On June 23, 2021, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) that would reinstate the "80/20" approach previously used to determine when an employer may take a tip credit for time that a tipped employee performs nontipped duties related to the employee's tipped occupation, abandoning the dual-job approach taken by the prior administration in a final rule that was issued at the end of 2020. Under the proposed rule, an employer may not take a tip credit for time spent performing nontipped duties (1) to the extent that time exceeds 20 percent of the employee's workweek, or (2) if the time exceeds 30 continuous minutes. The deadline to submit written comments on the proposed rule is August 23, 2021.

Background

The Fair Labor Standards Act (FLSA) requires employers to pay nonexempt employees at least the federal minimum wage, which currently is $7.25 per hour under the FLSA. However, employers may pay tipped employees (i.e., those who customarily receive tips) a lower direct cash wage (no less than $2.13 per hour under federal law, though this minimum is higher under many state laws) and count up to $5.12 per hour of an employee's tips toward the minimum wage requirement. This is commonly known as taking a "tip credit."

Current FLSA regulations addressing tipped employees provide that an employee in a dual job is a tipped employee for whom an employer may take a tip credit only while employed in the tipped occupation. In other words, where the employee performs two or more distinct jobs for the employer, one (or more) of which is tipped and one (or more) of which is not, the employer may take a tip credit only for the time the employee spends in that tipped occupation.

The current regulations also recognize that an employee in a tipped occupation may perform duties that are not "directed toward producing tips," such as a server "who spends part of her time" performing nontipped duties, such as "cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses."

Prior to 2018, the DOL followed the 80/20 approach for determining when an employer may take a tip credit for hours that a tipped employee performs nontipped duties related to the their tipped occupation. Under that approach, an employer could continue to take a tip credit for the time an employee spent performing duties related to their tipped occupation that do not produce tips, but only if that time did not exceed 20 percent of the employee's workweek.

In 2018, the DOL rescinded its 80/20 guidance and later issued new guidance that would permit an employer to take a tip credit for the time a tipped employee performs related, nontipped duties, as long as the employee performs those duties contemporaneously with, or for a reasonable time immediately before or after, the tipped duties. The new guidance also adopted the Occupational Information Network (O*NET) as a source for determining when the nontipped duties relate to the tipped occupation.

On December 30, 2020, just three weeks before President Biden's inauguration, the DOL published a  final tipped employee rule, which was to take effect on March 1, 2021. The final rule incorporated the DOL's updated guidance regarding when an employer may take a tip credit for time spent in nontipped duties related to a tipped occupation.

However, in early 2021, after the Biden administration took office, the DOL twice extended the effective date of the portion of the 2020 final tip rule pertaining to dual jobs to "consider whether to withdraw and re-propose" it. The DOL also delayed the effective date of the portion of the 2020 final tip rule pertaining to the assessment of civil money penalties (and has since completed a notice of proposed rulemaking related to that portion). The remainder of the 2020 tip final rule?addressing the keeping of tips, tip pooling, recordkeeping and minor technical changes?became effective on April 30, 2021 (after a brief, initial delay).

The NPRM explains that the DOL now believes that the portions of the 2020 tip final rule pertaining to dual jobs "may fall short of providing the intended clarity and certainty for employers and could harm tipped employees and non-tipped employees in industries that employ significant numbers of tipped workers."

The Proposed Rule

The proposed rule provides that "an employee is engaged in a tipped occupation"?and thus the employer may take the tip credit?"when they either perform work that produces tips, or perform work that directly supports the tip-producing work, provided the directly supporting work is not performed for a substantial amount of time."

For example, food preparation and cleaning bathrooms are not part of a server's tipped occupation because these duties neither produce tips nor directly support the tip-producing work, so the proposed rule still does not permit an employer to take a tip credit for time spent in that work. However, cleaning the tables to prepare for the next customers would be considered work that directly supports the server's tip-producing work of waiting on tables, so the proposed rule permits an employer to take a tip credit for time spent performing that work if it is not a substantial amount of time.

The proposed rule would reinstate the 80/20 guidance by defining "substantial amount of time" to mean exceeding 20 percent of the hours worked during the employee's workweek. A continuous period exceeding 30 minutes is also a "substantial amount of time" under the proposed rule. With respect to the 80/20 guidance, the proposed rule is slightly different (and more employer-friendly) from the prior 80/20 guidance. Under the prior 80/20 guidance, if an employee spent more than 20 percent of his or her hours worked performing nontipped duties, the employer could not claim the tip credit for any time spent performing nontipped duties. Under the proposed rule, if an employee spends more than 20 percent of his or her hours worked performing nontipped duties, the employer would not be able to claim the tip credit for only the time spent performing nontipped duties in excess of 20 percent.

Thus, under the proposed rule, a server who spends a continuous one-hour period (i.e., more than 30 minutes) performing directly supporting work (cleaning tables for the next customers, folding napkins, preparing silverware, garnishing plates, etc.) has spent a "substantial amount of time" performing the directly supporting, but nontipped, work. As a result, the employer may not take a tip credit for that one-hour period.

A server who works 30 hours per week and spends seven hours cleaning tables for the next customers and garnishing plates (never more than 30 continuous minutes) has spent a "substantial amount of time" performing directly supporting work. Under the proposed rule, the employer cannot take a tip credit for any time that exceeds 20 percent of the workweek, i.e., one hour, but still may take the tip credit for six hours of nontipped work.

What This Means for Employers

The proposed rule, which represents the second pivot on this issue that employers of tipped employees have had to make in just a few years, marks a likely return to the much-maligned (by employers) but frequently upheld (by courts) 80/20 rule for determining when employers may take a tip credit for the minimum wage for tipped employees. The rule would be administratively burdensome for employers because it appears to require them to monitor closely employees' time spent on even the nontipped duties supporting their tipped occupations, particularly as service-industry employers with tipped employees struggle to emerge from the COVID-19 pandemic that has been devastating to many such businesses. The rule also is likely to lead to an increase in litigation, potentially on a class basis that greatly increases potential exposure, by employees who claim their employers took tip credits after they worked a "substantial amount of time" performing nontipped duties.

In anticipation of the proposed rule becoming final, employers claiming the tip credit for tipped employees should work closely with counsel to assess their current payment and recordkeeping practices and to restructure job duties and responsibilities for tipped employees as necessary to comply with the proposed rule.

For More Information

If you have any questions about this Alert, please contact Eve I. Klein, Christopher D. Durham, Natalie F. (Hrubos) Bare, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.