Hunton Employment & Labor Perspectives

The Department of Labor (“DOL”) recently published an Opinion Letter (FLSA-2018-27) reissuing its January 16, 2009 guidance (Opinion Letter FLSA-2009-23) and reversing its Obama-era position on the 20% tip credit rule.  This opinion letter marks another major shift in DOL’s policy and presents a welcome change for employers in the restaurant industry.

For about 10 years, restaurant industry employers faced the daunting and costly prospect of collective and class action litigation by server and bartender employees  paid under the tip credit who claimed they spent more than 20% of their time on “side work” that did not directly produce tips.  The tip credit generally permitted employers in tip-producing industries to compensate employees at a minimum rate of $2.13 per hour, and to take a credit against the tips an employee received equal to the difference between this minimum rate and the federal minimum wage.  However, if an employee’s tips did not amount to at least $5.12 per hour (the difference between the federal minimum wage of $7.25 per hour and the $2.13 tipped worker minimum), an employer would be responsible for the remainder of the employee’s wages between what the employee earned in wages and tips combined and the federal minimum wage.

Under the Obama Administration, the DOL withdrew Opinion Letter FLSA2009-23 and followed a 20% tip credit rule contained within the DOL’s Field Operations Handbook.  That rule restricted employers from claiming the tip credit for employees who spent 20% or more of their working time performing non-tipped duties, even if those duties were related to their core tip-producing activities.  As a result, employees engaged in non-tipped activities—for example, restaurant servers who set tables between waiting on patrons—were at times entitled to both the regular federal minimum wage and tips received.  Additionally, the pay due to a particular employee under the 20% rule was difficult to determine if the employee’s engagement in customer-facing and back-of-house activities varied significantly, or the employee’s time in specific tasks was not sufficiently monitored.

The DOL’s new opinion letter adopts a different approach, under which the availability of the tip credit will no longer be tied to a strict percentage cut-off delineating time spent on tip-producing versus non-tip-producing activities.  Rather, the tip credit will be available for all hours tipped employees work so long as any related duties, such as back-of-house responsibilities, “are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.”

As this type of work is performed “contemporaneously” in many workplaces, employers may no longer need to pay the full minimum wage for time tipped employees spend in cleaning, maintenance, or other activities that relate to their primary, customer-facing service roles, even if those activities amount to more than 20% of the employees’ working time.  Nevertheless, employers should still be mindful in evaluating tipped employees’ job duties on a regular basis.