• John B. Reyna

DOL publishes final rule changing FLSA tip credit regulations

Updated: May 31

On October 28, 2021, the U.S. Department of Labor (“DOL”) published a final rule establishing limits on the amount of time tipped employees can spend performing work that is not tip-producing work and still be paid a lower direct cash wage under the Fair Labor Standards Act (“FLSA”). This final rule takes effect on December 28, 2021. Below is a summary of the final rule and its implications.


Tipped employees and the tip credit.


The FLSA requires covered employers to pay non-exempt employees a minimum wage of at least $7.25 per hour.[1] However, the FLSA allows an employer to satisfy a portion of its minimum wage obligation to a tipped employee by taking a tip credit towards the minimum wage based on the amount of tips an employee receives.[2] An employer that takes a tip credit must pay the tipped employee a direct cash wage of at least $2.13 per hour. The tip credit satisfies the difference between the direct cash wage of at least $2.13 per hour and the federal minimum wage of $7.25 per hour (i.e., a maximum tip credit of $5.12 per hour).


The FLSA defines tipped employees as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”[3] Historically, tipped employees have included servers, bartenders, and nail technicians. The DOL has recognized that many tipped workers serve in a dual jobs situation, in which employees are employed both in a tipped and non-tipped occupation.


The history of the 80/20 Rule.


In 1988, the DOL Field Operations Handbook introduced the 80/20 Rule, which required employers to pay tipped employees the full minimum wage, rather than the lower tipped wage, if an employee spends more than more than 20% of their time performing non-tip generating duties. Thus, under the Rule, an employer could not take a tip credit when tipped employees devoted more than 20% of their time to non-tip generating activities.

The Trump DOL rejected the 80/20 Rule. In lieu of the 80/20 Rule, the Trump DOL concluded that an employer may take a tip credit for the time a tipped employee performs related, non-tipped duties, as long as those duties are performed contemporaneously with, or for a reasonable time immediately before or after, tipped duties. The Trump DOL further explained that it would use the Occupational Information Network (“O*NET”) to determine whether a tipped employee’s non-tipped duties are related to their tipped occupation. This final rule was published with an effective date of March 1, 2021. However, immediately following the transition, the Biden DOL delayed the effective date of the Trump-era regulations.


The October 2021 version of the 80/20 Rule.


The Biden DOL has declared that a tipped employee’s work duties must be divided into three categories: (1) tip-producing work; (2) directly supporting work; and (3) work that is not part of a tipped occupation. The final rule amends the definitions of tip producing work, directly supporting work, and work that is not part of a tipped occupation. Tip-producing work is defined as “any work performed by a tipped employee that provides service to customers for which the tipped employee receives tips.”[4] Directly supporting work is “work performed by a tipped employee in preparation of or to otherwise assist tip-producing customer service work.”[5] Work that is not part of the tipped occupation is defined as “any work that does not provide service to customers for which tipped employees receive tips, and does not directly support tip-producing work.”[6]


An employer is entitled to take a tip credit for tip-producing work and is not entitled to take a tip credit for work that is not part of a tipped occupation (i.e., any time spent in this category must be compensated at full minimum wage). The final rule clarifies that there is no de minimis exception to work that is not part of a tipped occupation. Still, the category of directly-supporting work is where things get tricky.


Under the final rule, employers may take a tip credit when an employee is engaged in work that is not tip producing but that is directly supporting of tip-producing work. However, there are limitations. Directly-supporting work cannot be performed for a substantial amount of time. The final rule defines substantial amount of time as either (a) more than 20% of the hours in the workweek for which the employer has taken a tip credit; or (b) a continuous period of time that exceeds 30 minutes.[7]


The final rule clarifies that the first 30 minutes of continuous directly supporting work may be compensated at a tip credit rate (subject to the 20% limit), but any time in excess of 30 minutes must be paid at full minimum wage.[8]


The final rule also clarifies that the 20% limitation only applies to the time that an employee has been paid at the tip credit rate.[9] Calculation of 20% is made by subtracting the hours in that workweek for which an employer does not take a tip credit, either because the employee is engaged in a non-tipped occupation, the employer decides not to take the tip credit for those hours, or because those hours exceed the 30-minute threshold.[10] Any time that is compensated at the full minimum wage because it exceeds the 20 percent limit, however, is not excluded from the workweek in calculating the 20 percent tolerance. The employer only has to calculate the 20 percent tolerance once during the workweek.


The final rule contains a list of duties that the DOL deems to fall into each of the three categories. The final rules states that the examples are “illustrative” and “not exhaustive.” The list below summarizes the examples relating to servers, bussers, and bartenders.


Server - Tip-producing

  • Providing table service

  • Taking orders

  • Making recommendations

  • Serving food and drink

Server - Directly supporting

  • Dining room prep work

  • Refilling salt and pepper shakers and ketchup bottles

  • Rolling silverware

  • Folding napkins

  • Sweeping or vacuuming under tables in the dining area

  • Setting and bussing tables

Server - Not part of tipped occupation

  • Preparing food (including salads)

  • Cleaning the kitchen or bathroom


Busser - Tip-producing

  • Assisting servers with their tip-producing work for customers

  • Filling water glasses

  • Clearing dishes from tables

  • Fetching and delivering items to and from tables

  • Bussing tables

  • Changing linens

  • Setting tables

Busser - Directly supporting

  • Pre- and post-table service prep work

  • Folding napkins

  • Rolling silverware

  • Stocking the busser station

  • Vacuuming the dining room

  • Wiping down soda machines, ice dispensers, food warmers, and other equipment in the service alley

Busser - Not part of tipped occupation

  • Cleaning the kitchen or bathrooms


Bartender - Tip-producing

  • Making and serving drinks

  • Talking to customers at the bar

  • If the bar includes food service, serving food to customers

Bartender - Directly Supporting

  • Slicing and pitting fruit for drinks

  • Wiping down the bar or tables in the bar area

  • Cleaning bar glasses

  • Arranging bottles in the bar

  • Fetching liquor and supplies

  • Vacuuming under tables in the bar area

  • Cleaning ice coolers and bar mats

  • Making drink mixes

  • Filling up dispensers with drink mixes

Bartender - Not part of tipped occupation

  • Cleaning the dining room and bathrooms


Depending on the circumstances, some directly supporting work is raised to the tip-producing category if the work performed is provided to a customer. The preamble to the final rule emphasizes that the “determination is whether the tipped employee can receive tips because they are performing that task for a customer.” For example, a bartender who retrieves a particular beer from the storeroom at the request of a customer sitting at the bar, is performing tip-producing work, even though a bartender who retrieves a case of beer from the storeroom to stock the bar in preparation for serving customers, would be performing directly supporting work.


In the final rule, the DOL holds steadfast to its longstanding position that food preparation is not part of the tipped occupation of a server. However, the preamble to the final rule states that “a server’s tip-producing table service may include some work performed in the kitchen for their customer . . . .” The preamble lists certain food-related tasks as tip-producing, such as toasting bread to accompany prepared eggs, ladling pre-made soup, and scooping ice cream onto pre-made dessert.


The final rule clarifies that the tip-producing work of a tipped employee who both prepares and serves food to customers, such as a counterperson (e.g., sushi chefs), includes all tasks that are performed to provide the customer service work of preparing and serving the food.[11]


The preamble addresses the situation of a tipped-employee who is multi-tasking between tip-producing work and directly supporting work. For example, a bartender who organizes the bar (i.e., directly supporting work) and chatting with customers (i.e., tip-producing work). In that situation, an employer may take a tip credit. However, that is in contrast to a tipped employee who performs directly supporting work while there is a lull in service. For example, a server who folds napkins while waiting for her last table to pay their bill. Since the server is not actively engaged in tip-producing work, the time is properly categorized as directly supporting work.


Takeaways.


First, employers need to prepare for the effective date of the final rule on December 28, 2021. The following are some tips for becoming compliant.


Employers should begin documenting both the various tasks that their tipped employees perform as well as common idle times that arise during a shift. While the final rule provides examples of tip-producing and directly-supporting work, there is still the potential for disputes over whether a particular job task fits within the definition of tip-producing work, directly-supporting work, or work that is not part of the tipped occupation. Employers should consult an attorney to determine which category each task falls under.


Employers must determine a way to track directly-supporting work time to determine whether the work exceeds the 20% or 30-minute limitations.


State law must also be considered since certain states do not permit a tip credit at all. FLSA does not preempt more protective state or local laws.


For further information on this topic, please contact John B. Reyna at info@texashospitalitylaw.com. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-attorney relationship between the Texas Hospitality and Non-profit Law Center, PLLC and any recipient.

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[1] See 29 U.S.C. § 206(a). [2] See 29 U.S.C. § 203(m)(2)(A). [3] See 29 U.S.C. § 203(t). [4] Tip Regulations Under the Fair Labor Standards Act (FLSA); Partial Withdrawal, 86 Fed. Reg. 60114 (Oct. 29, 2021) (to be codified at 29 C.F.R. § 531.56(f)(2)). [5] Id. (to be codified at 29 C.F.R. § 531.56(f)(3)). [6] Id. (to be codified at 29 C.F.R. § 531.56(f)(5)). [7] See Id. (to be codified at 29 C.F.R. § 531.36(f)(4)). [8] Id. [9] Id. [10] The preamble to the final rule provides two examples to illustrate the substantial amount of time concept. [11] Tip Regulations Under the Fair Labor Standards Act (FLSA); Partial Withdrawal, 86 Fed. Reg. 60114 (Oct. 29, 2021) (to be codified at 29 C.F.R. § 531.36(f)(2)(ii)).

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