Proposed Tip Credit Regulations Place Further Litigation on the Menu | Seyfarth Shaw LLP

Proposed Tip Credit Regulations Place Further Litigation on the Menu | Seyfarth Shaw LLP

Seyfarth Synopsis:  If the gist of a proposed regulation is made final, the 80/20 rule will be back, and with a vengeance.  Employers who take a tip credit for their tipped employees will have to ensure that those employees spend no more than 20 percent of their time in a workweek, and no more than 30 minutes of uninterrupted time, on side work that does not itself generate tips.

Tip credit regulations always have been a murky stew for employers.  Congress enacted the tip credit provisions to the FLSA to alleviate some of the financial burdens on industries that employ tipped workers.  At the time, the goal was simple: count a portion of customers’ gratuities for service employees toward the minimum wage. Yet, over the years, whether a tipped employee is eligible for tip credit has been a hotly contested issue both in the courts and in various presidential administrations’ rulemakings.  Just last week, the United States Department of Labor issued a Notice of Proposed Rule Making (NPRM) which creates greater limits on an employer’s ability to take a tip credit under the FLSA.

What is Currently on the Tip Credit Menu?

Currently, the maximum tip credit an employer can take for “tipped employees” is $5.12 per hour.  With a federal minimum wage of $7.25 per hour, this means that an employer may pay its employees an hourly wage of $2.13 per hour, on the basis that tips that customers provide will more than make up for the $5.12 per hour difference between that wage and the minimum wage.

But what exactly constitutes a tipped employee, and what happens when a tipped employee isn’t always engaging in activities that earn tips?  Since the tip credit was introduced, the DOL has explained that an employee may be employed in two occupations, one tipped and one not, but the employee may be paid the sub-minimum wage amount only for time in a tipped occupation.  For example, an employee may be employed by a hotel as a both a maintenance employee and restaurant server, but can be paid under the tip credit only for time spent as a restaurant server.

That, however, can be a difficult line to draw, particularly when a tipped employee spends part of their time on duties that relate to tipped work, but don’t produce tips themselves. For example, how should a restaurant pay a server who rolls or polishes silverware, bussers who may spend time brewing coffee, or bartenders who clean bar glasses (think Sam Malone in Cheers with his ever-present white towel drying beer mugs)?

Restaurateurs have long struggled to make sense of when they can and can’t use the tip credit. For decades, the DOL explained what are and what aren’t tip-producing duties, what duties are and are not related to tipped duties, and how much tolerance exists for a tipped employee to perform duties that aren’t tip producing duties only through opinion letters and its Field Operations Manual.  In doing so, the DOL never definitely set forth what is and isn’t tipped, but it did determine that a tipped employee couldn’t spend more than 20% of their time on “related duties.”  Unsurprisingly, this lack of clarity and the 80/20 rule led to a smorgasbord of litigation and, consequently, large settlements.

In 2018, however, the DOL took the 80/20 rule off the menu.  In an employer win, the DOL issued new sub-regulatory guidance removing the rigidness of a specific time split, and codified its guidance in a regulation.  That regulation, which was published in December 2020 and was scheduled to go into effect on March 1, 2021, eliminated the focus on a specific percentage of time spent on non-tipped duties and instead stated that an employer may take the tip credit for the time an employee performs related, non-tipped duties, as long as those duties are performed contemporaneously with, or for a reasonable time immediately before or after, tipped duties.  And to make things clearer, the DOL defined related duties by stating that a non-tipped duty is presumed to be related to a tip-producing occupation if it is listed as a task of the occupation in the Occupational Information Network O*NET.

No longer, it appeared, were hospitality employers required to calculate how much time tipped employees spent task by task.  No longer, it seemed, were such employers left to wonder what is and what isn’t a tipped or tipped-related task.

This period of relative calm lasted as long as it takes to eat an amuse bouche, unfortunately, as several courts refused to defer to the DOL’s new sub-regulatory guidance and continued to adhere to the 80/20 rule.  Further, once the administration changed, the DOL delayed the effective date of the regulation.

The Old/New Recipe for the Tip Credit

Last week, the DOL published a NPRM replacing that 2020 rule. The new proposed rule largely repackages the old 80/20 rule, and also places even greater limits on employers’ ability to take the tip credit under the FLSA.  What is work within a tipped occupation is no longer guided by the duties listed in O*NET.  Rather, under the new proposed rule, work within a tipped occupation includes (a) work that “produces tips” or (b) work that “directly supports” tip-producing work, provided it is “not performed for a substantial amount of time.”

Tip-producing work is defined circularly as “any work for which tipped employees receive tips.”  The DOL provides precious few examples in the regulation of that for a few job categories, noting that “a server’s tip producing work includes waiting tables” and that “a bartender’s tip-producing work includes making and serving drinks.”  The commentary to the proposed regulation provides a few other examples, but, because tip-producing work is defined only through examples, the proposal ultimately leaves it up to individual DOL investigators and judges to decide what they each think produces tips and what doesn’t.

So too with the definition of work that “directly supports tip-producing work.”  It is defined as “work that assists a tipped employee to perform the work for which the employee receives tips.”  Again, the proposed regulation provides only a few examples.  For servers, it includes “preparing items for tables so that the servers can more easily access them when serving customers or cleaning the tables to prepare for the next customers” and for, bartenders, it includes “slicing and pitting fruit for drinks so that the garnishes are more readily available to bartenders as they mix and prepare drinks for customers.”  The commentary to the DOL’s proposal lists a few other examples, but again leaves restaurateurs and bar owners wondering which tasks are tip-producing, which merely support tip-producing work, and which are completely outside the tipped occupation.

As noted, the proposed rule provides that work that directly supports tip-producing work is work within a tipped occupation only to the extent it not performed for a “substantial amount of time.”  The proposed rule provides that work is performed for a substantial amount of time if it (1) exceeds, in the aggregate, 20 percent of the employee’s hours worked during the workweek or also if (2) it is performed for a continuous period of time exceeding 30 minutes.  In other words, the 80/20 rule has returned, is being codified, and now is accompanied by a limit on how much side work can be performed under the tip credit at any one given time, which many employers may view as particularly troubling.  Indeed, under the DOL’s proposal, if server Jane were to work a 40-hour week under the tip credit, earn several hundred dollars in tips, spend a total of seven hours cleaning tables along the way, and then spend one 30-minute stint rolling silver while the restaurant is slow, no FLSA violation is committed.  But if server Joe were to work that same 40-hour workweek for double the amount of tips that Jane received, spend no time cleaning tables, but then spend a single 31-minute stint rolling silver, his employer would face FLSA liability for paying Joe under the tip credit.

For the next two months, the public has the opportunity to submit comments to the proposed rule.  We suspect that many employers of tipped employees will be challenging the DOL to reconsider several aspects of its proposed rule, including:

  • The circular nature of the definitions of “tip-producing work” and work that “directly supports” it;
  • The small number of examples of those terms;
  • The fact that employers likely would have to track tipped employees’ job duties by the minute and with multiple job or pay codes, and/or create and enforce highly-regimented work schedules designating when employees may help with side work;
  • Whether the additional 30-consecutive minute rule is necessary on top of the 80/20 rule;
  • If an employee makes a large amount of tips from which their take-home pay is exponentially greater than the minimum wage, whether there is a need to apply these stringent regulations at all; and
  • The effect of the new rule on employees who support servers and bartenders, viewed traditionally as tipped employees, performing duties like pitting olives, clearing dishes, and rolling silverware.

The DOL’s comment period is open until August 23, 2021.  Concerned employers should make their views known, but brace themselves for a set of tip credit rules that will be difficult to administer and likely would lead to large serving of litigation.


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