The new guidance for businesses whose employees rely on tips for some or all of their wages goes into effect on December 28, 2021.
A new ruling from the federal Department of Labor updates guidance for businesses whose employees rely on tips for some or all of their wages. In the past, employers were required to pay tipped employees minimum wage for every hour worked that didn’t produce tips, if those hours were in excess of 20% of the employee’s workweek. For tip-producing work, employers are eligible to take a “tip-credit,” reducing the staff member’s hourly rate to adjust for any tips received.
Under the old rule, job duties were in two categories: work that directly produced tips and work that did not directly produce tips. This old 80/20 rule excluded the tip credit for hours devoted to non-tip producing activities unless the work:
- Exceeds 20% of the employee’s workweek, or
- Takes a continuous period of time exceeding 30 minutes
The new guidance, issued by the DOL Wage and Hour Division, goes into effect December 28, 2021. It changes the guidelines to 3 categories of work for tipped employees:
- Job duties that directly produce tips
- Job duties that directly support tip-producing work
- Any other job duties
Types of tip-producing work
Businesses are still eligible to use tip credits for hours spent directly producing tips. The newest category — duties that directly support tip-producing work — may be challenging to understand. The DOL defines this work as duties that prepare and support the employee’s efforts to receive tips from customers. They include secondary duties that service-providing workers perform to assure customer service. Work that supports tip-producing work in can include:
- Rolling silverware
- Folding napkins
- Setting tables
- Bussing tables
- Stocking bussing stations
- Refilling condiments
- Cleaning customer-use areas
- Replenishing food for a salad bar
- Seating customers
- Cleaning adjacent to customer table
- Processing payments
The DOL included some additional duties, normally associated with kitchen prep work, in their ‘tip-producing’ work categories:
- Toasting bread to accompany prepared eggs
- Adding dressing to pre-made salads
- Scooping ice cream
- Ladling soup
- Preparing bread or chip baskets
- Brewing coffee
Because of the COVID-19 pandemic, the DOL also defined that if a “server receives tips from serving customers by taking their phone orders and providing them with carry-out meals,” employers may properly categorize those tasks as tip-producing. This means time spent could be eligible for hourly tip credit.
80/20 still applies
No matter what type of work the worker performs — tip-producing or supporting tip-producing — the 80/20 rule still applies. If the employee spends more than 20% of the workweek or 30 continuous minutes performing tasks that don’t directly result in tips, the tip credit is invalid. You must pay these employees the full minimum wage in the area for the hours (or minutes) they spend on those tasks.
If the employee spends more than 20% of the workweek or 30 continuous minutes performing tasks that don’t directly result in tips, the tip credit is invalid.
What are tip credits?
Tip credits allow business to reduce a tipped employee’s hourly rate to the federal $2.13 per hour (or more, depending on local statutes), for every hour they directly earn tips or perform work that supports their tip earnings.
To qualify for the tip credit, employers must assure the employee earns a minimum of $30 per month in tips. Employers receive a ‘tip credit’ of $5.12 per hour, reducing the federal minimum wage requirement from $7.25 per hour to $2.13. Depending on your area, the minimum wage and minimum tip wage may vary. In some areas, lower hourly tipped wages are not allowed: in others, they are higher than the federal rate.
Tips are the property of the employee and management cannot take them, unless there are pooling or sharing agreements.
Tip pooling and sharing
In some cases, businesses establish a tip pool or sharing agreement with staff members. These can include a ‘pool,’ where all customer tips are collected during a shift. Tips are then distributed evenly among all the workers who regularly receive tips (and no others) for that time frame.
Tip sharing can be a more informal agreement, in which tipped employees ‘share’ a portion of their tips during the shift with non-tipped employees. This can include bussers, cooks, or barbacks. The ‘shared’ percentage is agreed-upon in advance and paid at the end of the shift or periodically.
Any other job duties
According to the new guidance, tipped employees engaged in any work that does not directly or indirectly result in tips are required to be paid the minimum wage for that amount of time. This includes cleaning rest rooms or lobby areas, ordering supplies, etc. The new guidance specifically states there is no minimum amount of time for these duties. For example, if an employee spends 5 minutes cleaning a bathroom, they are eligible for minimum wage pay for that 5 minutes of time.
For employers, the new rules may be pose a challenge to calculate. As an employer, to ensure you pay workers correctly, keep detailed schedules and notes, and provide training.
Start with guidelines on the tasks designated as tip-producing and supporting tip-producing. Inform staff that you will pay the normal hourly ‘tip rate’ for these duties, depending on your area.
Next outline the 80/20 rule: any work (tip-producing or supporting) that exceeds 20% of the workweek or takes 30 minutes or longer to perform. These duties will be paid at the minimum wage in your area.
Finally, explain that any duties that don’t fall into these two categories — no matter how long (or short) it takes to perform them — will be paid at the minimum wage in your area.
The new guidance underscores how tip credits should be applied only for hours worked that impact the employee’s ability to be tipped. Generally, any task that isn’t directly involved in serving the customer should be paid at the minimum wage in your area. You should also pay minimum wage for tasks that are customer-serving, and that take up more than 20% of the employee’s workweek or last for more than 30 minutes.