DOL Issues Final Rule on Tipped Employees – Mandatory Tip Pools and Related Duties
On December 22, 2020, the U.S. Department of Labor announced a final rule that revises its tipped employee regulations to conform with amendments that were made to the Fair Labor Standards Act by the Consolidated Appropriations Act of 2018 (the “CAA”), which we discussed in our March 2018 E-Update.
Under the FLSA, an employer of tipped employees can satisfy its obligation to pay those employees the federal minimum wage by paying those employees a lower direct cash wage (no less than $2.13 an hour) and counting the employees’ tips as a credit to satisfy the difference between the direct cash wage and the federal minimum wage. (Notably, many states have enacted higher minimum wage rates, including for tipped employees). This credit is known as the “tip credit.” Tipped employees are those who customarily and regularly receive more than $30 per month in tips. Tips do not include service charges, such as minimum gratuity amounts for large groups of customers, which are considered revenue to the employer.
Tip Pools. The FLSA provides that an employer who takes a tip credit may include only employees who customarily and regularly receive tips, such as restaurant servers and bartenders, in mandatory “tip pools” (i.e., the practice of requiring employees to contribute a certain amount of tips into a collective pool that is divided among employees). The DOL promulgated regulations in 2011 that applied this restriction on mandatory tip pools to all employers, whether or not those employers make use of the tip credit. However, in March of 2018, as part of a budget compromise, Congress passed the CAA which amended the FLSA by reversing the DOL’s restriction on tip pooling practices of employers that did not utilize the tip credit. As a result, if the employer does not take the tip credit, tips may be shared with other employees who do not customarily and regularly receive tips, such as dishwashers, cooks, chefs and janitors. The final rule imposes new recordkeeping requirements under such circumstances.
Tips for Employees Only. The CAA also provided that, regardless of whether the employer takes the tip credit, the law prohibits employers, managers and supervisors from receiving any share of the tips. An employer who unlawfully keeps tips earned by employees is subject to a civil monetary penalty of up to $1,100 for each violation, pursuant to 29 U.S.C. § 16(e)(2). The final rule makes clear that an employer must distribute any tips collected as part of a mandatory tip pool at least as often as it pays wages in order to avoid “keeping” the tips.
Related Duties and the 80/20 Rule. In addition to conforming the regulations to the CAA’s provisions, the final rule also reflects the Department of Labor’s recent guidance that an employer may take a tip credit for any amount of time 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. Previously, the Department’s position was that an employer may not take a tip credit for time an employee spends on non-tip producing duties if the time spent on non-tip producing duties exceeded 20% of the employee’s workweek. This rule, known as the 80/20 rule, was difficult to administer for many employers because they lacked guidance to determine whether a non-tipped duty is “related” to the tip-producing occupation.
As noted in our November 2018 E-Update, the DOL issued an opinion letter that month rejecting the 80/20 rule. The DOL now takes the position that there is no limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties and all other requirements of the FLSA are met. The DOL states that “Duties listed as core or supplement for the appropriate tip-producing occupation in the Tasks section of the Details report in the Occupational Information Network (O*NET) http://online.onetcenter.org or 29 C.F.R. § 531.56(e) shall be considered directly related to the tip-producing duties of that occupation. For example, for waiters and waitresses, such tasks include preparing and clearing tables, sweeping and mopping floors, taking out trash, answering phones, rolling silverware, stocking service items, and filling condiment containers, among many others. If the task is not listed in O*NET, the employer may not take a tip credit for time spent performing that task – although such task may be deemed non-compensable under the de minimis rule (meaning that such little time is spent on the task that it need not be paid).
It is important to note, however, that many courts have rejected the DOL’s November 2018 opinion letter and continue to enforce the 80/20 rule. Whether these courts will accept the regulatory guidance remains to be seen.
Summary. The final rule:
- Explicitly prohibits employers, managers, and supervisors from keeping tips received by employees;
- Removes regulatory language imposing restrictions on an employer’s use of tips when the employer does not take a tip credit, making it clear that such employers may allow workers such as cooks or dishwashers, to share in a mandatory tip pool, and imposes new recordkeeping obligations under those circumstances;
- Incorporates in the regulations, as provided under the CAA, new civil money penalties, currently not to exceed $1,100, that may be imposed when employers unlawfully keep tips; and
- Amends the regulations to reflect prior guidance explaining that an employer may 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.