The U.S. Department of Labor (DOL) published a Notice of Proposed Rulemaking regarding the tip provisions under the Fair Labor Standards Act on Oct. 8, 2019, a proposal that seeks to address two main areas:
Tip Pooling: The DOL proposed to finalize a rule outlined in its 2018 Field Assistance Bulletin that clarified that employers who pay the full Fair Labor Standards Act (FLSA) minimum wage are no longer prohibited from allowing employees who are not customarily and regularly tipped — such as cooks and dishwashers — to participate in tip pools.
80/20 Rule: The proposed regulations adopt the DOL’s 2018 opinion letter that retracted the “80/20 rule,” which prevented employers from taking the tip credit when a tipped employee spent more than 20 percent of their working time on non-tipped work.
Overview of the Tip Credit
The FLSA generally requires employers to pay employees at least the federal minimum wage, currently $7.25 per hour. The FLSA allows certain employers to count a limited amount of the tips its “tipped employees” receive as a credit toward this federal minimum wage obligation. Employers may satisfy the federal minimum wage by paying a base hourly rate (a minimum of $2.13) and accounting for the remainder ($5.12) through the value of tips an employee receives. In order to apply a tip credit, the employer must first notify employees that their tips are being credited toward the minimum wage and employees must be able to retain all tips that they receive.
The tip credit can only be applied to a tipped employee — defined as an employee who regularly earns at least $30 per month in tips. If taking a tip credit, the tip credit must make up the difference between the cash wage and minimum wage to reach at least $7.25 per hour.
While this is the federal rule, state laws may differ. Many states have a higher minimum wage. In addition, the states of Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington do not allow employers of tipped employees to take a tip credit. Several states currently allow a tip credit, but require a higher direct or cash minimum wage be paid to employees.
Clarification of Tip Pooling Rules
In March 2018, Congress amended the FLSA as part of the Consolidated Appropriations Act (CAA) of 2018. The CAA prohibited an employer from keeping tips received by its employees for any purposes, including allowing managers or supervisors to keep employees’ tips, regardless of whether the employer takes a tip credit. As a result, employers could require tipped employees paid above the minimum wage to share tips with other employees, as long as the tips were not shared with supervisors, managers, or the employer itself. This amendment led the DOL to issue a Field Assistance Bulletin in April 2018 providing clarity on the amendment. The DOL noted it would use the duties test of the executive overtime exemption under the FLSA to determine whether an employee is a manager or supervisor.
The DOL’s proposed rule, Tip Regulations under the FLSA, as published, would:
- Adopt the duties test of the executive overtime exemption for identifying supervisors and managers prohibited from receiving tips from other tipped employees.
- Allow employers to implement compulsory tip pools that include non-tipped employees – such as cooks and dishwashers — provided that the employer does not take a tip credit and pays the employee the full minimum wage.
- Prohibit forced sharing of tips with persons owning 20% or more of the business.
- Require employers to maintain records of the tips received by employees if the employer operates a compulsory tip pool, even if the employer does not take a tip credit.
- Adopt the DOL’s long-standing position that an employer does not improperly “keep” tips because it holds the tips (including credit card tips) until the next regularly scheduled payday.
The Dismantling of the 80/20 Rule
During the Obama administration, the DOL took the position that an employer was allowed to apply a tip credit toward workers’ wages only when the tipped employee was devoting less than 20% of his or her shift performing tasks that did not explicitly produce tips from the guests. In November 2018, the DOL reissued and adopted a 2009 opinion letter clarifying how employers must pay tipped employees who perform dual jobs. In the opinion letter, the DOL stated that it did not intend to place a limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as these tasks are performed contemporaneously with direct customer service duties.
To decide whether a duty was related to a tipped occupation, the DOL relied upon duties set out in the federal occupational database, O*NET, www.onetonline.org, noting that if the duties were included in the database, then the DOL would presume they were related to the tipped occupation.
The DOL's rule that tip regulations under the Fair Labor Standards Act, as published, would:
- Allow an employer to take a tip credit for any amount of time that an employee in a tipped occupation performs related, non-tipped duties contemporaneously with his or her tipped duties, or for a reasonable time immediately before or after performing the tipped duties. This would eliminate the task-by-task timekeeping requirement.
- Provide that, in addition to the examples listed in the regulation by the DOL, a non-tipped duty is related to a tip-producing occupation if the duty is listed as a task of the tip-producing occupation in the Occupational Information Network (O*NET). For example, O*NET identifies the duties of a waiter to include “filling salt, pepper, sugar, cream, condiments, and napkin holders.” This clarification eliminates the task-by-task timekeeping requirement.
In addition, the DOL is seeking comments on how to identify related duties for tipped occupations for which there is not an O*NET entry, such as in emerging positions and industries.
The public comment period on the Notice of Proposed Rulemaking ends Dec. 9, 2019. Whereas a final rule is not expected to be released until 2020, the National Restaurant Association has publicly commented on the proposed rule. It believes it establishes an appropriate balance and provides much needed regulatory clarity. Paychex will continue to monitor the proposed rule and provide updates with any developments.
Learn about the FICA tip credit and calculate your savings.