Department of Labor Clarifies Limitations on Employer Tip Credits

The U.S. Department of Labor (DOL) Wage and Hour Division recently issued a final rule clarifying its stance on when employers can pay their tipped employees less than minimum wage. The final rule included new subregulatory guidance on when employers are permitted to take a “tip credit,” which allows them to pay workers who receive tips a lower wage.

How Tip Credits Work

Under the federal Fair Labor Standards Act (FLSA), employers are required to pay nonexempt employees a minimum wage of at least $7.25 per hour. However, if an employee is considered to be a “tipped employee,” their employer can take what is known as a “tip credit” toward the minimum wage requirement. In essence, the tip credit allows the employer to use the tips received by the employee to offset its obligation to pay its workers minimum wage.

The FLSA defines a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” Employers that accept a tip credit are required to pay the tipped employee a wage of at least $2.13 per hour. If the employee receives sufficient tips to cover the remaining $5.12 per hour, the employer does not have to pay them anything more. However, if the employee makes less than $5.12 in tips per hour, the employer must pay them enough to ensure their total pay at least equals the minimum wage.

When Employers Can’t Claim a Tip Credit

Applying the tip credit can become problematic when an employee is responsible for performing both tipped and untipped work. In this type of “dual job” situation, the employer can only take a tip credit for the time the employee spends performing tipped duties, as well as the time spent on “related duties” that do not themselves produce tips. 

For instance, a server who is assigned certain opening and closing duties, such as cleaning and setting tables, refilling condiment containers, preparing beverages, and occasionally washing plates or cups, is typically considered to be a “tipped employee” throughout their shift, even though they are not tipped for their side work. 

The DOL’s long-standing guidance on the subject states that if an employee spends more than 20% of their work hours performing side work, their employer cannot take a tip credit for the time spent in such duties. This is known as the “80/20 rule” or the “80/20 guidance.”  

The DOL’s recent final rule on this subject went into effect on December 28, 2021, and states that employers may only take tip credits when an employee is engaged in tip-producing duties or activities that directly support those duties. The new final rule also codifies the 80/20 rule and requires employers to pay tipped employees at least $7.25 per hour when they spend at least 30 continuous minutes on non-tip-producing tasks. 

Employers who have tipped workers should review their policies to ensure that they comply with the most recent final rule. Employers will likely want to implement time-keeping procedures that allow for the tracking of time employees spend on non-tipped work to ensure all employees are paid appropriately and in accordance with the DOL’s final rule. Employers can be subject to hefty fines if employees are underpaid, so it’s important to verify that your payroll practices are compliant with both federal and state wage and hour laws. 

If you would like assistance updating your workplace practices, you can contact us for a complimentary consultation.