Under the federal law known as the Fair Labor Standards Act (FLSA), as regulated by the Department of Labor (DOL), employers may take a credit against their minimum wage obligations if an employee regularly receives tips. This is commonly referred to as a “tip credit.”
The FLSA and the DOL’s regulations have always required employees to meet certain requirements in order for their employer to utilize the tip credit, taking into account the fact that employees rarely (if ever) perform only tip-generating work. For many years, the DOL interpreted the FLSA as allowing employers to utilize the tip credit so long as the employee devotes at least 80 percent of their working time to tip-producing activities. This led to the concept known as the “80/20 Rule.”
In October 2019, the DOL under the Trump Administration announced a reversal in course, and sought to eliminate the 80/20 Rule in favor of a more flexible (and employer-friendly) requirement that the tip credit could be used for any amount of time so long as non-tipped work is performed contemporaneous with tipped work, or a reasonable time immediately before or after.
That change, however, was short lived. On October 28, 2021, the DOL under the Biden Administration announced a new final “dual jobs” rule, which went into effect on December 28, 2021. The new rule not only revives the 80/20 Rule, but includes several other key components:
Functional Job Duties Test
The new rule incorporates what it describes as a “functional” test based upon an employee’s job duties. This functional test breaks down an employee’s tasks into three different groups, and the rule provides examples of each:
- (Category #1) Tip-Producing Work: This is work the employee performs directly providing services to customers for which the employee receives tips. Examples are a server providing table service, taking orders, and serving food; a bartender serving drinks and talking to customers at the bar; and a busser filling water glasses, clearing dishes and fetching and delivering items from the table.
- (Category #2) Directly Supporting Work: This is work that is performed by a tipped employee in preparation of or to otherwise assist tip-producing customer service work. Examples are a server refilling salt and pepper shakers and ketchup bottles, rolling silverware, sweeping or vacuuming under tables in the dining area, and setting tables; a bartender slicing fruit for drinks, wiping down the bar and tables in the bar area, vacuuming the bar area, and cleaning glasses; and a busser folding napkins and rolling silverware, cleaning the ice, soda and food warming machines, and stocking the busser station.
- (Category #3) Work That is Not Part of the Tipped Occupation: This is work that is not part of the tipped employee’s profession and does not provide any service to customers for which the employee receives tips. Examples are a server or busser preparing food, or cleaning the kitchen or bathrooms; and a bartender preparing food, or cleaning the dining room, kitchen or bathrooms.
The Revived (and Revised) “80/20 Rule”
The new rule reinstates the “80/20 Rule” by providing that employers can utilize the tip credit so long as 80 percent or more of the work is tip-generating, and not more than 20 percent is directly supporting work. No tip credit can be taken for any work that is not part of the employee’s tipped occupation.
In terms of the categories above, employers seeking to utilize the tip credit need to ensure that employees spend at least 80 percent of their working time in category #1, no more than 20 percent of their working time in category #2, and none of their working time in category #3. If an employee is performing any category #3 work, they should be paid the regular (non-tipped) minimum wages for that time.
“Substantial” Non-Tipped Work Is Not Subject to a Tip Credit
The rule establishes that employers cannot take a tip credit if the employee performs supporting work (category #2) for a “substantial amount of time.” This is the same concept from which the “80/20 Rule” originates; however, the new rule provides an additional new requirement:
The new rule establishes that an employer cannot utilize a tip credit if an employee performs supporting work (category #2) for a period exceeding 30 continuous minutes. An employer can still take a tip credit for the first 30 continuous minutes, and incorporate that time into the weekly 20 percent analysis. However, employers must pay an employee minimum wages for supporting work performed after the lapse of the first 30 continuous minutes, which would then fall out of the weekly 20 percent analysis (because the employee has already received minimum wages for that time). Supporting work done in intervals of less than 30 minutes scattered throughout the workday would not invalidate the tip credit, subject to the standard weekly 20 percent analysis.
For example, if an employee performs category #2 work continuously for 45 minutes, the employer can take a tip credit for the first 30 minutes, but must pay regular (non-tipped) minimum wages for the last 15 minutes. The first 30 minutes would then get incorporated into the weekly 20 percent analysis, but the last 15 minutes would not.
To make matters more complicated, the DOL also takes the position that a tipped employee’s down time, such as during a slow-down in customers, constitutes supporting work (category #2).
The laws and rules applicable to traditionally tipped employees can be confusing to both employers and employees alike. Therefore, the guidance and advice of a qualified labor and employment attorney is highly recommended.