Food & Beverage

• Where Do We Stand? An Action Plan for Employers on Tip Credit Compliance and the 80/20 Rule

Many employers in hospitality and other service industries take the tip credit toward their minimum wage obligation under federal wage and hour law – but complying with evolving rules has been challenging in recent years. When can tipped employees be paid a reduced minimum wage and when must they be paid the full minimum wage? How have rules, guidance, and interpretations from courts and the Department of Labor (DOL) changed in recent years?

Here’s an update for employers and a five-step action plan for compliance.

What Happened?

Last August, the 5th U.S. Circuit Court of Appeals issued a momentous decision in theRestaurant Law Center v. DOLcase that vacated the DOL’s infamous 80/20/30 rule. This was the agency-created rule that previously limited the types of job duties that tipped employees could perform and the amount of time that employees could perform those duties while being paid a tipped wage.

As a refresher:
The FLSA allows employers to take a so-called“tip credit”and pay employees who traditionally receive tips – such as servers and bartenders – as little as $2.13 an hour, so long as they make at least the standard minimum wage ($7.25 an hour) when tips are factored in. The idea behind this practice is that these employees generally make the majority of their income through gratuities.

But the 80/20/30 rule made it difficult for employers to use the tip credit under federal law.

Under the historic80/20 rule, a worker who spends more than 20% of their time in a week performing non-tip-producing work must be paid the full minimum wage for that time. The80/20/30 rule, which the Biden administration finalized the 2021, added a limitation on directly supporting work performed for more than 30 consecutive minutes.

Following theRestaurant Law Centerdecision vacating the 80/20/30 rule, the DOLwithdrew the rule and updated its guidelines for investigators. Now, there is no longer any mention of either the original 80/20 rule or the more recent 80/20/30 rule in the FLSA regulations or guidelines.

Currently, both the regulations and guidelines note that an employer may pay an employee a tipped wage when the employee is performing duties that arerelated to the tipped occupation, such as a server setting tables, without any apparent time limitation. The same employee, however, may not be paid a tipped wage for the time spent working ina different non-tipped job, such as role performing maintenance work.

The DOL’s field guidelines refer to this contrasting scenario as the“dual jobs” rule.

What Does This Mean for Employers?

For employers in Texas, Louisiana, and Mississippi – which are covered by the 5th Circuit’s ruling –it appears clear that both the 80/20 and 80/20/30 rules are dead, and employers must comply
only
with the Dual Jobs rule.These employers no longer have to meticulously track the amount of time tipped employees perform their various job duties, so long as the duties are part of their tipped occupation.

For employers outside the 5th Circuit, though, the picture is less clear. For example, some state laws impose their own version of the 80/20/30 rule. And other jurisdictions have legacy decisions from courts upholding the original 80/20 rule that have not yet been expressly overruled. In these jurisdictions, to be safe and as a best practice, employers should still comply with the original 80/20 rule until the relevant federal appeals court has an opportunity to review the issue in light of theRestaurant Law Centercase (or the US Supreme Court rules otherwise).

Consider this example:Earlier this year a restaurant in Nebraska sought to dismiss a collective action lawsuit brought by a group of servers alleging a violation of the original 80/20 rule. The employer argued that this claim was no longer viable following theRestaurant Law Centerdecision. The Nebraska federal district court, however, denied the motion, finding (at…