On December 22, 2020, the U.S. Department of Labor (DOL) announced its long-awaited final rule revising the tipped employee regulations under the Fair Labor Standards Act (FLSA).

The final rule makes significant revisions to requirements for tip pooling arrangements, as well as for the application of the "tip credit" for tipped employees.

For example, the final rule permits an employer to implement a tip pool that includes non-tipped employees if the employer refrains from taking a tip credit. The final rule also prohibits employers, managers and supervisors from retaining tips received by employees, and clarifies which employees qualify as supervisors and managers. And, the final rule officially eliminates the cumbersome "80-20" approach previously used to determine when an employer may take a tip credit for hours that a tipped employee performs non-tipped duties related to the employee's tipped occupation.

The final rule was published in the Federal Register on December 30, 2020, and takes effect March 1, 2021.

Background

The FLSA requires employers to pay non-exempt employees at least the federal minimum wage, which is currently $7.25 per hour. However, employers may pay employees who customarily receive tips a lower direct cash wage (no less than $2.13 per hour) and count up to $5.12 per hour of an employee's tips toward the minimum wage requirement (known as taking a "tip credit"). Employers often execute this by implementing mandatory tip pooling or sharing arrangements among tipped employees, such as servers in the restaurant industry. However, employers have been prohibited from including non-tipped employees, such as "back of the house" restaurant employees, in tip pooling arrangements since those employees do not customarily receive tips.

In December 2017, the DOL issued a notice of proposed rulemaking (NPRM) that would have loosened restrictions on the participation of non-tipped employees in mandatory tip pools so long as the employer refrained from taking the tip credit. However, the DOL's December 2017 proposal also would have allowed businesses, managers and supervisors to retain employee tips as long as the employer was not taking the tip credit.

In response to the DOL's proposal, the 2018 Consolidated Appropriations Act (CAA) amended the FLSA to prohibit employers from retaining employee tips for any purpose, including sharing them with managers or supervisors. Consequently, on October 8, 2019, the DOL issued a new NPRM proposing, among other things, to update its tip regulations to incorporate the CAA Amendments. The 2019 NPRM withdrew the 2017 NPRM.

The Final Rule

Tip-pooling arrangements may include non-tipped occupations

The DOL's current regulations permit employers to include in mandatory tip pooling arrangements only those employees who customarily and regularly receive tips, such as servers, bartenders and bussers. The final rule changes that, and permits employers to implement a non-traditional tip pooling arrangement that includes both tipped and non-tipped employees if the employers refrain from taking a tip credit.

This is a significant change that allows employers more flexibility in implementing tip pooling arrangements. If employers decide to forego the tip credit and implement these non-traditional tip pools, non-tipped employees, such as cooks and dishwashers, will be able to participate in the sometimes lucrative tip pools enjoyed by tipped employees.

Employers, managers and supervisors may not retain employee tips

The DOL's final rule updates its tipped employee regulations to include the new statutory language from the CAA amendments, which prohibits an employer from retaining an employee's tips.

The final rule also clarifies when an employer may exert control over tips. Specifically, an employer may exert control over tips only to: (1) promptly distribute tips to the employee or employees who received them; (2) require employees to share tips with other eligible employees; or (3) promptly distribute tips to eligible employees in a tip pool, where the employer facilitates tip pooling by collecting or redistributing employees' tips.

The final rule also clarifies which employees qualify as managers and supervisors for purposes of the FLSA's prohibition on "allowing managers or supervisors to keep any portion of employees' tips." Managers and supervisors cannot keep employees' tips either directly or indirectly such as a via a tip pool, regardless of whether the employer takes a tip credit. The final rule uses the duties test, but not the salary test, from the FLSA's executive employee exemption to determine which individuals are managers or supervisors who may not keep tips.

To address comments on the NPRM, the final rule includes new language, clarifying that "[a] manager or supervisor may keep tips that he or she receives directly from customers based on the service that he or she directly provides." Thus, as noted by the DOL in finalizing the rule, "[a] salon manager, for example, may keep tips left by customers whose hair she personally styles." The DOL also explained that nothing in the statute prevents a manager or supervisor from voluntarily tipping out other employees.

Elimination of the "80/20 Rule"

The DOL's final rule also codifies its recent guidance regarding when an employer can take a tip credit for hours that a tipped employee performs non-tipped duties related to the employee's tipped occupation. In doing so, the DOL officially eliminates the so-called "80-20 rule," which prohibited an employer from taking the tip credit for work performing non-tipped duties if the time spent on those duties exceeds 20 percent of the employee's workweek.

As noted by the DOL in its NPRM, "this policy was difficult for employers to administer and led to confusion, in part because the guidance did not explain how employers could determine whether a particular non-tipped duty is 'related' to the tip-producing occupation and in part because monitoring surrounding the 80/20 approach on individual duties was onerous for employers." For example, restaurant industry employers have long had problems gauging whether a server's non-tipped duties, such as pre- and post-shift cleaning work, exceeded 20 percent of the workweek.

Under the final rule, an employer may now take a tip credit for all non-tipped duties an employee performs if (1) the duties relate to the employee's tipped occupation and (2) the employee performs the related duties contemporaneously with the tip-producing activities or within a reasonable time immediately before or after the tipped activities.

The final rule also adopts the Occupational Information Network (O*NET) as a source of guidance for determining when a tipped employee's non-tipped duties relate to his or her tipped occupation. O*NET is a comprehensive database of worker attributes and job characteristics, available at www.onetonline.org.

What This Means for Employers

The final rule provides significant clarity and flexibility to employers of tipped employees, both in the use and structure of tip pools as well as the use of tipped employees to perform non-tipped duties related to their tip-producing occupation. In light of the DOL's final rule, employers should evaluate their policies and practices applicable to tipped employees to confirm compliance with these updated regulations. Importantly, employers must still comply with any applicable state or local laws affecting tipped employees, as these laws can differ from the federal regulations in this final rule.

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