DOL Proposes New Rule on Tip Credits

A link to the notice of proposed rulemaking is here.

The rule seeks to reinstate the longstanding policy, sometimes called the “80/20” rule, which had been the subject of numerous single-plaintiff, collective, and class actions challenging the use of the tip credit for side work that is not directly related to serving customers. During the Trump Administration, the DOL finalized a rule in December 2020 permitting businesses to pay $2.13 per hour on secondary duties for an unlimited amount of time, provided the tasks were related to the worker’s tipped occupation and performed “contemporaneously” or directly before or after customer-serving tipped activities. The Biden Administration placed a hold on that rule.

The Fair Labor Standards Act (FLSA) allows employers with tipped workers to pay as little as $2.13 per hour in wages, while taking a credit against the tips earned by the employee to make up the balance of the federal minimum wage, which currently is $7.25 per hour.

The proposed rule also clarifies that an employer may only take a tip credit when tipped employees perform labor that is part of their tipped occupation. According to the proposed rule, work considered part of the tipped occupation includes “labor that produces tips and labor that directly supports tip-producing work, so long as the employee does not perform it for a substantial amount of time.” A server’s tip-producing work includes waiting tables; a bartender’s tip-producing work includes making and serving drinks and talking to customers; a nail technician’s tip-producing work includes performing manicures and pedicures.

The proposed rule offers the following examples of work that directly supports tip-producing work:

Work performed by a server that directly supports the tip-producing work includes, for example, preparing 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. Work that directly supports the work of a bartender would include slicing and pitting fruit for drinks so that the garnishes are more readily available to bartenders as they mix and prepare drinks for customers. Work that directly supports the work of a nail technician would include cleaning the pedicure baths between customers so that the nail technicians can begin customers’ pedicures without waiting.

The proposed rule provides that if an employee performs work that directly supports tip-producing work for a substantial amount of time – which either exceeds 20 percent of all of the hours worked during the employee’s workweek or exceeds 30 continuous minutes – that worker is no longer performing work that is part of the tipped occupation. Keeping track of that time will clearly be a challenge for employers, and if the rule becomes final, employers can expect a spate of litigation over this issue.

Finally, the proposed rule makes it clear that the tip credit is not available for work that is not part of the tipped occupation, which includes “any work that does not generate tips and does not directly support tip-producing work.” For example, “preparing food or cleaning the bathroom is not part of a server’s occupation. Preparing food or cleaning the dining room is not part of a bartender’s occupation. Ordering supplies for the nail salon is not part of a nail technician’s occupation.”

The DOL invites comments from the public on the proposed rule. The comment period closes on August 23, 2021. If the rule becomes final, it will not supersede state minimum wage laws that are more favorable to tipped employees.