Section 3(m) of the Fair Labor Standards Act (FLSA) has long permitted employers to count a limited amount of the tips received by their “tipped employees” as a credit toward meeting the employer’s obligation to pay the minimum wage. This is known as a “tip credit.” A “tip credit” can only apply to “tipped employees” and those employees must receive all their tips. An employer can, however, use a “tip pool” in which tips are shared only among those employees who “customarily and regularly receive tips.”

Employers taking a “tip credit” should remain mindful of their obligation to inform employees in advance of the following:

• The amount of cash wage the employer will pay the tipped employee — a minimum of $2.13 per hour to meet FLSA requirements;
• The amount of the tip credit to be taken — often the difference between the cash wage and minimum wage;
• That an employer will pay any difference between the minimum wage and what the employee receives in cash wages plus tips;
• That employees must retain all their tips, although the employer may require the employee to participate in a mandatory tip pool with other tipped employees that customarily and regularly receive tips;
• And that a tip credit will not apply to any worker who has not received this information.

In March 2018, Congress amended section 3(m) of the FLSA when it passed the Consolidated Appropriations Act of 2018 (CAA). Among other changes, the CAA amended the FLSA to provide that “[a]n employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.” It also permitted employers that did not take the tip credit to require employees to share tips with back-of-the-house employees or other non-managers through a mandatory tip pool. 

On Dec. 22, 2020, the Department of Labor (DOL) announced a final rule which addresses two areas: (1) updating the DOL’s tip regulations to incorporate the 2018 amendments to the FLSA; and (2) codifying a 2018 DOL opinion letter relating to how the tip credit applies to employees who perform both tipped and non-tipped duties, and effectively eliminating the so-called “80/20” rule. This new final rule is effective on March 1, 2021.

Will this final rule remain under a Biden administration?

Before getting ahead of ourselves regarding some details in this final rule, it is possible that these changes will not survive the upcoming change in presidential administration. Given the timing of this final rule and that President-elect Joe Biden has signaled an interest in eliminating the tipped minimum wage in its entirety, it is possible that a Biden administration will move to stop these rules before they take effect. So, stay tuned for future updates on these issues.

What is a “tip”?

Again, before getting to the primary changes from the final rule, it may be helpful to remember that a “tip” is a sum paid by a customer as a gift or gratuity in recognition of some service performed for the customer. Whether to give a tip and in what amount must be determined solely by the customer. It is not payment for a fixed charge. A compulsory charge for a service (e.g., a 15% “mandatory gratuity”) is not a tip.

Final rule updates incorporating the CAA’s changes

• Expressly prohibits employers from keeping employees’ tips for any purpose.
• Expressly prohibits managers and supervisors from keeping employees’ tips for any purpose.
• Employers that do not take a tip credit may implement mandatory “nontraditional” tip pools — that is, tip pools that include employees who do not customarily and regularly receive tips (e.g., cooks, dishwashers, etc.).
• New recordkeeping requirements for employers who do not take a tip credit, but collect employees’ tips to facilitate a mandatory tip pool.

The fact that employers are able to implement a mandatory tip pool but cannot keep employees’ tips for any purpose does not mean that employers must redistribute those mandatory tip pool monies on a daily basis. Rather, the final rule allows an employer that collects tips to facilitate a mandatory tip pool to redistribute the tips on the regular payday for the workweek.

Note also that these changes do not allow employers that take a tip credit to include non-tipped workers in a tip pool. In other words, if you take advantage of the FLSA’s tip credit provisions, you may not include those back-of-the-house workers in a tip pool.

Change to the “80/20” rule

The “80/20” rule, which this final rule seeks to eliminate, stood for the proposition that an employer was unable to use the tip credit for the time a tipped worker spends performing non-tipped duties related to a tipped occupation when that time exceeded 20% of the employee’s workweek. In other words, if a server spent more than 20% of his/her workweek cleaning and setting tables, polishing and rolling silverware, making coffee, washing dishes, etc., (i.e., side work) the employer could not take a tip credit for that time.

The final rule eliminates that framework. Instead, the final rule provides that an employer can take a tip credit for the time an employee in a tipped occupation performs related non-tipped duties, but those duties must be performed contemporaneously with or for a reasonable time immediately before or after the tipped duties.

That still leaves the question of, what is a “related” non-tipped duty? If a duty is listed as a task of the tip-producing occupation in the Occupational Information Network (O*NET at www.onetonline.org), the DOL will presume that the non-tipped duty is “related” to the tipped occupation.

While the elimination of the “80/20” rule may provide employers with more flexibility in using the tip credit, employers would be well served to remain cautious in this area given the “reasonable time” standard. The final rule acknowledges that the “reasonable time” limit “does not create as bright a line as a firm cap on the amount of time an employee may spend on particular duties,” so it leaves some ambiguity as to where a line can be drawn.  

What if my state — or city or other local municipality — has its own rules related to tips?

This final rule governs the federal FLSA. So, if your state, city, or local municipality has a law or legal standard that is more protective than the FLSA, you must follow that higher standard.

For example, Ohio’s minimum wage as of 2021 for most employers is $8.80 per hour, whereas the federal minimum wage is $7.25 per hour. Similar to the FLSA, Ohio also permits employers to use a tip credit to meet Ohio’s minimum wage. But Ohio law requires a higher minimum hourly rate — currently $4.40 per hour — than does the FLSA in order to use the tip credit. In other words, meeting the basic requirements necessary to take a tip credit under federal law will not mean you are meeting the basic requirements necessary to take a tip credit under Ohio law.