DOL Expands Rules on Penalties for Employers Who Keep Employees’ Tips

Employers who keep employees’ tips meant could be penalized in a wider range of circumstances. The new rule went into effect late last month.

The U.S. Department of Labor (DOL) announced a final rule on employer penalties earlier this year. It restores its ability to assess fines against employers who take employees’ tips. Whether the violations are repeated or willful no longer matters, DOL said. The final rule took effect on November 23.

You can receive a fine of up to $1,100 if you take employees’ tips under a new government rule.

The move means the Labor Department is scrapping a Trump-era standard that limited the federal agency to assessing financial penalties only for accidental and first-time violations.

The Labor Department’s Wage and Hour Division said there were concerns that the 2020 tip final rule inappropriately circumscribed the agency’s discretion to assess civil money penalties.

Employers can receive a fine of up to $1,100 for each violation.

“Civil money penalties are an incentive for employers to comply with their legal responsibilities,” Jessica Looman, acting administrator for DOL’s Wage and Hour Division, said in a press statement.

“When employers don’t comply, these penalties are a useful enforcement tool we can use to help achieve compliance,” Looman continued.

Women and minorities could benefit the most

“Workers who depend on tipped wages are every bit as entitled to expect to keep what they’ve earned as other workers,” U.S. Secretary of Labor Marty Walsh said in a news statement.

“An employer who withholds workers’ tips in violation of the law deprives them of that security and, in some cases, leads to workers earning less than the federal minimum wage,” Walsh said.

“This final rule helps us protect their earnings by strengthening tools to hold employers legally responsible for those violations,” Walsh continued.

The change could have a significant impact on women and minority workers. “The final rule announced today strengthens protections for tipped workers – who are largely women, immigrants, and people of color – and advances equity in the workplace,” Wage and Hour Division Acting Administrator Jessica Looman said.

Manager and supervisor tips

The final rule on employer penalties rule makes other changes.

The means managers and supervisors may contribute while they may not receive tips from mandatory tip pools or tip-sharing arrangements.

The rule also clarifies when managers and supervisors can keep the gratuities they receive. They can only keep their tips when a customer has given it directly for service they (the manager or supervisor) soley provide.

80/20 rule

The expansion of employer penalties comes just before changes to the so-called “80/20 rule” go into effect.

The Fair Labor Standards Act requires that employers pay employees at least $7.25 an hour. However, the FLSA allows an employer to take a “tip credit” against the minimum wage. Therefore, employers can satisfy their minimum wage obligation by paying employees who receive employee tips $2.13 an hour and claiming a credit against the tips earned by the employee to make up the balance of the wage requirement.

The 80/20 rule allows employers to take the tip credit for employees if they spend no more than 20% of their time on non-tipped duties. “Side work” includes activities such as:

• Mopping
• Wiping down tables
• Filling salt and pepper shakers
• Rolling silverware into napkins

Employers can only take tip credit for hours an employee has worked on tip-producing tasks.

The Labor Department amended its tip regulations in October to explain that an employer may only take credit employee tips for the hours when an employee is doing tip-producing work or engaged in tasks that directly support tip-producing work. In addition, tip-producing work is only considered part of an employee’s tipped occupation if it is not performed for a “substantial amount of time.”

The latest decision restores the Obama-era “80/20” rule.

The Trump administration overturned the Obama standard in December 2020. Under the Trump regulation, employers could pay the tipped minimum wage for non-tipped tasks performed simultaneously as the workers’ primary tipped duties. This was true regardless of how much time was spent doing the tasks.

The Economic Policy Institute has estimated that tipped workers would have been deprived of $700 million in wages.

The restored 80/20 final rule will take effect on December 28.

Compliance challenges

Laura Lawless, an attorney with Squire Patton Boggs, noted in a blog post that “employees understandably have concerns about the added complexity of timekeeping, scheduling, and exposure to class and collective actions for unpaid and underpaid wages” presented by the restored 80/20 rule.

Lawless suggests that “one option is to move to an hourly rate of pay and discontinue reliance on the tip credit altogether.” This means that “employers would only have to track, record, and pay for time worked as they do other non-exempt workers.”

She also reminded that local and state laws “may be more onerous than federal law.”

Reversing course under the Biden administration

The Biden Administration reverses many of the policies adopted under the Trump Administration. For example, DOL amended rules on employee tips to favor employees during the Obama administration. Under the Trump administration, the federal agency changed course, addressing civil penalties, tip pools, and the 80/20 rule.