Wasting no time, the Wage and Hour Division of the U.S. Department of Labor published a Final Rule on Friday that will formally withdraw regulations on tip credits that were issued in the final days of the Trump Administration. The Biden Administration regulations will take effect December 28.
The Trump Administration regulations were issued on December 30, 2020, but after President Biden took office, his Administration delayed their effective date twice. In July, the Administration followed up with proposed regulations that would have partially withdrawn the Trump regulations and replaced them with new language. The publication of the Final Rule on Friday completes the process.
As expected, and consistent with the proposed regulations published by the DOL in July, the Final Rule will, for the first time ever, codify the DOL’s prior guidance on the “80/20 Rule” when it comes to so-called “side duties” of a tipped employee. In the restaurant industry, these are duties that may not directly generate tip income, but are related to the tipped employee’s primary job duty of providing service to the restaurant’s customers.
Under the Fair Labor Standards Act and many state wage and hour laws, a tipped employee can be paid an hourly wage of less than the minimum that applies to most employees. The rationale is that the employee makes up the difference (and, often, more than makes up the difference) from the tips received. This is known as a “tip credit” because the employer gets credit in meeting its minimum wage obligations for the tips that the employee receives. However, tipped employees usually perform other duties (“side duties”) that may not directly generate tips.
Historically, “side duties” in the restaurant industry have been considered by the DOL to include tasks like cleaning and setting tables, toasting bread, making coffee, refilling condiment containers, wrapping silverware in napkins, and placing garnishes on food items before serving, such as adding croutons to a salad or topping a piece of pie with whipped cream. Since the late 1980s, the DOL has espoused what came to be known as the “80/20 Rule,” which essentially said that if a tipped employee spent more than 20 percent of his or her time performing side duties, the tip credit could not be applied to that time. The 80/20 Rule was a sub-regulatory effort of the DOL to clarify a regulation that talked about “dual jobs” and made the point that if an employee had two different jobs for the same employer, and one clearly met the definition of a “tipped employee” job and the other did not, the tip credit could be applied only to the time spent performing the tipped employee job. The example used in the regulation was a maintenance employee working in a hotel who also worked shifts as a waiter.
Although the maintenance employee/waiter example is relatively straightforward, the analysis becomes much more complicated when looking at the job duties of full-time wait staff who also perform “side duties.” As a result, over the years a tremendous amount of collective action litigation has ensued over compliance with the 80/20 Rule, and the restaurant industry has borne the brunt. The greatest difficulty in much of the litigation was how to measure every minute of every shift to assess when tip-generating tasks were being performed and when side duties were being performed.
The Trump regulations appeared to offer hope to the restaurant industry. The regulations would have eliminated the 80/20 Rule and replaced it with what appeared to be a more practical solution that might have at least lessened disputes over side duties and the tip credit. Employers would have been able to apply the tip credit to time spent performing side duties as long as the side work was completed during, or “for a reasonable time immediately before or after,” employees’ tip-generating work. The regulations also would have more precisely defined what did and did not constitute a “side duty” by reference to a federal occupational database known as the O*NET. However, the Trump regulations were to take effect on March 1, 2021, and by that time the Biden Administration was in place. As a result, the Trump regulations never took effect.
The Biden regulations
The Biden Administration regulations, which will take effect on December 28, will codify the 80/20 Rule and will add a new limitation not contained in any DOL guidance issued until now – that employers cannot apply the tip credit to time spent performing side duties if the time exceeds 30 consecutive minutes. The regulations also codify definitions of “tip-producing work” and “directly supporting work,” two terms that are critical to application of the 80/20 Rule and the 30-consecutive-minute limitations.
Employees who perform “tip-producing work” -- that is, work that qualifies for the tip credit -- include servers, bartenders, nail technicians, bussers, parking attendants, service bartenders, and hotel bellhops. Notably, the regulations say that the lists are illustrative and not exhaustive. For servers, tip-producing work includes providing table service, such as taking orders and making recommendations, and serving food and beverages.
“Directly supporting work” is properly subject to the tip credit, but only within the time limitations of the 80/20 Rule and the new 30-minute rule. The regulations again provide a list of illustrative but not exhaustive examples. “Directly supporting work” for restaurant servers includes dining room prep work, such as refilling salt and pepper shakers and ketchup bottles, rolling silverware in napkins, folding napkins, sweeping or vacuuming under tables in the dining area, and setting and bussing tables.
The regulations make clear that the 80/20 analysis is to be applied on a workweek basis by calculating 20 percent of the time spent in the workweek for which the employer has applied a tip credit. For example, 20 percent of 40 is 8. If a server works 40 hours in the workweek, and if 10 of those hours are spent on “directly supporting work,” the employer may be able to apply a tip credit for 8 hours of the “directly supporting work” but would have to pay at least the minimum wage for the extra two hours of “directly supporting work.”
In addition, the tip credit cannot be applied to any time spent performing “directly supporting work” for a continuous period of time that exceeds 30 minutes. Notably, any such time, along with any hours worked for which no tip credit was applied, are excluded in calculating the 20 percent tolerance.
Finally, the regulations make clear that no tip credit may be applied for time spent in work that the DOL considers to be not part of the tipped occupation at all -- in other words, any work that does not meet the definition of “tip-producing work” or “directly supporting work.” The regulations provide another illustrative but not exhaustive list of examples for restaurant servers, which includes preparing food (including salads), and cleaning the kitchen or restrooms.
Unfortunately, the new regulations appear to do very little in the way of preventing continued litigation. The regulations provide one seemingly bright-line rule – that a tip credit should not be applied to tipped employees for more than 30 minutes before the arrival of customers or guests, or for more than 30 minutes after their departure. That straightforward rule aside, the regulations are expected to result in litigation over whether a particular job task fits within the definition of “tip-producing work,” “directly supporting work,” or “work that is not part of the tipped occupation.” The other obvious area for potentially endless disputes is over the manner in which employers track and measure the time spent performing “directly supporting work” in order to determine whether the work exceeds the 20 percent or 30-minute limitations.
It remains to be seen whether the validity of the regulations will be challenged in court.
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