Over a year after Congress amended the Fair Labor Standards Act (FLSA) to clarify tip ownership questions, the U.S. Department of Labor (DOL) finally published a Notice of Proposed Rulemaking on October 8, 2019, with proposed changes to its current regulations on handling tips under its minimum wage guidance. The proposed regulatory changes address two key areas. First, the DOL proposes to finalize a rule previously outlined in its 2018 Field Assistance Bulletin that clarified who can, and who cannot, receive tips when a tipped worker does not receive a tip credit. Second, the proposed regulations adopt the DOL’s 2018 opinion letter that outlined the proper scope of the dual jobs regulation and the so-called 80/20 Rule involving work done by employees receiving a tip credit.
In March 2018, Congress amended the FLSA as part of the Consolidated Appropriations Act of 2018. The amendment provided that “[a]n employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.” The effect of the amendment was that employers could compel tipped employees paid above minimum wage (and thus not taking a tip credit) to share tips with other employees, so long as the tips were not shared with supervisors, managers, or the employer itself.
This amendment led the DOL to issue a Field Assistance Bulletin in April 2018 providing clarity on the amendment. The DOL noted that “supervisor” and “manager” would be defined as those managers that meet the duties test of the executive overtime exemption under 29 CFR § 541.100(a)(2)-(4).
The DOL’s proposed regulations adopt this “duties” test for identifying supervisors and managers prohibited from receiving tips from other tipped employees. The regulations also prohibit forced sharing of tips with persons owning 20% or more of the business, as defined by 29 CFR § 541.101. The proposed regulations also include express language permitting compulsory tip pools among non-management employees, such as dishwashers and cooks. Finally, the proposed regulations adopt the DOL’s long-standing position that an employer does not improperly “keep” tips because it holds the tips (including credit card tips) until the next regularly scheduled payday. Of note, the proposed regulations do not discuss the DOL and court-adopted position that employers may withhold the actual credit card transaction fee associated with liquidating an employee’s credit card tips. The employer community, therefore, can weigh in on this topic during the proposed regulations’ notice and comment period. Aside from that missed opportunity for the DOL to provide clarity, this portion of the proposed regulations is a relatively non-controversial update to bring the regulations into conformity with the recent legislation.
The 80/20 Rule aspect of the proposed regulations is likely to garner much more attention. In 1988, the DOL attempted to clarify an existing “dual jobs” regulation by inserting a provision in its Field Operations Handbook instructing DOL field investigators that the tip credit is not available when tipped employees devote more than 20% of their time to non-tip producing activities. That provision was relatively dormant until the early 2000s, when it started becoming the focus of litigation brought by tipped employees. During the Obama administration, the DOL publicly took the position that an employer was allowed to apply a tip credit towards workers’ wages only when the employees were spending less than 20% of their shift performing work that does not explicitly produce tips from the guests. This position fostered even more litigation and a completely unworkable standard for the hospitality industry, which became tasked with identifying, down to the minute, the work done by tipped employees on any given shift.
In November 2018, however, the DOL reissued and adopted a nearly decade-old opinion letter clarifying how employers must pay tipped employees who perform dual jobs. In the opinion letter, the DOL stated that it did not intend to place a limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as these tasks are performed contemporaneously with direct customer service duties, or for a reasonable period of time immediately before or after performance of direct customer service duties. In other words, as long as the side work is “running side work” there is no limit to the amount of side work that can be performed. So, if servers are brewing coffee and rolling and polishing silverware during operational hours while they are also serving guests, this type of work can be performed while the employer is still applying a tip credit towards the employees’ wages. The only quantitative limitation is that the server’s wages and tips combined must equal or exceed the minimum wage. To decide whether a duty was related to a tipped occupation, the DOL relied upon duties set out in the federal occupational database, O*NET, www.onetonline.org, noting that if the duties were included in the database, then the DOL would presume they were related to the tipped occupation.
Since the November 2018 reissuance of the opinion letter, some courts declined to grant deference to the DOL’s change in position. The proposed regulations adopt the language in the opinion letter and amend the dual jobs regulation to make clear to stakeholders that the 20% rule previously set forth in the DOL’s Field Operations Handbook no longer applies. The new rule would confirm that an employer may take a tip credit for any amount of time that an employee performs related, non-tipped duties contemporaneously with their tipped duties, or for a reasonable time immediately before or after performing the tipped duties. This is an important clarification that eliminates an unworkable task-by-task timekeeping requirement, and replaces it with a reasonable, occupation-focused standard that ensures tipped employees receive the full protection of the FLSA’s minimum wage and overtime provisions. Employers should consider voicing support for this proposed regulation through the regulatory comment process. In addition, the DOL is seeking comments on how to identify related duties for tipped occupations for which there is not an O*NET entry, such as in emerging positions and industries.