What’s the Fate of Tipping Regulations in the Restaurant Industry?

Perhaps lost in the clutter of rising wages and the industry’s pressing labor shortage, is what the future holds for restaurant tipping.

It’s understandable, to some extent, when you consider there were nearly half a million advertised hospitality and catering vacancies lying open across the U.S. in a recent data pull, according to job search engine Adzuna. It represented a 97 percent increase since the first week of 2021. And to illustrate the lengths operators are taking, more than 54,400 of the openings offered signing bonuses to new staff. Barbecue chain Mac’s Speed Shop rolled an incentive program in May that gave hourly employees a one-time bonus, based on tenure. It also promised any worker who referred a kitchen candidate a $250 bonus, if hired.

Also:

• Profit sharing every four weeks for hourly employees (if the store qualified).
• Anyone who worked 25 hours per week now qualified for health insurance. Benefits are available after 60 days for all employees and managers.f
• A hiring bonus for all new managers.
• A $1,000 bonus for new kitchen hires who stay until September 1 (in select markets).
• Free daily employee meals.

“Our people really do mean everything,” Mac’s president Shang Skipper said.

One thing to consider, however, returning to the tipping topic, is FOH roles received 3.3 times the number of applicants and interest than BOH roles during the depths of COVID, according to Landed, a platform that helps retail and food companies hire candidates. Earlier in the spring, the company said there were four times more BOH than FOH roles listed.

In response, Landed employers increased pay rates for BOH line-cook roles by 18 percent, on average, since the start of COVID.

The company credited the introduction of curbside takeout and delivery, and how “to-go orders have increased dramatically, adding to the stress of already understaffed BOH teams and causing more BOH team members to request moves to less stressful FOH roles.”

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

This is all a moving target. But one thing that’s certain is restaurants are tightening their recruiting pitches. Cameron Mitchell Restaurants, for instance, is touting competitive wages for non-tipped associates based on their experience, anywhere from $15-$25-plus/hour depending on the position and location.

While it might not be as difficult to sell FOH roles generally, there are perception gaps to cover with everything that’s going on. Rewards Network suggested including the average tipped value employees in those positions make weekly. While their base pay might be minimum wage (or the lower, tipped minimum wage), severs, hosts, and even bussers tend to make more at the end of the day than the sticker says. Don’t take that reality for a given, though. Putting it front and center could separate one job posting from the other. Say $5 per hour plus tips (an example) versus “our servers make $20 per hour on average.”

And so, keeping up with the tipping landscape remains critical. Especially if operators want to get the message across in an increasingly noisy labor climate. Square shared data with FSR on some recent COVID trends. Nationally, among businesses that were able to remain active for the duration of the pandemic (allowing for periods of inactivity for up a couple weeks at a time), the share of card transactions that were tip-able and received a tip increased slightly from 62.8 to 67.4 percent from March 1, 2020, pre-pandemic, to June 7, 2021.

Some other findings:

• There was a dip in the share of transactions that were tipped in the early weeks of the pandemic as commerce shifted online and over the phone. But as time wore on, the share of transactions being done from afar (CNP, or card not present) that received a tip climbed well past their pre-pandemic rate.
• The average tip amount has remained remarkably stable following a wave of generosity across most sectors in the early months of the pandemic.
• Among card transactions happening in person, there has been very little change in the average amount tipped, while the share of transactions receiving a tip has gradually continued to rise and is now higher than pre-pandemic.
• Where Square did see much more noticeable and permanent-looking changes are among CNP transactions, which would include online, and over the phone transactions. Among CNP transactions, the share receiving a tip across all sectors jumped up from just below 50 percent as of March 1, 2020 to nearly 88 percent by June 7, 2021 as many transactions that normally would have been done in person are being done remotely and norms around tipping seem to have shifted.
• The average tip amount as a percentage of the total tab for these CNP actually fell on average through the early months of the pandemic and seems to have stabilized around 16 percent, down from 19–22 percent before the pandemic began.

Key topics to follow

Angelo Amador, head of the Restaurant Law Center (from the National Restaurant Association), recently hosted a webinar on “The Future of Tipping Under the Biden Administration.” He chatted with Paul DeCamp, the national co-chair of law firm Epstein Becker Green’s wage and hour practice, to address some questions.

The fate of the tip credit

Currently, the FLSA requires restaurant employees earn minimum wage or higher. The tip credit allows operators to satisfy a portion of that obligation through tips.

The subminimum wage for tipped workers sits at $2.13 an hour at the federal level and $5 or less in nearly 40 states.

Today’s setup gives restaurants the ability to pay tipped workers less than standard minimum wage as long as workers’ tips make up the difference.

The Raise the Wage Act, which did not make it into the recent relief fund, proposed an increase of the federal minimum rate from $7.25 to $15 an hour over the next five years, starting at $9.50. But it also hiked the tipped wage from $2.13 to $4.95 and called to eliminate a separate minimum wage for tipped workers.

The Association said, while it might sound like a worker-friendly notion at face value, this could actually hurt employees, not help them—given tipped servers make between $19–$25 per hour.

Seven states disallow the tip credit under state law as we stand: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington.

Often this brings up a question: Can tips received by FOH employees be shared with BOH employees? A 1974 FLSA amendment states that FOH/BOH tip sharing is impermissible if the restaurant takes a tip credit for any of the employees involved.

And if a tip credit isn’t applied? This is where some recent change is taking shape. As of April 30, DOL regulations now permit tip-sharing with BOH employees, such as dishwashers or line cooks, as long as the restaurant is not taking a tip credit for any of the employees.

The update placed a prohibition on employers, including supervisors and managers, from keeping tips received by workers, regardless of whether the employer takes a credit for workers’ tips toward their obligation to pay those workers minimum wage.

The question brought up on the webinar regarding this: How do you define “supervisor?” For example, is a “head server” a supervisor? The DOL tried to clarify this with its December 2020 Final Rule, which recognized that an hourly employee with a title of “head,” “chief,” or “lead” might not legally be a supervisor. The Biden Administration halted this part of the rule, leaving the definition nebulous, the Association said. The matter is now open for comments until May 24.

The rule also set recordkeeping requirements for an employer that does not take a tip credit to include non-tipped workers, such as cooks and dishwashers, in nontraditional tip-sharing arrangements.

An employer that collects tips for tip pools must now distribute tips fully no later than the regular payday for the workweek or pay period in which the establishment collected the tips.

The so-called 80/20 rule came up in the webinar as well. This DOL decision prohibits restaurants from taking a tip credit for time an employee spends on “side-work” tasks (say, rolling silverware or setting up the restaurant) if that time exceeds 20 percent of the employee’s working time.

Perhaps the most controversial element of the DOL’s Final Rule announcement in December 2020 centered around the distinction. It removed any limits on the amount of time a tipped employee may spend on non-tipped duties as long as they are preformed “contemporaneously with tipped duties, or for a reasonable time immediately before or after” tipped duties. This was intended to go into effect March 1. A point at which DeCamp said it looked like the 80/20 rule had seen its final days.

However, the Biden Administration put an end to that, and opened the issue up for additional commentary. The DOL is now reviewing feedback and delayed any changes to the 80/20 rule until December 31, 2021. The Restaurant Law Center submitted comments of its own, underscoring “the restaurant industry has faced unique harm during the pandemic, making it important for DOL to finalize the rule and avoid causing further costs and losses for the industry.”

Much of the Law Center’s focus aimed at the DOL’s “dual-jobs” regulation, which is needed to address the application of the FLSA’s tip credit to tipped employees who perform both tipped and non-tipped duties.

It’s a debate that stretches decades. Apart from the “dual jobs regulation,” the first discussion by the Wage and Hour Division of tipped employees engaging in supposedly non-tipped work appears to be in a 1979 opinion letter (as shared in the Law Center’s comments to the DOL). It addressed waitresses who “report to work two hours before the doors are opened to the public to prepare the vegetables for the salad bar.”

The WHD concluded that “since it is our opinion that salad preparation activities are essentially the activities performed by chefs, no tip credit may be taken for the time spent in preparing vegetables for the salad bar.”

A year later, the WHD was asked to weigh in on whether the tip credit applied to a server in a restaurant who, as part of their closing duties, cleaned the salad bar, placed condiment crocks in the cooler, cleaned and stocked the station, cleaned and reset the tables, and vacuumed the dining room carpet.

WHD’s response was the employee would be considered a tipped employee for this period and the tip credit would apply because the employee was not engaged in a dual occupation.

It added there was no “clear dividing line” between the work of the server and the work of another occupation. The letter made no mention of any percentage limitation on tipped versus non-tipped duties or that the appropriate analysis would involve such a limitation.

In 1985, an opinion letter from the WHD addressed whether a server who, during a five-hour shift, performed 1.5 to 2 hours of preparatory work before the restaurant opening could be paid the tip credit rate for the time spent performing preparatory activities, which amounted to “30–40 percent” of the employee’s workday.

WHD concluded that because only one employee was assigned to the opening duties, the employee was responsible for preparing the entire restaurant, not just her area, and because the amount of time was 30 to 40 percent of the entire shift, the tip credit could not be applied.

As you can see, this topic has been a bit gray for a long time.

But none of these letters, Amador and the Law Center’s Deputy Director Shannon Meade said (they co-signed the comments), “articulated a temporal limit on performing tasks that do not directly generate tips in order for an employer to retain the right to take a tip credit for all time a tipped employee works.”

A 1988 Field Operations Handbook, which has since been rescinded, tried to create new categories of restaurant duties. Things like “general preparation work or maintenance,” and “not tip producing.” It unleashed a wave of class and collective action litigation asking whether certain tasks were tip-producing, related or incidental to tip-producing tasks, or unrelated to tip-predicting tasks.

This cost the industry “untold millions of dollars,” Amandor and Meade said. And it was avoidable. The WHD “should never have gone down the rabbit hole of applying the dual jobs framework to a single job in the industry,” they said.

Tasks such as getting the restaurant ready, restocking items, cleaning, and closing have long been an integral part of the tipped jobs commonly found in restaurants.

The 2020 Tip final rule acknowledged that these activities were a normal part of these jobs. The FLSA, though, provided no basis for carving up a tipped restaurant job into tipped and non-tipped segments.

As the Law Center sees it: “So long as an employer assigns a tipped employee to perform the core functions of an occupation during a shift [e.g., assigning a server to wait tables, or a bartender to prepare drinks for customers], that employee does not cease to be engaged in the tipped occupation by virtue of performing side work during a shift along with the core functions of the occupation. Nor does a tipped employee cease to be engaged in the tipped occupation merely because the employer assigns side work during times when the restaurant is slow.”

Read through the entire comments here for more.

In sum, the Law Center and the Association asked the DOL to allow the dual jobs portion of the 2020 Tip final rule to go into effect.

Actionable items

DeCamp offered three strategies on the webinar about how to comply with the 80/20 rule.

• 1. Eliminate or reduce the time tipped employees engage in opening or closing tasks that count toward the 20 percent of non-tipped time.
• 2. Require employees to clock in at the full minimum wage rate for shift prep until the restaurant opens. “Then clock out, and clock back in at a tipped wage,” DeCamp said. 
• 3. Consider assigning side work to designated employees earning minimum wage. “If you can offload the side work from the tipped employees, then in a lot of ways you do away with this 80/20 issue, or at least significantly reduce the risk,” he added.

The aforementioned Raise the Wage Act outlined a plan to phase out the tip credit by increasing the minimum pre-tip hourly wage to $4.95, with annual increases of $2 per hour each year until reaching the federal minimum wage. Sen. Bernie Sanders (I-VT) introduced the bill in January with 37 co-sponsors. DeCamp said on the webinar he does not expect it to garner enough support to pass.

Yet attempts to eliminate the tip credit are likely to continue. DeCamp highlighted efforts in Washington, D.C., Michigan, and Main. To date, they’ve been quelled by local legislatures.

“Grassroots groups are going state to state,” DeCamp said. “If they can’t get it done at the federal level, they’re going to try hard on a state-by-state basis to get rid of the tip credit. This is an ongoing issue to be mindful of.”