DOL Limits When Employers Can Pay Lower Wages to Tipped Workers

Restaurant owners and other hospitality employers that want to pay tipped employees less than the standard minimum wage must limit the time employees spend on nontipped duties or pay the full minimum wage for nontipped work, according to a final rule published by the U.S. Department of Labor (DOL) on Oct. 29.

Under the Fair Labor Standards Act (FLSA), certain employers can take a so-called tip credit and pay servers, bartenders and other tipped workers a tip minimum wage of as little as $2.13 an hour if those workers earn at least the standard minimum wage of $7.25 an hour once their tips are added in. 

The new rule, which takes effect on Dec. 28, will allow employers to take a tip credit only for the hours when an employee is working on tip-producing activities or tasks that directly support such activities, so long as the "80/20 rule" is followed. This means that the employee spends no more than 20 percent of the workweek on nontipped support tasks.

Under the new rule, employees must also be paid the full minimum wage when they spend at least 30 continuous minutes on secondary duties that don't generate gratuities.

"This new rule will require employers to closely monitor the amount of time spent by tipped workers on secondary duties each workweek to ensure that the 80/20 test is satisfied," said Keith Kopplin, an attorney with Ogletree Deakins in Milwaukee. "This can be a challenge in a tight labor market, when fewer employees are asked to do more."  

Kopplin said covered employers will need to track the ratio of tipped to secondary work each workweek. Additionally, he recommended that employers set up safeguards to ensure that tipped workers do not perform secondary duties in intervals that exceed 30 continuous minutes, since workers will be entitled to full minimum wage for those intervals even if the 80/20 rule is met for the workweek.

Rule Revived

The DOL had a long-standing policy of applying the 80/20 rule, but the prior administration rescinded the rule and replaced it with a broader "reasonable time" standard that allowed employers to pay just the tip minimum wage whenever tipped workers perform related side jobs (such as rolling silverware) either during, just before or a reasonable time after tipped duties.

The DOL's new rule reinstates the 80/20 test and adds the secondary requirement to pay the full minimum wage whenever side duties are performed for at least 30 continuous minutes, regardless of whether the 80/20 test has been satisfied for the workweek, Kopplin noted.

The rule aims to level the playing field for historically marginalized workers. "Women, people of color and immigrants represent more than half of all tipped workers," said DOL Wage and Hour Division Acting Administrator Jessica Looman. "Today's final rule enhances protections for this vital segment of the nation's essential workforce and combats income disparity and promotes equity."

The final rule also amends regulations addressing the hourly minimum wage paid to employees who perform work related to covered federal contracts.

More Tip-Rule Changes

Former President Donald Trump's administration issued a final rule in January (that was scheduled to take effect in March) amending the FLSA's requirements for tipped workers. After President Joe Biden's inauguration, however, the White House asked federal agencies to freeze proposed and pending regulations to give new leaders time to review pending rules, and the DOL delayed the rule on gratuities.

In March, the DOL announced that, "after considerable review," the following portions of the final rule would take effect on April 30:

• A provision that prohibits employers from keeping workers' tips, regardless of whether the employer takes a tip credit.
• A provision that allows employers that do not take a tip credit to include nontipped workers—such as cooks and dishwashers—in tip pools.

The final rule's record-keeping requirements also took effect. However, the DOL issued a new rule to withdraw and replace other portions of the prior administration's rule.

The Biden administration's rule, which takes effect on Nov. 23, authorizes the DOL to fine employers in more circumstances when they violate federal tip-sharing regulations.

The now-revoked rule issued by the prior administration would have allowed the DOL to assess penalties for tip-rule violations only when the department found that the employer repeatedly or willfully withheld employees' gratuities.

Under the new rule, employers may face fines of up to $1,100 each time the department finds that an employer retained employee tips, regardless of whether the violation is repeated or willful, noted Christopher Cognato and Steven Suflas, attorneys with Ballard Spahr, based in Philadelphia and Salt Lake City, respectively.

"The rule represents yet another move by the agency to protect tipped workers, putting hospitality-sector employers and others with tipped employees on clear notice that it intends to enforce [FLSA] requirements aggressively," they said.

The Biden administration's rule also clarifies when managers and supervisors can keep gratuities they receive. Although they may contribute to mandatory tip pools, they can keep only the tips they receive straight from customers for services they "directly" and "solely" provide.