Key Takeaways:

• U.S. Department of Labor (DOL) announces proposed rule for tip provisions of the Fair Labor Standards Act (FLSA)

• Proposed rule would result in changes to employers’ ability to take tip credit, tip pooling options when credit is not taken

• Proposed rule available for review and public comment for 60 days

Current Regulations
The FLSA permits an employer to take a tip credit for the amount between the direct cash wage it pays to an employee and the federal minimum wage. If an employee does not receive a sufficient amount in tips to equal the tip credit amount, the employer must make up any difference. Employers may only take this credit for employees who are engaged in an occupation in which they customarily and regularly receive more than 30 dollars per month in tips.

Employers are permitted to utilize a tip pooling or sharing arrangement. However, employers who take the tip credit may only implement a tip pool among traditionally tipped employees and may not include customarily non-tipped employees.

When determining whether an employee’s tips can be considered part of their wages for non-tipped work, such as setting tables or refilling ketchup bottles, the DOL previously utilized the 80/20 rule. Under that rule, employees are entitled to direct payment of the full minimum wage from their employers if their non-tipped work exceeds 20 percent of their total shift time. While the DOL seemingly abandoned the 80/20 rule in a 2018 opinion letter, there has been confusion as to whether the rule is still in effect.

Proposed Changes
Under the proposed rule, the following important changes would take place:

• Employers would be permitted to utilize mandatory tip pools that include non-tipped or “back of house” employees (i.e., cooks, dishwashers, etc.) provided that the employer does not take a tip credit and pays the full minimum wage. However, managers and supervisors are ineligible for participation in the tip pool.
• The DOL would use the job duties of the FLSA executive exemption test to determine if an individual is a manager or supervisor who is ineligible for participation in a tip pool. However, salary would not be considered. As such, an individual may be deemed a supervisor for purposes of ineligibility for a tip pool even though he/she may not meet the salary requirement for FLSA exemption.
• Employers who use a mandatory tip pool would be required to maintain records of the tips received by employees, even if the employer does not take a tip credit.
• Employers who use a mandatory tip pool would be required to distribute tips no later than the regular payday for the workweek in which the tips were collected, or for pay periods that cover more than one workweek, tips must be distributed by the regular payday for that pay period.
• Employers would be able to take the tip credit for all time spent by an employee performing “related duties” (i.e. work that is not directly tip-producing itself) provided that such duties are performed contemporaneously with the tipped duties “or for a reasonable time immediately before or after performing the tipped duties,” effectively eliminating the 80/20 rule.

It is important to note that the proposed rule would not change the tip-pooling regulations for restaurants that take a tip credit. In those instances, only the tipped employees can participate in the pool. Furthermore, employers will still be prohibited from keeping employees’ tips in any circumstance.

Impact
The proposed rule would clearly eliminate the 80/20 rule, which should result in a reduction of the litigation against restaurant industry employers arising out of the difficulties associated with recordkeeping of the specific breakdown of tipped employees’ tasks throughout their shift. Under the 80/20 rule, employees could assert that their non-tipped work exceeded 20 percent of their shift, and as such, their employers improperly failed to pay them full minimum wages. Under the proposed rule, employers would now be permitted to take the tip credit for all time spent by an employee performing “related” non-tipped duties, effectively eliminating the 80/20 rule.

In states where a tip credit is not permitted by law, such as California, a significant disparity between the take-home compensation of servers and back-of-house crew members has made kitchen jobs extremely difficult to fill. Under the proposed rule, employers in those states who are not taking a tip credit could now implement a tip pool that includes the back-of-the-house employees, making it easier to fill those traditionally non-tipped jobs.

Recommendation
Employers with tipped employees should carefully review their tip credit and tip pooling policies to ensure that they will be in compliance under the proposed regulatory changes. Employers should also confirm that they are not operating any tip pooling or sharing arrangement that includes supervisors or managers and that they are distributing all employees’ tips properly and timely.

For more information, please contact:

• Carianne P. Torrissi
• Caroline J. Berdzik
• Peter J. Woo
• Kristin Klein Wheaton
• Or another member of our Employment and Labor practice