United States: Department Of Labor Relaxes Rules For Tipped Employees

Executive Summary: The Department of Labor’s Wage and Hour Division (WHD) has announced it will no longer apply the “80/20 rule” to tipped employees, and will no longer require employers to pay the full minimum wage for time spent by a tipped employee performing “related” non-tipped duties. Under the WHD’s new policy, an employer may apply the Fair Labor Standard Act’s (FLSA’s) tip credit to all hours worked by an employee in a tipped occupation, including time spent performing non-tipped duties, as long as the duties are “related to” the tip-producing occupation, and performed either contemporaneously with the tipped duties or during a “reasonable” time period immediately before or after performing tipped duties.

Background: The FLSA generally requires employers to pay nonexempt employees at least the federal minimum wage, plus overtime pay if an employee works more than 40 hours in a workweek. Section 203(m) of the FLSA allows employers to apply a “tip credit” to satisfy part of the minimum wage obligation for tipped employees, thereby reducing the direct wages the employer is required to pay. A “tipped employee” means any employee engaged in an occupation in which s/he customarily and regularly receives more than $30 per month in tips. In addition, the employer must inform its tipped employees of the tip credit provisions of the FLSA, all tips received by the tipped employee must be retained by the employee, the employer must ensure that the combination of direct wages paid by the employer plus tips received by the employee equals or exceeds the minimum wage, and the employer must properly calculate and pay any overtime due.

Courts, WHD and employers have struggled with applying these rules to employees who perform tipped duties and also perform other duties. This can occur when the employee has a “dual job” (e.g., where a maintenance worker also sometimes works as a server), or where a tipped employee performs tipped duties and related non-tipped duties (e.g., where a server also sets tables, makes coffee or washes dishes). On January 16, 2009, WHD issued an opinion letter clarifying the effect of non-tipped duties on the availability of the tip credit, but on March 2, 2009, WHD withdrew that opinion letter “for further consideration.” It has consistently been the WHD’s position that an employer could not take a tip credit for any tasks performed that were “unrelated” to the tipped occupation. The WHD’s position under the Obama Administration was that if a tipped employee also spent 20 percent or more of his/her time performing “related,” but not directly tip-generating tasks, the employer could not take a tip credit for any time spent on those non-tipped tasks. This has generally been referred to as the “80/20” rule.

Several courts have upheld the 80/20 rule, including with respect to “related” tasks performed by a server before a restaurant opens or after it closes. In some lawsuits, employees have claimed that exceeding the 20 percent threshold means the employee is not a tipped employee and is entitled to the full minimum wage for all time worked, including time spent in tipped duties. Courts have reached differing conclusions on the standards that should be applied to these circumstances. The confusion over the concepts of tipped and non-tipped occupations and tipped and non-tipped tasks in determining whether an employer is entitled to take a tip credit against its employees’ minimum wage has largely resulted in a windfall for the Plaintiffs’ bar and encouraged the filing of a multitude of 80/20 and/or dual job lawsuits in recent years. FordHarrison’s October 2, 2018 Alert discussed some of the conflicting and often times confusing court decisions.

WHD has reissued the 2009 opinion letter, characterizing the reissued letter as “an official statement of WHD policy and an official ruling . . . .”

The Reissued Opinion Letter: The WHD’s official policy, effective from November 8, 2018, forward, is that (1) a tipped employee’s work is “part of a tipped employee’s occupation” if “directly related” to the employee’s occupation, and (2) “[n]o limitation shall be placed on the amount of these duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously with the duties involving direct service to customers or for a reasonable time immediately before or after performing such direct-service duties.” As one example of work performed “immediately . . . after” direct-service duties, the opinion letter cites a server’s time spent vacuuming after a restaurant closed.

For guidance in determining which duties are “related” to a tip producing occupation, WHD’s opinion letter states that duties listed in 29 C.F.R. § 531.56(e) and duties listed as core or supplemental to the occupation in the Tasks section of the Details report of the Occupational Information Network (O*NET), available at http://online.onetcenter.org, “shall be considered directly related to the tip-producing duties of that occupation.” The former refers to time that a server spends cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses. The latter, for “Waiters and Waitresses,” includes food preparation, stocking service areas, rolling silverware and preparing tables, bussing and cleaning tables, preparing the dining area for the next shift, sweeping, mopping, taking out trash, and cleaning bathrooms, in addition to food preparation, and actual customer service. The opinion letter states that employers may not take a tip credit for time spent performing tasks not contained in the O*NET task list. While eliminating the Obama Administration’s 80/20 rule, the opinion effectively retains the WHD’s prior position that an employer may not take a tip credit for work “unrelated” to the tipped occupation, but narrows considerably the scope of those tasks as compared to the Obama Administration’s position.

Employers’ Bottom Line:

WHD’s new policy statement is a practical approach to an unsettled area of wage and hour law. At least as far as WHD is concerned, as long as an employer clearly defines and limits a tipped employee’s duties to those related to the tipped occupation, using the O*NET task list as a guide, and as long as non-tipped tasks are only performed contemporaneous with or immediately before or after tipped duties, the employer should no longer need to be concerned with tracking the time spent in separate “non-tipped” duties. However, employers should keep in mind that courts are not bound to follow WHD’s policies. Because the new policy statement appears to be consistent with the FLSA, and well-reasoned, we can hope that most courts will adopt it, but we should expect at least some continued inconsistency in court decisions for the foreseeable future. Employers should also consider the laws of the states in which they do business and whether they have adopted any rules similar to or more stringent than the federal 80/20 rule.

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