Restaurant servers bringing food to tables.
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While the final rule will likely be challenged legally, restaurants should assume the rule will be in effect at least through the end of the Biden administration.

Is the New Tip Credit Rule Persuading Restaurants to Pay Minimum Wage Instead?

“It's just going to wreak havoc on a lot of restaurants’ business models," one expert says.  

The rules are changing when it comes to how restaurants can use the so-labeled “tip credit.” Restaurants have long been permitted to pay tipped employees a direct wage of $2.13 under the notion tips would make up the difference or go far beyond the minimum wage. 

But starting December 28, there will be a more specific limit to the amount of time tipped employees can spend on “non-tipped activities” when the employer collects a tip credit.

Earlier this month, the U.S. Department of Labor clarified employers may only take a credit for the hours when an employee is doing work that can produce tips or tasks that directly support that work. This remains the case as long as the tipped worker does not spend a substantial amount of time doing “tip-supporting” work.

The new rule defines a “substantial amount of time” as more than 20 percent of the hours worked during an employee’s week or a continuous period of time that exceeds 30 minutes.

Preparation work, like stocking a bar or rolling silverware, would be included under tip-supporting work and would count against the time limit rules.

While not all restaurants use the tip credit and several states have stricter guidelines they must follow, many operators have relied on the system as a standard part of their business model for years, says Steve Pockrass, a shareholder at labor and employment law firm Ogletree Deakins.

Victoria Vish, an associate attorney at Ogletree Deakins, adds there is a political pendulum swinging back and forth on the tip credit, and the current Biden administration has aimed to effectively get rid of it.

“This rule that they've now published is making it nearly impossible and impractical for employers to comply with the strict regulations,” Vish says. “The ultimate goal is likely for people to just pay full minimum wage.”

The 80/20 rule is nothing new, but now that it’s published in the Federal Register with strict definitions and an additional 30 minute ruling, restaurants may be expected to strictly monitor the exact amount of time employees spend on specific types of work. In practice, this might be hard for restaurants to achieve, meaning many might abandon the tip credit altogether in favor of just paying minimum wage.

The new rule comes at the same time restaurants are battling a widespread labor shortage and will potentially have to navigate the Occupational Safety and Health Administration’s vaccine mandate. This rule required employee vaccination or weekly COVID tests at companies with more than 100 employees but was suspended after a federal court blocked the measure. It is still up in the air whether the policy will be enforced.

With tips, an average server may make close to $25 an hour, Vish says, far surpassing the federal minimum wage of $7.25. And even though the rule provides some examples, like rolling silverware, the distinction between tipped duties and non-tipped duties is a challenging one to make. The clarified rule leaves some questions surrounding this that will ultimately have to be litigated, Vish says.

Pockrass echoes the sentiment that the rule is overly narrow in how it pinpoints what tasks are tip-producing and what is tip-supporting.

“Those terms are ambiguous because when you think about your experience at a restaurant, everything goes into that experience,” Pockrass says. “The quality of the food, the cleanliness of the table, the overall environment and atmosphere as well as what that server may do to help you or assist you. So there are lots of things that they may be doing that really are tip-producing work, even when they're not right at your table talking to you or assisting you. I think that's where it both creates some ambiguities and also was overly narrow.”

Naturally, there are nuances to the rule. If an employee is simultaneously doing tip-producing work and tip-supporting work at the same time, the tip-producing category will trump the other toward the tip credit. The most difficult part for restaurants will likely be how that time will be tracked and monitored, Vish says.

The way Vish and Pockrass see it, many restaurants will just get rid of the tip credit and begin paying minimum wage. Other restaurant employers will create systems to track employees’ time given to tasks.

Another option is to hire a minimum wage role specially dedicated to doing the non tip-producing “side work,” but this may be tough amid a national labor shortage, Vish says. Or perhaps restaurants will have to change their hours of operations so that servers always have a high traffic of customers to perform tip-producing work for.

No matter the solution, there will be difficulties during the adjustment, Pockrass says.

“It's just going to wreak havoc on a lot of restaurants’ business models at a time when we're already experiencing so much frustration,” Pockrass says. “We had advocated that if you're going to make some changes, now is not the right time. Restaurants are already struggling to operate profitably right now. So don't create additional administrative burdens and challenges.”

The impact likely won’t be consistent across the industry either. Casual dining might be most affected alongside local businesses that typically employ fewer staff. Some chain restaurants have moved entirely away from the tip credit because of differing state laws, but smaller, local mom-and-pop type restaurants might not have the systems or capacity to adequately comply.

“Locally owned restaurants were some of the ones that were hit the hardest as a result of the pandemic,” Pockrass says. “While they may have been able to stay afloat using things like the PPP loans and stuff like that, to now add this as another challenge on their plate, I think, becomes difficult and frustrating.”

During the Trump administration, a final rule from the Department of Labor removed limits on the amount of time a tipped employee could spend on non-tipped duties as long as they were performed “contemporaneously with tipped duties" or for a “reasonable time immediately before or after” tipped duties. With Biden in office, tip credit rules have reversed in a way that almost prevents restaurants from using the tip credit entirely, according to Pockrass.

“If that's what you want to do, then you go to Congress to get that done,” Pockrass says. “You don't create an administrative rule that makes it so difficult to comply that you then can't make use of something that is legally available.”

While the final rule will almost surely be challenged legally, restaurants should assume the rule will be in effect at least through the end of the Biden administration, Pockrass says.

To comply, restaurants must internally audit timesheets by tipped and non-tipped activities. Whether that is a general manager checking in with employees during a shift or staff using different job codes on POS systems, restaurants will need to adjust their operations to avoid being found non-compliant by the Department of Labor. The rule could be enforced either through a DOL audit or reports from servers at the restaurant themselves.

 “I think that a legal challenge is likely, but you can never operate under the assumption that a legal challenge will prevent one of these rules from going into effect,” Pockrass says.

While the clarified rule in theory protects restaurant workers from being paid unfairly, Pockrass and Vish fear that in practice, it could work against employees. Many restaurants may make adjustments to their workforce that will prove less beneficial to employees, Pockrass says. 

This could include cutting the number of employees to reduce wall time away from customers. Restaurants may also start paying minimum wage and then give employees many additional tasks, preventing employees from making as much money in tips. 

Some restaurants are even considering paying minimum wage and then adding an automatic service charge, which would likely prevent some customers from leaving tips for servers. In actuality, the rule could have the opposite effect of what it intended to do, Vish says.

“Is there a bad apple somewhere out there in the restaurant industry? Sure,” Pockrass says. “But does this rule then create problems for lots of restaurant employers and restaurant employees who are not bad apples and who are getting paid well? That's where I see the problem.”