This month, the U.S. Department of Labor (DOL) released guidance on paying tipped employees and those with dual jobs under the 80/20 rule. The guidance provides information on applying provisions under the Fair Labor Standards Act (FLSA) to tipped employees and those that perform dual jobs for the same employer. It also explains when an employer may claim a tip credit towards its minimum wage obligations. Legislation regarding tipped workers and related enforcement has been a focus of the DOL under the Biden Administration. Late last year, a federal court ordered a Pennsylvania restaurant to pay more than $1.35 million in back wages for illegal tip pooling.
Background of the 80/20 Rule for Tipped Employees
One of the most crucial employment laws all businesses must know, the FLSA establishes minimum wage, overtime pay, proper recordkeeping, and child labor standards affecting full-time and part-time workers. Section 3(t) of the FLSA defines a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” However, employees in tipped occupations do not always perform duties that directly produce tips. Such non-tipped but directly supporting duties may include cleaning tables, making coffee, or washing dishes. Under the 80/20 rule, an employer may only take a tip credit in certain situations. Those situations include:
- if a tipped employee is performing tip-producing work or
- the tipped employee is performing work that supports tip-producing work (as long as the tipped worker does not spend a substantial amount of time doing such work).
In addition, the rule defines a substantial amount of time as:
- More than 20 percent of the hours worked during the employee’s workweek; or
- A continuous period of time that exceeds 30 minutes.
In other words, a tipped employee must engage in tip-producing work 80% of the time for an employer to claim a tip credit.
Guidance on Paying Tipped Employees Under the FLSA
The DOL’s new guidance (Fact Sheet 15 and Fact Sheet 15A) reiterates the agency’s 2021 guidance on paying tipped employees under the FLSA. Namely, an employer must pay a tipped employee performing tip-producing work at least $2.13 per hour. The amount claimed as a tip credit cannot exceed $5.12 (the difference between $2.13 and the current minimum wage of $7.25). Furthermore, the tip credit cannot exceed the amount of tips the employee receives. Additionally, the guidance provides employers with examples of paying tipped employees under the 80/20 rule. Employers should consider the following example:
- An employee that works 30 hours a week (five hours a day; six days a week) performs non-tipped directly supporting work for no more than 30 continuous minutes, totaling nine hours per week – the nine hours of non-tipped directly supporting work is more than 20% of that part of the workweek (20% of 30 hours = six hours). Therefore, the employer must pay the employee minimum wage for three hours (the difference) and take a tip credit for 27 hours of the employee’s 30-hour workweek.
Employers may view other examples for paying tipped employees on the DOL’s Tips Dual Jobs: Definitions and Examples resource page. In addition, employers may benefit from utilizing point-of-sale or other digital systems to track when employers are performing tipped work or non-tipped directly supporting work.