U.S. Department of Labor Changes Rule for Tipped and Non Tipped Work
By John R. Hunt Attorney, Stokes Wagner Hunt Martez & Terrell, ALC | February 03, 2019
The U.S. Labor Department's Wage and Hour Division ("DOL") recently revoked its so-called "80/20 rule" for employees who receive tips. This "rule" had attempted to provide guidance about what happens where restaurant servers and other tipped employees work on tasks that don't directly generate tips, such as rolling silverware or wiping tables. The rule generally stated that where a tipped employee spent a "substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance," the employer could not take a tip credit and needed to pay the employee the full minimum wage.
Unfortunately, the rule also resulted in an astounding amount of litigation against hotel and restaurant companies by employees who claimed they had spent over twenty percent of their time doing things besides waiting on customers. Although the DOL's new interpretation still poses some questions, it should stem at least some of the tide of wage and hour litigation in the hospitality industry.
To understand the significance of the change, some description of the rule's history is necessary. Hotel and restaurant employees were not originally covered by the Fair Labor Standards Act, the federal law that imposes minimum wage and overtime requirements. When hospitality employees finally came within the protection of the FLSA, Congress was concerned about how to treat those persons who received most of their income from tips. It eventually chose to allow employers to take a "tip credit" which permitted a hotel or restaurant to credit some, but not all, of the tips an employee had received during a workweek when determining whether the employee had been paid the minimum wage.
After a number of amendments to the law, Congress settled upon the current framework which in most states allows an employer to pay a cash wage of $2.13 per hour and take a credit of $5.12 in tips received by the employee toward meeting the present federal minimum wage of $7.25 per hour. This "tip credit," however, only can be used for those employees who work in an occupation in which they "customarily and regularly" receive tips, and receive over $30 per month in tips.
After the addition of the tip credit amendment to the FLSA, the DOL faced the question of what wage should be paid to an employee who works for the same employer in two different occupations, one of which traditionally receives tips and one which does not. For example, a hotel employee who splits his or her time between working as a restaurant server and a maintenance person. In consequence, the DOL issued a "dual jobs" regulation which stated that: "In some situations an employee is employed in a dual job, as for example, where a maintenance man in a hotel also serves as a waiter.
In such a situation the employee, if he customarily and regularly receives at least $30 a month in tips for his work as a waiter, is a tipped employee only with respect to his employment as a waiter. He is employed in two occupations, and no tip credit can be taken for his hours of employment in his occupation of maintenance man."
Nevertheless, the DOL also recognized that tipped employees do not spend 100% of their time interacting with customers. Accordingly, it distinguished an employee who works in two separate occupations from "a waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses. It is likewise distinguishable from the counterman who also prepares his own short orders or who, as part of a group of countermen, takes a turn as a short order cook for the group. Such related duties in an occupation that is a tipped occupation need not by themselves be directed toward producing tips."
The DOL sought to refine this regulation further through the guidebook that it issues to its wage-and-hour investigators, the Field Operations Handbook. The Handbook stated that the regulation: "permits the employer to take a tip credit for time spent in duties related to the tipped occupation of an employee, even though such duties are not by themselves directed toward producing tips, provided such related duties are incidental to the regular duties of the tipped employees and are generally assigned to the tipped employee.
For example, duties related to the tipped occupation may include a server who does preparatory or closing activities, rolls silverware and fills salt and pepper shakers while the restaurant is open, cleans and sets tables, makes coffee, and occasionally washes dishes or glasses."
Nevertheless, the Handbook also set a quantitative limit on such work. It provided that: "where the facts indicate that tipped employees spend a substantial amount of time (i.e., in excess of 20 percent of the hours worked in the tipped occupation in the workweek) performing such related duties, no tip credit may be taken for the time spent in those duties. All related duties count toward the 20 percent tolerance."
Although this part of the Handbook never became a full-fledged regulation, it was applied by the federal courts in numerous cases. For example, in 2011, the U.S. Court of Appeals based in St. Louis ruled that servers at Applebee's restaurants who spent over 20% of their time on non-tipped producing activities, even those which were related to their work as servers, could pursue a lawsuit under the FLSA for unpaid minimum wages. In short, they were allowed to argue that the tip credit the employer took should be voided, the tips they received should not be counted toward minimum wage compliance, and they should recoup the full amount of minimum wages for each hour they had worked.
More recently, the U.S. Court of Appeals based in San Francisco overturned a lower court decision that had refused to allow employees to sue for alleged violations of the 80/20 rule. The district court had determined that whether a tip credit could be taken depended upon the occupation in which the employee worked, not on an analysis of the employee's activities throughout the course of the working day. The Court of Appeals, however, reversed this decision and held that the 80/20 rule was entitled to deference. In short, it permitted lawsuits by servers at various restaurants to proceed based on the contention that they had spent over 20% of their time working on non-tip producing activities. That is, activities that did not involve direct customer interaction.
Two months later, however, the DOL changed course and issued an opinion letter which revoked the 80/20 rule. The letter stated that the analysis as to whether a tip credit may be taken for an employee should be based upon his or her occupation. In sum, the DOL and the courts should consider whether a person is employed in a tipped "occupation" or working in a different occupation that does not generate tips. If the tipped employee is performing activities related to a tipped occupation, then no time limit is imposed on the related activities they may perform. To determine which activities are related to an occupation, the DOL referred employers to its O*NET database which lists numerous occupations and sets out the tasks related to those occupations. As stated by the DOL:
[D]uties listed as core or supplemental for the appropriate tip-producing occupation in the in the Tasks section of the Details report in the Occupational Information Network (O*NET) http://online.onetcenter.org or 29 C.F.R. § 531.56(e) shall be considered directly related to the tip-producing duties of that occupation. No limitation shall be placed on the amount of these duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously with the duties involving direct service to customers or for a reasonable time immediately before or after performing such direct-service duties.
Employers may not take a tip credit for time spent performing any tasks not contained in the O*NET task list. We note, however, that some of the time spent by a tipped employee performing tasks that are not listed in O*NET may be subject to the de minimis rule contained in Wage and Hour's general FLSA regulations at 29 C.F.R. § 785.47."
The DOL appeared to recognize that a minute-by-minute analysis of employees' activities would be unwieldy and impractical in many businesses, including those in the hospitality industry. What this means for employers is that they should reassess their current policies regarding tipped employees and attempt to determine whether or not the employees come within the limits imposed by the new rule. This would involve confirming that the employee actually is working in a traditionally tipped occupation and that all of his or her work duties constitute related activities as listed in O*NET. For those activities that are not listed as related to the tipped occupation in O*NET, a tip credit cannot be taken.
If an employer still is faced with a situation where an employee really does work in dual occupations, then there should be an allocation between tipped and non-tipped wages and the tip credit only can be taken for work which is related to the tipped occupation. For example, when an employee works as both a server and a front desk clerk, the tip credit could be taken only for the hours worked as a server.
Accordingly, hotels and restaurants should review their wage and hour practices with respect to tipped employees and determine the amount and volume of non-tipped activities they are performing. If non-tipped activities are performed over the course of a shift and they involve traditional activities of servers and bartenders, such as rolling silverware or making coffee or tea, a tip credit probably can be properly taken and the possibility of a claim under the FLSA would be significantly less.
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