Under the Fair Labor Standards Act’s tip credit rules, employers can pay a base hourly wage as low as $2.13/hour to employees who customarily and regularly receive at least $30/month in tips directly from customers. (Iowa law requires a minimum base hourly wage of $4.35/hour to this type of tipped employee.) Under both the Federal and Iowa statutes, employers must guarantee employees at least $7.25/hour (the federal and Iowa minimum wage) through a combination of base wages and tips for the first 40 hours of a workweek—and overtime pay when a workweek exceeds 40 hours.
FLSA compliance for tipped employees has been a challenge for employers for decades. In large part, this is because the Department of Labor’s Wage and Hour Division has based much of its enforcement policy on its own internal interpretation of the FLSA regulations. Unless you regularly review and understand WHD’s internal “Field Operations Handbook”, it can be difficult to determine the ever-changing ins and outs of how to pay tipped staff.
This confusion only increased in 2011 when the DOL began fiddling with tipped employee regulations with a so-called “clean-up” amendment of the FLSA regulations in order to counteract a 2010 Ninth Circuit Court of Appeals Ruling the Obama administration did not like. This regulatory amendment required employers to treat tipped employees paid the full minimum wage the same as those where the employer took advantage of the FLSA’s tip credit rules. Since then it has been hard to keep up with volleys between the courts and the DOL regarding tipped employees’ wages. Congress finally weighed in by amending the FLSA in March 2018. After that, WHD issued several guidance documents to clear up confusion on two aspects of tipped employee compensation, as explained in the next two sections, below.
Tip Pooling
The confusion over pay for tipped employees may have been the worst with respect to tip pooling. In 2018, WHD published Field Assistance Bulletin 2018-3 (Apr. 6, 2018) to expound on Congress’s amendment to the FLSA and bring clarity to tip pooling. It includes three points of practical application for employers with tipped employees and tip pools.
First, employers may not ever keep any tips received by their employees. This applies whether the employer takes a tip credit on the tipped employees’ wages or not. Managers and supervisors are prohibited from participating in any tip pools, too, because they are viewed as equal to the employer. As an enforcement policy, WHD will use the Executive exemption duties test found at 29 C.F.R. § 541.100(a) to determine whether an employee is or is not a manager/supervisor who is ineligible to share in a tip pool. As part of that test, the employee’s primary duty must include customarily and regularly directing the work of two of more full time equivalents.
Second, WHD nullified certain regulations barring tip pooling with non-tipped employees (such as cooks and dishwashers). Sections declared to be of no further force or effect are 29 C.F.R. §§ 531.32, 531.54, and 531.59. A proposed rule was issued in December 2017 to formally amend the Code of Federal Regulations; per the DOL’s recently issued Regulatory Agenda, further action is scheduled for December 2019.
Finally, the FAB summarizes the current status of tip pools under federal law amendment. Employers may now allow employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools if everyone in the pool is paid at least the full FLSA minimum wage.
Importantly, Congress’s FLSA amendment and the DOL’s related FAB left untouched the WHD’s position on unlawful tip pools. It is still the law that employers who claim a tip credit for their tipped workers (pay sub-minimum wages) may not include back of the house staff (such as cooks and dishwashers) in a tip pool. An employer who wants to operate a tip pool and take the tip credit must limit the tip pool to only front of house employees, such as servers. Invalid tip pools can result in WHD requiring the employer to retroactively pay the full minimum wage to all sub-minimum wage staff who participated in the invalid pool over a two-year investigative period. A potentially expensive mistake, to be sure.
Untipped Work and the Replacement for the “80/20 Rule” for the Tip Credit
The 80/20 rule for tipped employees first appeared in a 1988 revision to WHD’s FOH, which explained that where “tipped employees spend a substantial amount of time (in excess of 20 percent) performing preparation work or maintenance, no tip credit may be taken for the time spent in such duties.” Thus, a tipped employee who spent 20% or more of his/her time performing non-tipped duties was entitled to the full federal minimum wage for time spent on such non-tipped duties, and the employer could not take the tip credit during those times. It’s easy to imagine how hard it has been for employers and employees, alike, to track non-tipped duties separately from tipped duties to see if the 80/20 rule applied, and if it did, to adjust employee pay accordingly.
Late in the Obama Administration, Opinion Letter FLSA 2018-27 (Nov. 8, 2018) shifted WHD’s enforcement position away from this percentage-based rule for the tip credit. In February 2019, early in the Trump Administration, the WHD issued FAB 2019-2 (Feb. 15, 2019) explaining the change. Though it may be a rarity, both administrations agreed on abolishing the percentage test for non-tipped work’s ineligibility for the tip credit. The 80/20 rule is officially dead.
The Opinion Letter and FAB both state that the tip credit is available to employers so long as tipped employees’ non-tip producing duties “are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.” The Opinion Letter and FAB provide new guidance on how to determine which duties are tipped work and which are not via use of the DOL’s Occupational Information Network, or O*NET website. The guidance states:
“duties listed as core or supplemental for the appropriate tip-producing occupation in the Tasks section of the Details report in the Occupational Information Network (O*NET), … shall be considered directly related to the tip-producing duties of that occupation, … 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.”
In summary, employers can take a tip credit only for the time tipped employees spend performing duties listed in the relevant job’s O*NET Task list. If you’re not used to navigating O*NET, here are the steps to follow to reach Task lists of tipped duties:
(1) Search for a job classification for the tipped job using the search box;
(2) Click on the job(s) closest to the job being researched, and information about the job under the “Summary” tab will appear;
(3) Click on the “Details” tab and a list of ‘Tasks” will appear at the top of the results; then,
(4) Click on the “+” sign under Tasks section to display all of the Core and Supplemental tasks for that job (both of which are tipped work).
For example, there are 25 Core and Supplemental Tasks listed on O*NET for Waiters and Waitresses, all of which would be considered tipped work.
Thanks to DOL for providing this helpful guidance, regarding the new rule on what types of work tipped workers may perform without the employers’ loss of the tip credit.
The DOL’s new enforcement position on non-tipped work for tip-credit employees has been relaxed, but it does not mean tipped employees can spend an unlimited amount of time performing non-tip-generating work at subminimum pay rates. If they do, they are likely performing more than one job, meaning they are entitled to the full minimum wage for hours worked in untipped activities.
Note Regarding State Law
Employers also should consider state laws regarding tipped employees, which can differ significantly from the FLSA. For instance, some states do not permit a tip credit at all. Other states permit a tip credit that differs from the federal requirements. As an example, Iowa’s minimum wage for tipped employees is $4.35/hour, resulting in a maximum tip credit of $2.90/hour. In contrast, the federal minimum tipped wage of $2.13/hour results in a maximum federal tip credit of $5.12/hour. Each law adds up to the same $7.25/hour in wages for the tipped employee, but each slices it differently. Employers must follow state law when it is more protective of the employee than federal law. Therefore, Iowa employers must follow Iowa’s tip credit law.
Conclusion
Properly paying tipped employees requires wading through court interpretations, DOL guidance and regulatory changes, and legislative amendments — not to mention state laws. Employers who misapply these laws face the prospect of owing significant back pay, as well as liquidated damages, civil monetary penalties, and attorneys’ fees. In light of the potential liability, seeking the advice of an employment law professional who knows this area of the law can be invaluable.