During the Trump administration, the U.S. Department of Labor (DOL) issued guidance governing tipped employees, providing long-awaited clarification on wage and hour issues such as (1) when nontipped employees can share in a mandatory tip pool, (2) what constitutes wrongfully “keeping” an employee’s tips, and (3) when employers may take a tip credit. The regulations were originally slated to go into effect on March 1, 2021, but the Biden administration delayed enactment until April 30 so the DOL could review related law, policy, and fact issues.
If the final rule is permitted to take effect, it could have sweeping repercussions for businesses with tipped employees. Accordingly, it’s an “egg-cellent” idea for those of you with tipped employees—especially in the food service industry—to review the changes in advance.
The updated regulations focus at least in part on when employers may take a tip credit and the implications of doing so. Therefore, it’s important for you to understand what a tip credit is before going further.
The federal minimum wage is currently $7.25 per hour, but employers with “tipped employees” (those who customarily and regularly receive more than $30 per month in tips) can take a “tip credit” toward their minimum wage obligation. If an employer chooses to take a tip credit, it must pay tipped employees at least $2.13 per hour. Then the tips can fill the gap up to the minimum wage.
If the employee doesn’t make enough tips to equal out to at least $7.25 per hour, however, the employer must pay the difference. Now, on to the meat and potatoes!
Four ‘Souper’-Sized Takeaways
The updated regulations make several changes and additions, but here are the four biggies:
- Employers that refrain from taking a tip credit may include employees who don’t traditionally receive tips, such as dishwashers and cooks, in a mandatory tip pool.
- Employers that don’t take a tip credit but collect employees’ tips for a mandatory tip pool must keep records of the amount of tips received by each worker.
- Employers may not “keep” employees’ tips for any purpose, which means they must distribute the money promptly, and supervisors and managers can’t share in the pool or otherwise take workers’ tips.
- Employers can take a tip credit for the time a tipped employee spends on traditionally nontipped activities if the work duties are (1) related to the employee’s job and (2) performed contemporaneously with (or within a reasonable time immediately before or after) the tipped activities.
No. 1: Please ‘Donut’ Make Me Share Via Tip Pooling
Many restaurants, coffee shops, and other service industries engage in tip pooling, i.e., requiring tipped employees to contribute the money to a collective pool and redistributing it evenly among staffers. Previously, the regulations prohibited employers from adopting a mandatory tip pool that included employees who didn’t regularly and customarily receive tips, regardless of whether the company took a tip credit.
The updated regulations allow employers who don’t take a tip credit to adopt a mandatory tip pool that includes workers who typically don’t receive tips, such as cooks and dishwashers. But employers that take the credit are still prohibited from including the workers in a mandatory tip pool.
No. 2: Keeping Tabs Via Payroll Records
Employers taking a tip credit already have recordkeeping requirements under the Fair Labor Standards Act (FLSA). But the updated regulations impose a recordkeeping rule on employers that (1) don’t take a tip credit but (2) collect employee tips for a mandatory pool.
Employers must identify employees who receive tips on payroll records. And they must keep tabs on the weekly or monthly amount of tips received by each employee, as reported by the individual.
No. 3: ‘Taco’ About Unfair! (No, Employers Can’t Keep Tips)
Employers can’t keep tips received by employees for any purpose. The updated regulations explain an employer improperly “keeps” tips when (1) it fails to distribute them promptly to the employee or workers in a tip pool, or (2) managers or supervisors take the tips or share in a tip-pooling arrangement.
Managers and supervisors can keep a tip, however, if they receive it for service they personally provide to the customer. For example, if a front-of-house manager has to wait tables because the restaurant is short-staffed, she can keep the tips she earns from serving those customers.
No. 4: ‘Give Me Some Credit Here!’
The updated regulations clarify when an employer can take a tip credit for tipped employees while they perform traditionally nontipped duties. Previously, the DOL applied the “80/20 rule,” which allowed an employer to take a credit for nontipped duties only if the employee spent 20 percent or less of her time in a workweek on those tasks.
The updated regulations adopt the more flexible “related duties test,” which allows employers to take a credit for nontipped activities if (1) the duties are related to the employee’s tipped occupation, and (2) the individual performs the related duties contemporaneously with the tip-producing activities or within a reasonable time immediately before or after them.
Employers with tipped employees, especially those of you who have or are considering adopting a tip pool, should review your company’s wage and hour practices to ensure compliance with the DOL’s updated regulations before they go into effect. If you’re unsure whether your practices comply with federal and state law, contact legal counsel for advice.
On that note, keep in mind the FLSA and the updated regulations discussed in this article are federal requirements. Before adjusting your employment practices, be sure to review any applicable state wage and hour laws.