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This promises to be an active year for the DOL as it attempts a dramatic change in course from the past four years.

Tip Credits, Tip Pooling, and Tip Sharing Could Get More Complicated and Risky

The game as we know it for full-service restaurants might soon face a major challenge.

In a pair of proposed rules published on March 25, 2021, the Wage and Hour Division of the U.S. Department of Labor has taken additional steps to derail and eventually modify regulations issued during the Trump Administration. The latest moves would have a significant impact on full service restaurants that use the tip credit provisions of the Fair Labor Standards Act (FLSA), as well as establishments where tipping is common and tip pooling or tip sharing is used to facilitate an equitable distribution of the tips.

Practices at issue

Tip credits under the FLSA and similar state minimum wage and overtime laws allow a restaurant employer under certain conditions to apply a portion of the tips that a tipped employee receives toward meeting the minimum wage obligation. Currently, the FLSA allows a tip credit of up to $5.12/hour in meeting the $7.25/hour minimum wage requirement. This means an employer can pay a wage of not less than $2.13/hour to a tipped employee and still satisfy the minimum wage requirement as long as certain conditions are met.

READ MORE: What New Restaurant Tipping Regulations Could Mean for the Industry

Most, but not all, state minimum wage laws have similar tip credit provisions, but the minimum wage rates and tip credit amounts vary significantly. Tip pooling and tip sharing, which can be either entirely voluntary among employees or employer mandated subject to limits set by the FLSA and state laws, are a means of facilitating an equitable distribution of tips among employees who in some manner help generate the tips.   

Trump tip regulations would be delayed through year-end

In the first proposal, the DOL would extend for a second time the effective date of portions of the Tip Regulations Under the Fair Labor Standards Act, referred to in the Biden proposal as the “2020 Tip Final Rule.” The 2020 Rule was issued by the Trump Administration on December 30, 2020, with an effective date of March 1, 2021. The Biden Administration initially proposed delaying the effective date until April 30. Then in the March 25 proposal, the effective date was proposed to be pushed out through December 31 of this year.

The portions of the 2020 Rule that would be delayed include two sections relating to the assessment of Civil Money Penalties, and one section relating to the 20 percent cap on “side duties,” discussed below.

Parts of the 2020 Rule were challenged in a lawsuit filed early this year by the Pennsylvania Attorney General, along with attorneys general from seven other states and the District of Columbia. According to the DOL, the lengthy delay will give it time to study further the portions of 2020 Rule that were challenged in the lawsuit.

The court case focuses primarily on the 2020 Rule’s changes to the DOL’s previous enforcement position. Before the 2020 Rule, the DOL placed a cap of 20 percent on the amount of time that a tipped employee could spend performing so-called “side duties.” These are duties that do not directly generate tip income but are related to the tipped employee’s primary job duty of providing customer service, such as refilling condiment containers, wrapping silverware in napkins and placing garnishes on food items before serving. If the side duties exceeded the 20 percent cap, then the DOL’s position was that the employer could not pay the employee at the FLSA tip credit rate, but instead had to pay the full minimum wage rate with no tip credit. The 2020 Rule eliminated that 20 percent cap on side duties because in practice it had proven to be very difficult to administer and had resulted in a great deal of litigation in the restaurant industry.  Such litigation typically comes in the form of class or collective actions alleging that servers are required to spend more than 20 percent of their time performing side duties but are still being paid at the tip credit rate.

In place of the 20 percent cap, the 2020 Rule would have allowed employers to pay the FLSA tip credit rate for some related side duties as long as the work was completed during, or “for a reasonable time immediately before or after,” their tip-earning work. The 2020 Rule would also have allowed restaurants to use “tip pools” to share tips with back-of-house employees, as long as all workers participating in the pool were receiving the full minimum wage.

Although the ultimate result of the Biden Administration’s delay of the effective date remains to be seen, it is highly likely that the DOL will either return to the 20 percent cap or propose an alternative that will place strict limits on the amount of time that tipped employees can spend performing side duties and still have a tip credit applied to their wage rate. The practical difficulties of imposing such a time limit, which the Trump DOL seemed to understand, is that short of running around behind each server with a stop-watch and timing every task performed, it is nearly impossible to accurately record time spent performing side duties, particularly in busy restaurants at peak hours.

Replacement of regulations relating to penalties and other aspects of tip pooling or tip sharing

The second proposal pertains to other aspects of the 2020 Rule that are presumably viewed by the DOL as being less controversial than the 20 percent rule. These include the criteria to be used by the DOL in assessing Civil Money Penalties for violations of restrictions on tip pooling and tip sharing, how to define “managers or supervisors” for purposes of excluding them from employer-mandated tip pooling, and recordkeeping requirements related to employer-mandated tip pooling or tip sharing arrangements.

In this proposal, the DOL would withdraw portions of the 2020 Rule and replace them with language that significantly expands the DOL’s authority to assess Civil Money Penalties for tip pooling and tip sharing violations. Among other things, the proposed replacement language would eliminate the requirement in the 2020 Rule that such violations be “repeat or willful” (the standard for assessment of civil money penalties for minimum wage or overtime violations). Thus, employers found to have “kept employee tips” in violation of the FLSA could not only be liable for back wages and liquidated damages, but could also be assessed Civil Money Penalties by the DOL. Unlike back wages and liquidated damages that go to the affected employee, Civil Money Penalties go to the federal government.

Stay tuned for further updates on the DOL’s rulemaking activities. This promises to be an active year for the DOL as it attempts a dramatic change in course from the past four years.

Jim Coleman is a partner and co-chair of the wage and hour practice group at Constangy, Brooks, Smith & Prophete. He practices in the firm’s Metro Washington D.C. office, where he counsels employers on wage and hour matters, as well as defending them in wage and hour litigation and administrative proceedings. He can be reached at jcoleman@constangy.com.