Without planning out some practices, restauranteurs may be required to pay tipped employees (i.e., those who earn at least $30 per week through tips) the federal minimum wage for much of their work under the Department of Labor’s Final Rule on Tipped Employees that took effect on Dec. 28, 2021. This article will analyze the history of “tip-credit” and minimum wage, the impact of the new rule, and current challenges to the regulation. 

Quick Facts

The final rule accomplishes a number of reforms and re-reforms including:

• Reinstates the 80/20 rule previously removed by the Trump administration;
• Limits the time a tipped employee can perform non-tip producing work to 30 continuous minutes;
• Caps the amount of time a tipped employee can perform non-tip producing work to 20% of their work week; and
• Trifurcates the types of tasks performed by tipped employees to determine which wages are eligible for tip credit and which are not. These activities are now categorized as either:
  • Tip-producing;
  • Tip-supporting; or
  • Unrelated tasks that are not part of a tipped occupation.[i]

The Rule likely does not affect employers in states without a tipped minimum wage.[ii] These states include Alaska, Arizona, California, Colorado, Connecticut, Hawaii, Minnesota, Montana, Nevada, New York, Oregon, and Washington.[iii]

Background

Under the Fair Labor Standards Act (FLSA), employers must normally pay employees at least the federal minimum wage of $7.25 an hour. For employees who are categorized as “tipped employees” – that is, employees who “customarily and regularly” receive more than $30 a month in tips – the standard is significantly lower.[iv] Employers may pay tipped employees cash wages of $2.13 an hour and rely on a “tip credit” to meet the minimum wage requirement.[v]  Under the current minimum wage, the maximum tip credit is $5.12 an hour, ($7.25 - $2.13 = $5.12). Thus, an employer may pay a tipped employee $2.13 an hour, and, so long as the employee’s total earnings for the week exceed what he or she would be due under the minimum wage, the employer has no further obligations in terms of compensation.  This standard is not a challenge, as tipped employees generally earn more – especially in upscale restaurants – than their hourly-paid colleagues (dishwashers, etc.).

History of “Dual Jobs” Regulations

Since 1967, the Department of Labor (DOL) has promulgated regulations concerning employees who receive tips as part of their compensation.[vi] In 1979, the DOL addressed the then novel issue of laborers who perform both tipped and non-tipped labor, opining that employers could not receive a tip-credit where servers were preparing salads before the restaurant opened.[vii] In 1988, in order to limit the time an employee spends doing non-tipped labor, the Wage and Hour Division (WHD) effectively instituted what came to be known as the 80/20 rule.[viii] The 80/20 rule, which requires that employees be paid minimum wage where 20% or more of their labor is non-tip producing, remained the DOL’s guidance on the matter for over 20 years until the rule was superseded in 2009 by an opinion letter that softened the standard.[ix] The 2009 guidance, however, was withdrawn just two months after its promulgation and the 80/20 rule was reinstated and remained in place until 2018.[x] In 2018, the 2009 guidance was reinstated and steps were taken to formulate the guidance into a final rule.[xi]

Under the 2018 proposed rule, employers would be allowed to take “tip credit” for time an employee spends performing related, non-tip earning duties so long as those duties were performed contemporaneously with tipped duties.[xii] As expected, courts pushed back against the proposal, with the Eleventh Circuit declaring that rule was unreasonable and opining that the 80/20 rule was still the reasonable standard to apply.[xiii] Thus, while the regulations have changed significantly since the initial conception of the term “dual jobs”, the basic premise has remained: generally, employees should earn at least the federal minimum wage when they perform non-tip producing labor. The question that the regulations routinely consider is how much non-tip producing labor is too much?

2020 Final Rule

Under the 2020 Final Rule (effective December 28, 2021), three significant changes are implemented. First, the final rule categorizes labor into three categories: tip producing, tip supporting, and unrelated labor.[xiv] Providing several examples of tasks that fall into each, the rule trifurcates in this manner in the hopes of providing some clarity for employers.

Secondly, the final rule reinstates the 80/20 rule with a notable addition. As aforementioned, the 80/20 rule dictates that no more than 20% of a tipped-employee’s time can be spent on work that is not directly tip-producing.[xv] In other words, for a waiter or waitress, no more than 20% of his or her time on the clock can be spent doing anything other than waiting tables without the employer having to pay the full federal minimum wage for time worked.

Finally, the rule also imposes a 30-minute cap on how much time a tipped employee may perform tip-supporting or unrelated duties before they have to be paid minimum wage.[xvi] Once minute 31 rolls around, the employee must now either stop performing the work or be paid $7.25 an hour until he or she stops the work.  As an example, if a tipped employee spends an hour rolling silverware, then the first thirty minutes of that hour would be paid at $2.13 an hour while the second thirty minutes would be paid at $7.25 an hour.

Notably, the 30-minute rule only applies to work performed for 30 continuous minutes. Thus, theoretically, an employee could perform the labor for 30 minutes, transition to a tip-producing role for another half hour, and then transition back. However, trying to game the system in such a way will only provide minimal benefits as the 80/20 rule institutes a cap on non-tip producing work.

Challenges to the Rule

On Dec. 3, 2021, the Texas Restaurant Association and the National Restaurant Association filed suit in the District Court for the Western District of Texas  against the Biden administration in an effort to overturn the regulation.[xvii]  The basis for the suit is that the regulation is functionally a statute that conflicts “with the plain language of the law.”[xviii] Underpinning this lawsuit is the concern that the rule will pose additional burdens on restaurants, specifically at a time in which a national labor shortage is hitting the service industry especially hard.[xix] The case is currently pending.

Key Takeaways

For employers, the new rule likely means an increase in three types of costs: rule familiarization costs, adjustment costs, and management costs.[xx] Of these, it seems that adjustment and management costs will be the most significant.  Indeed, employers will now need to be intentional about categorizing and documenting what tasks employees perform and for how long.  Because of the difficulty in complying with hardline rules in a fluid work environment, it is likely that employers will incur additional labor costs when, and if, transitioning proves difficult. Attorneys advising clients on how to avoid these costs should emphasize the need to organize work schedules and categorize labor on the front end so as to avoid being hit with higher labor costs. 

There are additional concerns that the promulgation of this rule will exacerbate the labor shortage that has already hit the service industry particularly hard. Due to a potential cascade effect, there are fears that employers will need to hire more workers to comply with the rule.[xxi] Indeed, in the comment period for the rule, concerned parties noted that employers who would need to hire additional workers to comply with the regulations would be unable to do so.[xxii]  In response to these concerns, the DOL opined that “over the majority of the time horizon of this regulatory impact analysis, the Department believes that quantification using non-pandemic data allows for reasonable approximations.”[xxiii] Only time will tell.

Steve Darden is Managing Partner of Hunter, Smith & Davis, LLP in Johnson City, where his practice involves representation of employers before administrative bodies, in court, and at the bargaining table, as well as providing legal advice regarding employer-employee relations, compliance issues and litigation avoidance.  He earned his JD from the University of Tennessee. Steve can be reached at sdarden@hsdlaw.com or (423) 283-6303.

Will Ellis is an associate at Hunter, Smith & Davis, LLP, where he primarily practices in civil litigation, focusing specifically on insurance defense, insurance coverage, and labor and employment defense. He earned his JD at the University of Alabama. Will may be reached at wellis@hsdlaw.com.