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DOL Issues New Tip Regulations, but Rule’s Future Remains Uncertain

UPDATE: In January 2021, President Biden directed all federal agencies to freeze any proposed regulations and administrative rules that have yet to take effect, including the Trump DOL’s rule revising tip regulations. The Biden DOL announced the rule’s effective date will be delayed until April 30, 2021 to give additional opportunity for review and consideration of the proposed rule. The rule’s future remains uncertain and may be rescinded or substantially revised in the future. The Biden DOL also announced the rescission FLSA Opinion Letter 2021 – 4 addressing tip pools that include both tipped and nontipped workers that was based on this proposed rule. 

On December 22, 2020, the Department of Labor (DOL) issued a final rule revising the FLSA’s tip regulations. In theory, the new rule will go into effect on March 01, 2021. However, it is anticipated that either the Democratic-controlled Congress or incoming Biden administration may eliminate or make substantial revisions to the rule before it can take effect. Employers are encouraged to consult with legal counsel prior to making changes to their tip pooling practices.

If the new rule does go into effect, it will make changes in two key areas. First, the rule incorporates tip ownership changes that Congress implemented under the Consolidated Appropriations Act (CAA) of 2018. Secondly, the rule codifies the DOL’s 2018 opinion letter that eliminated the 8020 rule. Our previous article on the DOL’s elimination of the 8020 rule can be found here.

Tip Ownership

The CAA amended the FLSA to provide the following:

  • Employers may exert control over tips only to: 
    • Promptly distribute tips to employees;
    • Require employees to share tips with other eligible employees; or 
    • Where the employer facilitates tip pooling by collecting and redistributing employees’ tips, promptly distribute tips to other eligible employees in a tip pool by the next regularly scheduled pay day. 
  • Employers may require a nontraditional tip pool that includes tipped employees (such as servers) and nontipped employees (such as cooks and dishwashers), provided that: 
    • The pool does not include any employers, managers, or supervisors; and 
    • The employer pays employees at least the full minimum wage and does not use a tip credit. 
  • Explicitly prohibits employers, regardless of whether they take a tip credit, from keeping employees’ tips for any purpose. This includes prohibiting managers and supervisors from keeping tips received by employees. Managers” and supervisors” are defined as those employees who meet the duties test of the FLSA’s executive overtime exemption. 
  • Employers who violate these tip ownership provisions can be subject to civil monetary penalties for repeat or willful violations.

8020 Rule Elimination

In addition, the new rule codifies the DOL’s 2018 guidance explaining that an employer may take a tip credit for time that an employee in a tipped occupation (such as servers) performs related non-tipped duties (such as rolling silverware or cleaning tables) either contemporaneously with or for a reasonable time immediately before or after performing tipped duties.

Where an employee performs tipped and non-tipped duties, the employer may take a tip credit for non-tipped duties performed, so long as 

  • The duties are related to the employee’s tipped occupation (i.e., a server cleans the table after a customer leaves); and 
  • The related duties must be performed either contemporaneously with the tip-producing activities or within a reasonable time immediately before or after” the tipped activities. The new rule does not provide guidance on what will be considered a reasonable time.”

Under the DOL’s old 80÷20 rule,” employers could not pay a tip credit to tipped employees who spent more than 20% of their time on non-tip producing tasks (such as servers who spent more than 20% of their time washing dishes). Employees’ time spent on non-tip producing tasks was required to be paid at minimum wage rather than the reduced tip credit rate. This required employers to closely monitor and account for how tipped employees spent their work time. The rule also created litigation over whether tipped employees’ non-tip generating duties accounted for more than 20% of the employees’ total time.

While some employers will favor the new rule’s occupation-focused standard over the 8020 rule’s task-by-task timekeeping requirement, it remains to be seen whether the rule will go into effect. It is possible that the Biden Administration’s DOL, led by incoming Secretary Marty Walsh, or the newly Democratic-controlled Congress will make changes to one or both of the rule’s provisions before its effective date in March. 

Boardman Clark’s Business team will continue to monitor this legislative development. Employers should keep in mind that many states and localities have additional regulations affecting tipped employees that differ from the FLSA. Employers are encouraged to consult with legal counsel to ensure continued local, state, and federal wage and hour compliance. 

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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