One economist believes the change could cost tipped workers a collective $700 million.
The Department of Labor issued a final rule Tuesday to allow restaurants to require servers to pool tips with staff who don’t typically earn them. It also softened restrictions on non-tipped work for employees who earn a lower, tipped minimum wage.
Broadly, the long-awaited decision addresses which employees can legally participate in tip pooling under the Fair Labor Standards Act and the conditions under which restaurants can claim “tip credit.” The final rule will go into effect 60 days after publication in the Federal Register (estimated to be roughly February 20, 2021).
The changes could be significant, and, if not amended or rolled back by a new administration, likely seen as a win for many restaurateurs, especially in terms of narrowing the pay gap between the front and back of the house. The final rule allows tipped employees, like servers, to pool tips with non-tipped workers, such as cooks and dishwashers, in situations where the restaurant pays the tipped workers equal to or greater than the minimum wage, in lieu of taking a “tip credit,” or paying tipped employees a subminimum wage, the National Law Review said.
“This final rule provides clarity and flexibility for employers and could increase pay for back-of-the house workers, like cooks and dishwashers, who have been excluded from participating in tip pools in the past,” Cheryl Stanton, the Labor Departments’ wage and hour administrator, said in a statement to The Hill. “Newly allowed tip sharing may incentivize the inclusion of these previously excluded workers and reduce wage disparities among all workers who contribute to customers’ experience.”
Despite uncertainty tied to COVID-19 and its effects on hospitality, the DOL said it “believes that the justifications for the Rule remain as strong as—if not more so than—before the pandemic.”
“More flexibility in compensation and labor allocation will help businesses retain workers and maintain capacity. Further, the increased cooperation and efficiency that the final rule promotes will help businesses maintain quality of service—and therefore support tipped-employee compensation and provide increased certainty to tipped workers—at a time when the industry as a whole is struggling.”
Additionally, the final rule clarifies that a restaurant’s manager and supervisors cannot retain tips received by employees for any purpose, whether the employer takes a tip credit or not.
It also shakes up the so-called 80/20 Rule. The previous Obama administration policy required tipped employees spend at least 80 percent of their time on tipped-wage duties, like waiting tables, rather than untipped back-of-the-house functions, such as washing dishes and so on. The Labor Department added the notion to its enforcement handbook in 1988. Essentially, when tipped workers spent at least 20 percent of their workweek on duties that didn’t generate tips, they were entitled to the full minimum wage ($7.25 per hour) for that time, rather than the $2.13 base tip pay.
Now, consistent with the final rule’s amended regulations, a restaurant can take a tip credit for time that a tipped employee spends performing “related,” non-tipped duties. It’s explained as “contemporaneously or for a reasonable time immediately before or after performing the tipped duties.” The fresh regulations also address which non-tipped duties are “related” to a tip-producing occupation. Some examples: “cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses.”
“In that example, the employee is still engaged in the tipped occupation of a server, for which the employer may take a tip credit, rather than working part of the time in a non-tipped occupation,” the DOL said.
Critics of the final rule argue restaurants can now restrict wages for non-tipped staff, like dishwashers, and cover the gap with pooled tip money from servers.
Changing the 80/20 rule will stir controversy. In the past, restaurants needed to ensure tipped workers could make up the difference (generally from $2.13 an hour to $7.25 an hour) through tips. And that they would spend no more than 20 percent of their time on non-tipped work. But in the refreshed final rule, they’re required to spend a “reasonable time” on these kind of tasks, before or after tipped work.
Heidi Shierholz, a scholar at the Economic Policy Institute and former chief economist at the Labor Department under President Obama, told The Hill, “Reasonable time’ is not defined, and its ambiguity will make it difficult to enforce, providing employers an immense loophole and leaving workers behind.” She predicted the change could cost tipped workers a collective $700 million a year, and shift more jobs from non-tipped to tipped.
Back in December, Saru Jayaraman, executive director of One Fair Wage, a national nonprofit organization representing subminimum wage workers, said nearly 10 million tipped and other service workers lost their jobs since March. The majority of which, she added, were unable to access unemployment benefits through their states due to the fact they earned the subminimum wage for tipped workers. As noted, it’s $2.13 an hour at the federal level and $5 or less in nearly 40 states.
For those still working, she said, tips were down roughly 50–75 percent during COVID-19.
“The Trump Administration’s plan to let multimillion-dollar restaurant corporations pay workers just $2.13 per hour, even when they’re doing work that does not allow them access to tips, will hurt the millions of restaurant and service workers in the United States who are already struggling amid his mismanaged pandemic,” Jayaraman said in a statement at the time.
Important to note, the DOL’s changed standard for participating in a tip pool will affect the seven states where taking a tip credit is not currently allowed.
In 2018, Congress enacted a variety of amendments to the FLSA, with one key amendment prohibiting employers from keeping tips received by employees for any purpose, “including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”
This led to the DOL in 2019 seeking to amend various regulations with tipped employees, eventually resulting in Tuesday’s Final Rule.
From JD Supra, here’s a breakdown of what the Final Rule accomplishes:
An employer may exert control over tips only to:
- Promptly distribute tips to the covered employee/employees
- Require employees to share tips with other eligible employees; or
- Where the employer facilitates tip pooling by collecting and redistributing employees’ tips, promptly distribute tips to eligible employees in a tip pool.
Employers may mandate a nontraditional tip pool that includes tipped employees (such as servers) and non-tipped employees (such as cooks), provided that: (1) the pool does not include any employers, managers, or supervisors; and (2) the employer does not pay the tipped employees using a tip credit but instead pays them the full minimum wage without applying any tip credit.
- Prior to the passage of the 2018 FLSA amendments, DOL regulations prohibited employers from requiring tipped employees to share tips with non-tipped employees.
Where an employee performs tipped and non-tipped duties, the employer may take a tip credit for non-tipped duties performed, so long as (1) the duties are related to the employee’s tipped occupation (i.e., a waiter cleans the table after a customer leaves); and (2) the related duties must be performed either contemporaneously with the tip-producing activities or within “a reasonable time immediately before or after” the tipped activities.
- This provision eliminates the widely used, but never formally codified “80/20” approach, which provided a heavily litigated demarcation line for employers to follow.
- The final rule does not define “a reasonable time immediately before or after.”
Employers will be required to (1) identify on their payroll or other records each employee who receives tips; and (2) keep records of the weekly/monthly amount of tips received by each employee.
In terms of how it could benefit restaurants, as labor and employment law firm FordHarrison wrote, operators who do not take a tip credit may be able to make back-of-the-house positions more attractive by allowing those employees to receive additional income through tips. “Although employers should consider the laws of the states in which they do business and whether they have adopted any rules similar to or more stringent than the proposed federal 80/20 and tip pooling rule,” the firm said.
It is also worth keeping in mind the Biden administration could look to roll back implementation of the new rules and produce its own amendments.
“For now, employers should keep things business-as-usual and watch for any updates in the upcoming months,” FordHarrison added.