On October 8th, the Department of Labor proposed changes to tip regulations under the Fair Labor Standards Act (FLSA). The aim of these changes is to simplify the rules concerning tip credits and bring more employees under the category that can receive tips. As per the provisions under this rule, for the first time, back-of-the-house workers could see their wages rise as they would be included in tip pools. Also, the proposed rules clarify when an employer can claim a tip credit and make additional earnings available to non-tipped workers by a process of tip sharing which is more inclusive. As a result of this rule, tipped workers may experience a slight dip in their wages, as employers could reduce the overall time tipped workers spend on tip-generating work and this could lead to non-tipped workers gain from tip-pooling arrangements.

Background to the proposed changes

Various types of employees in the service industry like waiters, drivers, movers, and others regularly receive tips as a part of their work. The amount of such tips varies greatly, and some employees may receive tips greater than their hourly wages while others may receive tips equal to just a fraction of their hourly wages. As the tip structure varies, complex regulations have been enforced concerning tipped work and there is no consistency. Keeping this in mind, the Department of Labor (DOL) has proposed a rule that will simplify such regulations and expand the eligibility for tips.
The current federal minimum wage as per the FLSA is $7.25 per hour. In instances where employees receive tips regularly, in order to be considered as a ‘tipped employee’, they must receive at least $30 in tips per month. Employers may choose to meet the minimum wage requirement by paying less than $7.25 in hourly wage and the gap is supplemented by the amount generated through tips. Some states have different requirements as there are differences between state and federal minimum wage levels.
The portion of the employee earnings covered by tips and not by an hourly wage can be claimed as a ‘tip credit’ by the employer. The maximum tip credit that an employer can currently claim is $5.12 per hour, and when combined with the cash wage of $2.13 per hour, the total comes to $7.25 per hour and meets the FLSA minimum wage requirement.

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80/20 rule

Tip regulations are complex and have changed several times during the years. The Wage and Hour Division (WHD) of the DOL follows the 80/20 rule as specified in the Field Operations Handbook to regulate when employers can claim a tip credit. As per this rule, employers cannot claim a tip credit if their tipped employees spent more than 20 percent of their time doing untipped work. For example, if an employee works as a waiter but also helps in doing other work like preparing meals or helping with closing. If the additional work done by the waiter exceeds 20 percent of his overall work hours, his employer cannot claim a tip credit for him.
The 80/20 rule has made it necessary for the employers to closely track the hours of employees engaged in tippable work and there is always a confusion regarding which work activities are to be considered as tippable work and which are to be excluded. The 80/20 rule itself was withdrawn in 2009 by a WHD opinion letter but was reinstated three months later. A WHD opinion letter in the year 2018 gave the 80/20 rule the status of an official WHD ruling. In February 2019, WHD removed the 80/20 rule by amending its Field Operations Handbook.

Tip-sharing arrangements

Ever since 1974, the DOL has allowed only employer-mandated tip pools to include tipped employees. This excludes other types of workers who significantly contribute to the success of tipped employees. So, under these regulations, a waiter at a restaurant can share his tips with his fellow waiters at the end of the shift, but the back-of-the-house employees like dishwashers or cooks are to be excluded and cannot receive any tip money from the mandatory pool. However, the proposed changes by the DOL can impact how employers can claim a tip credit and who can participate in tip pools.

Details of the proposed rule change

As per the proposed rule changes, the 80/20 rule has been withdrawn completely and the tip-credit eligibility depends on the basis of whether the occupation is tipped or non-tipped, instead of time spent on tip-generating work. Employees in tippable work making more than $30 a month in tips could be paid the FLSA required a minimum $2.13 per hour cash wage while the rest can be supplemented by tip credit.
Under the proposed changes, employers can continue to choose to pool employee tips. However, non-tipped employees like dishwashers and cooks can be eligible to be included in the tip pool on the condition that the employer is not taking a tip credit. The new rule will not prevent tip pooling between only tipped employees if an employer takes a tip credit and it will not affect any voluntary tip pooling among employees.
Also, under the proposed changes, it has been specified that employers cannot pocket employee tips for any reason, and proposes a fine of $1,100 per violation. The suggested changes to the regulations will be subject to public comment for 60 days. The DOL will then consider such inputs before issuing final new rules. While employers in states that have stricter or different laws pertaining to the tip credit, tip pooling and tip sharing, like New York will not be impacted much due to the changes proposed by the DOL, but other states employers are closely watching the developing situation and what picture the regulations finally take.

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