UPDATE: On February 24, 2021, the Wage and Hour Division (WHD) announced that it would delay the effective date of the Tip Rule until April 30, “to allow the Department to review issues of law, policy, and fact raised by the rule before it takes effect.” Among other items, WHD is expected to revisit the Tip Rule’s provisions regarding tip ownership and employees who perform tipped and non-tipped duties.

*  *  *

On December 22, 2020, the U.S. Department of Labor (DOL) issued a final rule solidifying tip credit issues under the Fair Labor Standards Act (FLSA).  The rule becomes effective 60 days after its publication in the Federal Register.¹

The rule addresses two key areas.  First, it incorporates legislative changes to the FLSA related to tip ownership, even when employers do not apply a tip credit toward employees’ wages. Second, it adopts the DOL’s 2018 opinion letter that clarified the scope of the dual jobs regulation and eliminated the so-called 80/20 Rule.

Tip Ownership

In the Consolidated Appropriations Act (CAA) of 2018, Congress amended the FLSA to provide that “[a]n employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.” It also permitted employers that did not take the tip credit to require employees to share tips with back-of-the-house employees or other non-managers through a mandatory tip pool.

The new rule conforms to the CAA, permitting an employer to exert limited control over tips in circumstances where an employer: (1) promptly distributes tips to the employees who received them; (2) requires employees to share tips with other eligible employees; or (3) facilitates tip pooling by collecting and redistributing tips to eligible employees in a tip pool by the next regularly scheduled payday. In these circumstances, under the CAA and now this rule, the employer does not unlawfully “keep” tips.

Furthermore, the rule codifies the DOL’s April 2018 Field Assistance Bulletin stating that “supervisor” and “manager” are defined as those managers who meet the duties test of the FLSA’s executive overtime exemption under 29 CFR § 541.100(a)(2)-(4).  The rule also follows the CAA in prohibiting forced sharing of tips with persons owning 20% or more of the business, as defined by 29 CFR § 541.101. 

Perhaps most important, the rule adopts the DOL’s 2018 guidance that employers are permitted to compel tipped employees who are paid at least minimum wage (and thus no tip credit is taken) to share tips with non-tipped employees (such as cooks and dishwashers), so long as the tips are not shared with supervisors, managers, or the employer itself.

The rule and CAA further provide that a violation of the tip ownership provision can subject employers to penalties for repeat or willful violations. 

Employers should be aware that many states have their own rules that place restrictions on who can participate in a tip pool.  With respect to employers that are governed exclusively by the FLSA, however, this portion of the new rule is a relatively non-controversial update to bring the regulations into conformity with the CAA.

80/20 Rule

In 1988, the DOL attempted to clarify an existing “dual jobs” regulation by inserting a provision in its Field Operations Handbook that instructed DOL field investigators that the tip credit is not available when tipped employees devote more than 20% of their time to non-tip-producing activities. This concept, known as the 80/20 Rule, was not often relied upon until the early 2000s, when it became the focus of tip-credit litigation.

During the Obama administration, the DOL publicly took the position that employers could only apply a tip credit for employees spending less than 20% of their shift performing non-tipped work. This position led to more litigation and proved completely unworkable for the hospitality industry, in part due to lack of guidance on which duties qualified as tipped or non-tipped.  The position also left employers with the onerous task of identifying, down to the minute, the work done by tipped employees on any given shift.

In November 2018, the DOL reissued and adopted a nearly decade-old opinion letter (and later made corresponding changes to the Field Operations Handbook) clarifying how employers must pay tipped employees who perform related non-tipped duties. That opinion letter stated there is no limit on the amount of duties related to a tip-producing occupation that may be performed, so long as the tasks are performed contemporaneously with direct customer service duties, or for a reasonable period of time immediately before or after performance of direct customer service duties. In other words, as long as side work is “running” side work—i.e., related duties performed during the course of a shift—there is no 20% or other limit to the amount of side work that can be performed. If servers are brewing coffee and rolling and polishing silverware during operational hours while they are also serving guests, this type of work can be performed while the employer is still applying a tip credit toward the employees’ wages. The only quantitative limitation is that the server’s wages and tips combined must equal or exceed the minimum wage.  The DOL further stated that duties set out in the federal occupational database, O*NET, www.onetonline.org, are presumed to be related to the tipped occupation.

The new rule follows the language in the opinion letter, and amends the dual jobs regulation to make clear that the 80/20 Rule is a thing of the past. The new rule provides that an employer may take a tip credit for any hours that an employee performs related, non-tipped duties contemporaneously with their tipped duties, or for a reasonable time immediately before or after performing the tipped duties.

The new rule itself does not provide additional guidance on what will be considered a “reasonable time” immediately before or after performance of tipped duties, but the DOL commented on that issue in the preamble to the new rule.  The DOL described two bellhops, each of whom worked a 10-hour shift.  The first bellhop spent a full eight hours assisting guests with luggage, and then worked two more hours cleaning, organizing, and maintaining bag carts in storage.  The second bellhop spent 48 minutes per hour assisting guests with luggage, and 12 minutes per hour on miscellaneous cleaning functions.  Although both bellhops spent a total of two hours on cleaning functions, the first bellhop worked in a dual occupation – eight hours as tipped bellhop and two hours as non-tipped cleaner.  The second bellhop was a tipped employee for the entire 10 hours.  

By eliminating the focus on the percentage of time spent on non-tipped duties (i.e., the 80/20 Rule), the new rule jettisons an unworkable task-by-task timekeeping requirement, and replaces it with a reasonable, occupation-focused standard that ensures tipped employees receive the full protection of the FLSA’s minimum wage and overtime provisions.  The new rule should also minimize courts’ reluctance to grant deference to the DOL’s position.²  

Employers would be well advised to continue to monitor this area of the law.  Employers must also be mindful that the FLSA does not preempt more protective state or local laws, and many states have tipped employee pay provisions that differ from the FLSA in important respects.

Takeaways

After a difficult 2020, which saw the Covid-19 pandemic decimate much of the hospitality industry, the year is ending with at least a little bit of good news on the regulatory front. In particular, the 80/20 Rule has been an intractable problem that has led to a flood of litigation in which courts are asked to scrutinize workers’ shifts on an hour-by-hour and minute-by-minute basis. Ultimately, the DOL’s common-sense position in eliminating the 80/20 Rule is a most welcome development.

It should also be noted that changes to regulations generally require the involvement of stakeholders.  The combined efforts of the hospitality community effectively shaped the contents of this new rule by becoming active and vocal participants in the rulemaking process. 

Littler’s Workplace Policy Institute (WPI) is grateful for the confidence and trust the industry places in it to ensure its voice and expertise is relied upon as the government considers new regulations.  After the DOL issued its Notice of Proposed Rulemaking and published this new rule in draft form, Littler, on behalf of many hospitality clients and trade organizations, submitted many comments and suggestions.  The DOL recognized Littler WPI’s comments a dozen times in the preamble to the new rule. 

On behalf of the industry, Littler urged the DOL to use the new rule to formally adopt the DOL’s informal guidance authorizing employers to deduct the actual cost of credit card processing charges from employees’ credit card tips.  Although the DOL did not incorporate that suggestion into the text of the new rule, it did expressly reaffirm the position in the preamble.  The DOL also credited comments by Littler in support of provisions of the new rule related to “nontraditional” tip pooling where no tip credit is taken, and various aspects of the replacement of the 80/20 Rule with a more practical and administrable, occupation-focused solution.   WPI hopes that the industry is as thrilled as it is that their efforts will create stability and clarity for employers and employees.

One final note—a number of states and organizations have claimed they will challenge this new rule.  Littler and WPI will continue to monitor these developments closely and look forward to working with the industry to defend any challenges that may be brought.