This information is written and provided by our Legal Resource Center partners Fisher & Phillips LLP.
With the government’s final rules on the tips provisions of federal wage and hour law becoming effective just weeks ago, employers will be challenged with ensuring they have a plan to address the rules’ impact on their operations – and that your policies and practices on tips, tip pooling, and tip reporting are compliant with the new rules. The first rule issued by the U.S. Department of Labor (DOL), effective November 23, 2021, expanded the agency’s authority to assess penalties against employers who violate the tip provisions of the Fair Labor Standards Act (FLSA). It also clarified when managers and supervisors may receive and retain tips. The second rule, effective December 28, 2021, reinstated – and worsened – the notorious “80/20” Rule, amended the FLSA’s tip provisions regarding when restaurants with tipped employees may take a tip credit, and modified the definition of work that is considered part of a tipped occupation. What do employers need to know – and what are the ten most important action steps you should take to make sure your tip credit ticking time bomb doesn’t detonate?
5 Most Significant Changes to Come from Rule Updates
If you are not familiar with the two new rules that went into effect near the end of 2021, you can read our detailed Insights here and here. However, taking a big step back, there are five significant revisions that you need to account for given the rule updates.
The FLSA allows DOL to assess civil money penalties of up to $1,162 (adjusted upward from $1,100 for inflation) for violations of the minimum wage, overtime pay, and tip provisions. While these penalties are typically applied for repeated or willful violations, DOL can assess civil money penalties for tip violations that are not repeated or willful under the new Final Rule. In a startling development, civil money penalties can be assessed even for first time violations. Therefore, you face the potential of paying back wages, liquidated damages, and civil money penalties – and the loss of the tip credit – even for your first misstep in this area. These dangers are on top of potential state law penalties for those who operate in states where there are more restrictive tips-related laws.
Managers and supervisors are still prohibited from keeping any portion of an employee’s tips under the Final Rule. However, an employer does not violate the FLSA when a manager or supervisor keeps tips that “he or she received directly from customers based on the service that he or she directly and solely provides.” While this provides some clarification, employers must still proceed with caution. In situations where a manager or supervisor helps serve a customer along with an employee, they may not keep any tip that the customer may leave because the manager or supervisor did not “solely” provide service. Managers and supervisors also cannot participate in a tip pool in which non-managerial employees participate, but they are permitted to contribute tips to it.
The Final Rule looks to the duties test of the FLSA’s executive exemption to determine who is a manager or supervisor. The executive exemption applies to employees whose “primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; who customarily and regularly directs the work of two or more other employees; and who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.”
The term “management” is defined broadly and includes, among other things, activities such as: interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; disciplining employees; and planning the work. Interestingly, DOL did not apply the salary basis portion of the executive exemption to the new Rule. Because of this, assistant managers, team leads, and shift runners who are not paid on a salary basis or who are paid a salary of less than $684 per week could be considered a manager.
Under the FLSA, covered employers are generally required to pay their employees at least the federal minimum wage, which is currently $7.25 per hour. Under Section 3(m), however, employers of tipped employees can satisfy their minimum wage obligation by paying their tipped employees direct cash wages of no less than $2.13 per hour and take a tip credit of no more than $5.12 per hour. If the combination of the employee’s direct cash wage and tips received by the employee is less than the federal minimum wage, the employer must make up the difference.
The FLSA defines “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” For many years, the regulations have recognized that an employee remains a tipped employee even if the employee spends part of their work time performing side work that is related to the primary tip-producing work, but does not produce tips (i.e., cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses). In a 1988 update to its Field Operations Handbook, DOL first introduced the 80/20 rule and took the position that the tip credit would be lost for the workweek if an employee spent more than 20% of their time in a workweek performing this side work – and thus the employer would have to pay the employee the full minimum wage. This standard created significant confusion for employers and resulted in years of litigation.
Understanding the burden this imposed on employers, the Trump administration’s DOL issued a Final Rule in December 2020 which sought to eliminate the 80/20 Rule. The 2020 Rule would have applied a more workable standard that allowed employers to take the tip credit for duties performed “for a reasonable time immediately before or after” a tipped duty. Following the change in administration to the Biden White House, the DOL withdrew the 2020 Rule before it could take effect. Under the new administration’s Final Rule:
The new Rule utilizes a “functional” test to determine what duties fall into each category of work.
One of the biggest challenges for employers is determining what task fits into what category of work and then tracking the time the employee spends performing the work. In many cases, the same work could be could be “tip-producing work” or “directly supporting work” depending on when it is performed. For example, table service in between serving customers for bussers would be “tip-producing work.” But if it is done in preparation for the next day after the restaurant closes, it would be “directly supporting work.”
Another significant challenge for employers is that there are times when a server is waiting for customers to arrive and is not performing active work. While not directly addressed in the new regulation itself, DOL said in the preamble to the Final Rule that this time is not “tip producing” because the employee is not providing service to a customer. Instead, it is “directly supporting” work because it is in preparation for customer service. It appears then that DOL will take the position that this time, is subject to both the 30-minute and the 20% limitations.
What Should We Do Now? 10-Step Action Plan
Prior to the December 28 effective date of the 80/20 Rule, several employment associations representing the hospitality community filed a lawsuit in federal district court challenging the Rule. The lawsuit, filed by attorneys including a former DOL official, seeks to enjoin and vacate the Rule on the grounds that it is “arbitrary, capricious, contrary to the FLSA, promulgated in violation of the Administrative Procedures Act, and a violation of separation of powers.” The DOL must file a response by January 19, and plaintiffs will file their reply by January 26. While the outcome of the litigation remains uncertain, the 80/20 Rule is currently in effect and employers need to be prepared. What should you do? Here’s a 10-step action plan:
Fisher Phillips will continue to monitor this situation and provide updates as appropriate. Make sure you are subscribed to Fisher Phillips’ Insight System to get the most up-to-date information. For further information, contact your Fisher Phillips attorney, the authors of this Insight, any attorney in Wage and Hour Practice Group, or any member of our Hospitality Industry Team.
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