DOL Proposed Rule Would Limit Application Of FLSA Tip Credit

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For many decades, the Fair Labor Standards Act has allowed employers of tipped employees to apply a tip credit in meeting the minimum wage obligations of the federal wage and hour law.

Currently under federal law, an employer of tipped employees can pay a tipped employee a minimum wage of $2.13 per hour and apply a tip credit of $5.12 per hour to satisfy the FLSA’s current minimum wage requirement of $7.25 per hour. (State minimum wage laws may have both higher minimum wages and stricter tip credit requirements.) Obviously, certain conditions apply, including that the tipped employee must earn at least enough tips to cover the amount of the tip credit.

In March, we wrote that the Biden Administration was reversing course on the rulemaking efforts undertaken by its predecessor as they related to tip credits and what have been commonly referred to as “side duties.” In the restaurant industry, these are duties that may not directly generate tip income but are related to the tipped employee’s primary job duty of providing customer service to the restaurant’s guests.

Historically, side duties have been deemed by the U.S. Department of Labor to include tasks like cleaning and setting tables, toasting bread, making coffee, refilling condiment containers, wrapping silverware in napkins, and placing garnishes on food items before serving, such as adding croutons to a salad or topping a piece of pie with whipped cream. Since the late 1980s, the DOL has espoused what came to be known as the “80/20 Rule,” which essentially said that if a tipped employee spends more than 20 percent of his or her time performing side duties, the tip credit cannot be applied to that time. The 80/20 Rule was a sub-regulatory effort of the DOL to clarify a regulation that talked about “dual jobs” and made the point that if an employee has two different jobs for the same employer and one clearly meets the definition of a “tipped employee” and the other does not, the tip credit can be applied only to the time spent performing the tipped employee job. The example used in the regulation was a maintenance employee working in a hotel who also worked shifts as a waiter.

Although the maintenance employee/waiter example is relatively straightforward, the analysis becomes much more complicated when looking at the job duties of full-time wait staff who also perform “side duties” (as almost all wait staff do). As a result, over the years a tremendous amount of collective action litigation ensued over compliance with the 80/20 Rule, and the restaurant industry has borne the brunt. The greatest difficulty in much of the litigation was how to measure every minute of every shift to assess when tip-generating tasks were being performed and when side duties were being performed in order to apply the 80/20 Rule.

In late 2020, the Trump DOL published a final rule that appeared to offer hope to the restaurant industry. The rule would have eliminated the 80/20 Rule and replaced it with what appeared to be a more practical solution that might at least lessen the amount of litigation over side duties and the tip credit. Under the rule, employers would have been able to apply the tip credit to time spent performing side duties as long as the side work was completed during, or “for a reasonable time immediately before or after,” employees’ tip-generating work. The rule also would have more precisely defined what did and did not constitute a “side duty” by reference to a federal occupational database known as the O*NET. However, the new rule never took effect.

As we wrote in March, after President Biden took office, the DOL took steps to delay the effective date of the rule. Then, last month, the DOL published a notice of proposed rulemaking that, if finalized, will restore the 80/20 Rule and add a new twist – not only can the tip credit not be applied to time spent performing side duties in excess of 20 percent of the work week, but also any side duties performed for a continuous period of time exceeding 30 minutes will be ineligible for application of the tip credit. Unfortunately, the proposed rule would take restaurant employers back to the days of trying to parse out every minute of every shift in an effort to categorize it as either tip-producing work or side duties, and then assess the quantity of each for purposes of applying the 80/20 Rule -- while also taking note of whether there were any periods of time exceeding 30 minutes where side duties were performed continuously.

The proposed rule also contains some ambiguous language that calls into question whether the DOL intends to narrow the list of tasks it has previously deemed to be included as a side duty. The new proposal defines “tip-producing work” as any work for which a tipped employee receives tips, and makes the simple but vague statement that “[a] server’s tip-producing work includes waiting tables.”  The proposal’s examples of work that “directly supports” tip-producing work but is subject to time limits on performance, are as follows: “[P]reparing items for tables so that the servers can more easily access them when serving customers or cleaning the tables to prepare for the next customers.” Food preparation and cleaning bathrooms is not considered either tip-producing work or work that directly supports tip-producing work. In the case of bartenders, making and serving drinks, and talking to customers, is considered tip-producing work -- but not preparing food or cleaning the dining room.

Unfortunately, the ambiguities of the proposed language and the return to the minute-by-minute analysis of time spent on various tasks do not create much hope that the litigation in this area of the FLSA will subside.

Again, please keep in mind that the FLSA does not preempt state wage and hour laws. Some states do not authorize tip credits at all, and some states have tip credit rules that differ from those of the U.S. Department of Labor. Finally, many states have higher minimum wages than the federal minimum wage.

The notice of proposed rulemaking is open for public comment through August 23.  Comments can be submitted electronically at https://www.regulations.gov.

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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