Summary

The U.S. Department of Labor announced a Final Rule on December 22, 2020, that clarifies tip pooling for employees in the food service and hospitality industry, as well as how the tip credit applies to employees who perform both tipped and non-tipped duties.

 

The Upshot

The Final Rule:

  • allows employers to create “nontraditional” tip pools including employees who do not regularly receive tips, as long as those employees receive minimum wage;
  • explains that employers may collect tips to operate a tip pool, but may not keep tips received by employees;
  • requires recordkeeping for those employers who do not take a tip credit but who facilitate a mandatory tip pool;
  • clarifies that employers may take a tip credit for employee time spent on related, non-tipped activities that are performed before, after, or at the same time as tipped duties; and
  • will be effective in 60 days.

The Bottom Line

Employers may still choose whether to take a tip credit or whether to institute a mandatory tip pool. This Final Rule simply gives employers more latitude in structuring their pay practices if they do not take a tip credit and otherwise pay the federal minimum wage.


FULL ALERT

The Consolidated Appropriations Act (CAA) of 2018 made numerous changes to the Fair Labor Standards Act (FLSA) regulations. The Department of Labor’s (DOL) new Final Rule implements those changes. For example, the CAA prohibited employers from keeping tips received by their employees, regardless of whether the employer took a tip credit. This Final Rule codifies that prohibition and clarifies that the prohibition applies to managers and supervisors as well. Moreover, if employers collect tips for the purposes of coordinating a mandatory tip pool, employers must fully redistribute those tips at least as often as they pay wages.

The CAA also allowed employers to require tip pooling if they did not take a tip credit. This Final Rule explains that those employers may implement “nontraditional” tip pools, which include employees who do not traditionally receive tips, such as cooks and dishwashers. However, for those employers who do take a tip credit, the guidance remains unchanged—the tip pool may only include those employees that customarily receive tips, such as waiters and bussers.

Additionally, this Final Rule expands on current regulations that allow employers to take a tip credit for time employees in tipped occupations spend performing related non-tipped duties—as long as those duties are performed contemporaneously with, immediately before, or immediately after tipped duties. Previously, employers were required to follow the 80/20 rule, which permitted employers to take a tip credit for the hours an employee spent on non-tipped activities, only if such activities comprised 20 percent or less of the employee’s time during the workweek. Under the new Rule, employers may take a tip credit for time waiters spend setting tables, making coffee, or toasting bread, without concern about strict adherence to the 80/20 rule. The Final Rule further states that a non-tipped activity is presumably related where it is listed as a duty for a tip-producing occupation on O*NET, the Occupational Information Network. This regulatory change will provide welcome relief to restaurants where employees tend to engage in a variety of ancillary activities to the tip-producing services.

The DOL projects that the Rule could improve pay equity, as a potential $109 million would transfer from the front-of-the-house employees to the back-of-the-house employees. The DOL posits that this pay equity could then result in reduced employee turnover, decreasing employer hiring and training costs. Finally, the DOL believes this Rule will allow for greater efficiency for employers because it may reduce time and effort spent on designing tip pools.

This Rule codifies much of the sub-regulatory guidance that was issued by the DOL back in 2018 and which has come under fire from several courts. However, it is important for employers in the food service and hospitality industry to be mindful of state and local legislation that may contain provisions that are more restrictive when it comes to tip pools. The differences between federal and state/local rules are often traps for unwary employers and provide fertile ground for plaintiffs’ class and collective action lawyers.

Attorneys in Ballard Spahr’s Labor and Employment Group regularly assist food service and hospitality organizations with wage and hour issues, including structuring tip pools and advising on non-tip related activities.


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