Tag Archives: tipped employees

New Rules for Tipped Employees to Take Effect in February 2021

Contributed by Suzanne Newcomb, December 28, 2020

On December 22 the Federal Department of Labor (DOL) published a Final Rule changing the FLSA regulations for tipped employees. The Final Rule takes effect 60 days after publication. A caveat before we dig into the Final Rule; the change affects only federal law. As with all things wage-and-hour-related, many states, and some local governments, enforce more stringent requirements. Some jurisdictions prohibit tip credits entirely. This post focuses on the federal standard only. Employers must adhere to the requirements applicable to their particular business in each location in which they operate.

The FLSA has long allowed a “tip credit” to cover a portion of the minimum wage an employer would otherwise be required to pay certain employees who regularly receive gratuities. One requirement is that the tipped employees retain all of their tips with the exception of a qualified tip pool. The regulations surrounding tip pools have changed over the years due to a range of court rulings, legislative action, and agency rule making. The Final Rule is the latest iteration of regulations surrounding the “tip credit provision” [29 USC § 203(m)(2)(A) often referred to as simply “section 3(m)”].

Under the newly published Final Rule:

  • Employers may continue to enforce mandatory tip pooling arrangements;
  • If the tip credit is taken, the employer may not include employees who do not routinely receive tips (i.e. kitchen staff) in a mandatory tip pool;
  • Employers that do not take the tip credit (i.e. those that pay tipped employees a set hourly wage that is at or above the applicable minimum wage for non-tipped employees) may include employees who do not routinely receive tips in mandatory tip pools;
  • Managers and supervisors (as determined based on the duties portion of the test for the FLSA’s executive exemption) are prohibited from participating in tip pools (regardless of whether a tip credit is taken);
  • Tip pool funds must be paid out at least as frequently as the employer pays out base hourly wages; and
  • Finally, employers may take a tip credit for time spent performing tasks that do not generate tips (i.e. cleaning, stocking, rolling silverware, etc.) as long as the non-tip generating duties relate to the tipped occupation and are performed contemporaneously with, or immediately before or after, the duties for which the employee does receive tips. The Rule expressly rejects the 80/20 rule referenced in some opinion letters and court decisions. 

A final reminder that is particularly relevant in light of the massive sustained blow the service industry has taken of late; the tip credit cannot exceed the amount of tips the employee actually receives. Also, if an employee’s base hourly rate, plus the tips actually received, adds up to less than the applicable minimum wage for any particular shift, the employer must make up the difference.

Are You Applying the “Tip Credit” to Your Employees’ Wages Correctly?

Contributed by Heather Bailey

The Federal Labor Standards Act allows employers to pay their employees who regularly and customarily receive more than $30 a month in tips a reduced wage under the existing minimum wage (this is commonly known as taking a “tip credit”). However, problems occur when the employer applies the tip credit during all hours of the employees’ shifts, even though they may be performing dual jobs – one job that generates tips and another that does not. For example, a bartender or server may make coffee or set tables incidental to their tip generating duties, and thus can be compensated by using the tip credit even when performing such duties. However, employers need to know what to do when these incidental jobs or other non-tip generating duties take up a substantial amount of an employee’s work day. When this happens, an employer does not get the benefit of paying the reduced wages for time spent doing the other work.

The U.S. Court of Appeals for the Eighth Circuit in Fast v. Applebee’s now gives employers more guidance. Here, the appeals court upheld the district court’s reliance on a 1988 U.S. Department of Labor Wage and Hour Division Field Operations Handbook that provides that the tip credit may not be given “where the facts indicate that specific employees are routinely assigned to maintenance, or that tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance….” Section 30d00(e).

The employees argued that their non-tip generating duties (i.e., wiping down bottles, cutting fruit, taking inventory and cleaning up after closing) consumed a substantial amount of their shift, and, consequently, Applebee’s should not be allowed to pay them a reduced hourly rate when performing these duties. The appeals court stated that the Department of Labor’s 20% rule should be followed when assessing such claims.

Practice Tips:

  • Assess the duties performed by your tipped employees to see if they are incidental to the tip-producing duties, or if they take up 20% of more of the employees’ work day.
  • Keep accurate records, such as job descriptions, which support that the employees’ duties are related to and intertwined with tip-generating and anything else is just incidental.

Please note that some states have different tip credit laws that differ from federal law and should be consulted in order to make sure you comply with state law as well.