531.56(f)(1)(iii) states an employee has performed “directly supporting work” for “a substantial amount of time” if that work either (a) exceeds 20 percent of the hours worked during the employee’s work week, or (b) the employee performs directly supporting work for a continuous period exceeding 30 minutes. Section 531.56(f)(1)(iii)(A) states that, if a tipped employee spends more than 20 percent of the employee’s total hours worked for the workweek performing “directly supporting work,” employers cannot take a tip credit for any time that exceeds the 20 percent threshold. As to directly supporting work performed for continuous periods of more than 30 minutes, proposed § 531.56(f)(1)(iii)(B) would prohibit employers from taking a tip credit for any portion of such periods.

Proposed § 531.56(f)(1)(i) says work “directly supports” tip-producing work if it helps an employee perform the work for which the employee receives tips. In addition to the above-discussed example regarding servers, § 531.56(f)(1)(i) includes examples regarding bartenders and nail technicians. The preamble to the NPRM also discusses a few non-exclusive examples of “directly supporting work” involving other tipped occupations.

The NPRM requests comments to the proposed revisions to the tip credit regulations. The NPRM was published in the Federal Register on June 23, 2021, https://www.govinfo.gov/content/pkg/FR-2021-06-23/html/2021-13262.htm. Interested parties have 60 days from the date of the publication to submit comments, making them due on or before August 23, 2021.

Employers’ Bottom Line: Portions of the NPRM may change after DOL publishes the proposed rule in final form. Most likely, however, a final rule will retain some version of the proposed 80/20 rule and the disallowance of the tip credit for continuous periods of “directly supporting work” exceeding some specified limit. Employers should anticipate increased litigation and DOL enforcement following implementation of a final rule. Accordingly, employers using the tip credit should consider procedures to help monitor, schedule and limit non-tipped work by tipped employees. This could include exploring the feasibility of hiring a few workers to perform some or all of certain non-tipped duties. Employers should also consider administrative controls, such as rotating non-tipped duties among tipped staff to avoid or minimize occurrences of any employees’ non-tipped duties exceeding the limits proposed in the NPRM. These controls could also help employers identify instances when a particular employee has exceeded these limits. This would allow employers to avoid inadvertent minimum wage violations by paying an employee’s full minimum wage instead of taking a tip credit during the particular workweek. Employers should also be prepared to train managers and supervisors on efforts to control non-tipped work and comply with tip credit limits if some version of the DOL’s proposed revisions become part of the tip credit regulations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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