Proposed revisions to tip credit regulations will impact employers

The Fair Labor Standards Act (FLSA) has a tip credit provision that allows employers to pay a reduced hourly wage or subminimum wage to tipped employees, provided the tipped employees receive enough tips to bring their hourly rate to the prevailing minimum wage. Under section 3(m) of the FLSA, which defines the term “wage,” an employer of tipped employees can satisfy its obligation to pay those employees the federal minimum wage by paying a lower direct cash wage (at least $2.13 per hour) and counting a limited amount of its employees’ tips as a partial credit to satisfy the difference between the direct cash wage paid and the federal minimum wage (known as a “tip credit”) if it follows certain requirements.

Under Department of Labor regulations adopted in 2011, commonly referred to as the 80-20 rule, employers could not take the tip credit for an employee if the employee’s non-tipped tasks (cleaning the restaurant or wrapping silverware in napkins) take up to 20% or more of their work time. In addition, the Department of Labor revised its tip regulations to apply the statutory condition contained in section 3(m) of the FLSA that tipped employees retain all of their tips (except for those tips distributed through a tip pool limited to customarily and regularly tipped employees) to all employers, regardless of whether they claim a tip credit or not.

On October 7, 2019, the Department of Labor announced a proposed rule revising tip regulations under the FLSA. The proposed rule would make it easier for employers to require servers and bartenders who usually receive tips to share tips with cooks and dishwashers who usually do not receive tips.

Below is a summary of the pertinent revisions under the proposed rule:

  • Elimination of the 80-20 rule – An employer may take a tip credit for any amount of time an employee in a tipped position performs non-tipped duties so long as those duties are performed contemporaneously with, or within a reasonable time immediately before or after, the employee’s tipped duties. 
  • Mandatory tip pools – Employers that pay tipped employees at least the full federal minimum wage that do not claim a tip credit may include non-tipped workers in mandatory tip pools. The rule prohibiting employers who do claim a tip credit must still ensure that mandatory tip pools only include tipped workers.
  • Employers may not keep employee’s tips – Employers, including managers and supervisors, are prohibited from keeping any portion of an employee’s tips, including from a tip pool. An employee who owns at least a 20% equity interest in an enterprise and who is actively engaged in its management would be considered a manager or supervisor.
  • Penalties for violations – Employers that violate the rule will be subject to new civil penalties of up to $1,100, plus an equal amount in liquidated damages. 

The official comment period ends on December 11, 2019. 

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