US: Department of Labor relaxes rules for tipped employees

Employers now have greater flexibility in how they remunerate tipped employees who also perform non-tipped duties as a result of a reissued opinion from the US Department of Labor. This article sets out details of the revised and clarified policy, which is already effective.

Executive Summary

The Department of Labor’s Wage and Hour Division (WHD) has announced it will no longer apply the ‘80/20 rule’ to tipped employees, and will no longer require employers to pay the full minimum wage for time spent by a tipped employee performing ‘related’ non-tipped duties.

Under the WHD’s new policy, an employer can apply the Fair Labor Standard Act’s (FLSA’s) ‘tip credit’ (meaning that employers can pay tipped employees below minimum wage as long as they receive enough in tips to make up the difference) to all hours worked by an employee in a tipped occupation. This includes time spent performing non-tipped duties, as long as the duties are ‘related to’ the tip-producing occupation, and performed either at the same time as the tipped duties or during a ‘reasonable’ time period immediately before or after performing tipped duties.

Background

The FLSA generally requires employers to pay non-exempt employees at least the federal minimum wage, plus overtime pay if an employee works more than 40 hours in a work week. Section 203(m) of the FLSA allows employers to apply a ‘tip credit’ to satisfy part of the minimum wage obligation for tipped employees, thereby reducing the direct wages the employer is required to pay. A ‘tipped employee’ means any employee engaged in an occupation in which he or she customarily and regularly receives more than USD 30 per month in tips. In addition, the employer must inform its tipped employees of the tip credit provisions of the FLSA, all tips received by the tipped employee must be retained by the employee, the employer must ensure that the combination of direct wages paid by the employer plus tips received by the employee equals or exceeds the minimum wage, and the employer must properly calculate and pay any overtime due.

Courts, WHD and employers have struggled with applying these rules to employees who perform tipped duties and also perform other duties. This can occur when the employee has a ‘dual job’ (e.g. where a maintenance worker also sometimes works as a server), or where a tipped employee performs tipped duties and related non-tipped duties (e.g. where a server also sets tables, makes coffee or washes dishes).

On 16 January 2009, WHD issued an opinion letter clarifying the effect of non-tipped duties on the availability of the tip credit, but on 2 March 2009, WHD withdrew that opinion letter ‘for further consideration’. It has consistently been the WHD’s position that an employer could not take a tip credit for any tasks performed that were ‘unrelated’ to the tipped occupation. The WHD’s position under the Obama Administration was that if a tipped employee also spent 20% or more of his or her time performing ‘related’, but not directly tip-generating tasks, the employer could not take a tip credit for any time spent on those non-tipped tasks. This has generally been referred to as the ‘80/20’ rule.

Several courts have upheld the 80/20 rule, including with respect to ‘related’ tasks performed by a server before a restaurant opens or after it closes. In some lawsuits, employees have claimed that exceeding the 20% threshold means the employee is not a tipped employee and is entitled to the full minimum wage for all time worked, including time spent in tipped duties. Courts have reached differing conclusions on the standards that should be applied to these circumstances. The confusion over the concepts of tipped and non-tipped occupations and tipped and non-tipped tasks in determining whether an employer is entitled to take a tip credit against its employees’ minimum wage has encouraged the filing of a multitude of 80/20 and/or dual job legal actions in recent years.

WHD has now reissued the 2009 opinion letter, characterising the reissued letter as ‘an official statement of WHD policy and an official ruling’.

The Reissued Opinion Letter

The WHD’s official policy, effective from 8 November 2018, forward, is that:

• A tipped employee’s work is ‘part of a tipped employee’s occupation’ if ‘directly related’ to the employee’s occupation.
•  ‘[N]o limitation shall be placed on the amount of these duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously with the duties involving direct service to customers or for a reasonable time immediately before or after performing such direct-service duties.’ As one example of work performed ‘immediately . . . after’ direct-service duties, the opinion letter cites a server’s time spent vacuuming after a restaurant closed.

For guidance in determining which duties are ‘related’ to a tip-producing occupation, WHD’s opinion letter states that duties listed in the Code of Federal Regulations 29 C.F.R. § 531.56(e) and duties listed as core or supplemental to the occupation in the Tasks section of the Details report of the Occupational Information Network (O*NET, an online database, available at http://online.onetcenter.org, that gives job definitions and requirements for numerous occupations) ‘shall be considered directly related to the tip-producing duties of that occupation.’

The former refers to time that a server spends cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses. The latter, for ‘Waiters and Waitresses’, includes food preparation, stocking service areas, rolling silverware and preparing tables, bussing and cleaning tables, preparing the dining area for the next shift, sweeping, mopping, taking out trash, and cleaning bathrooms, in addition to food preparation, and actual customer service.

The opinion letter states that employers may not take a tip credit for time spent performing tasks not contained in the O*NET task list. While eliminating the Obama Administration’s 80/20 rule, the opinion effectively retains the WHD’s prior position that an employer may not take a tip credit for work ‘unrelated’ to the tipped occupation, but narrows considerably the scope of those tasks as compared to the Obama Administration’s position.

Employers’ Bottom Line

WHD’s new policy statement is a practical approach to an unsettled area of wage and hour law. At least as far as WHD is concerned, as long as an employer clearly defines and limits a tipped employee’s duties to those related to the tipped occupation, using the O*NET task list as a guide, and as long as non-tipped tasks are only performed at the same time as or immediately before or after tipped duties, the employer should no longer need to be concerned with tracking the time spent in separate ‘non-tipped’ duties.

However, employers should keep in mind that courts are not bound to follow WHD’s policies. Because the new policy statement appears to be consistent with the FLSA, and well-reasoned, we can hope that most courts will adopt it, but we should expect at least some continued inconsistency in court decisions for the foreseeable future. Employers should also consider the laws of the states in which they do business and whether they have adopted any rules similar to or more stringent than the federal 80/20 rule.