Department of Labor Issues Proposed Rule Regarding Tipped Employees

By: Frank T. George

Last week, the U.S. Department of Labor (DOL) published a proposed regulatory rule that—if finalized—will impact tipped employees and their employers.

Rather than paying tipped employees the federal minimum wage of $7.25 per hour, employers can lawfully count a portion of an employee’s tips toward the minimum wage.  This is referred to as taking a “tip credit,” and the Fair Labor Standards Act (FLSA) currently permits employers to take a maximum tip credit of $5.12 per hour—meaning they are only obligated to pay their tipped employees a direct hourly wage of $2.13.

What happens, though, when an employee serves more than one function?  What if, for example, a restaurant employee spends one part of his or her shift waiting tables and another part clearing and washing dishes?  Can an employer claim a tip credit even when the employee is performing work for which he or she does not typically receive customer gratuities?

The DOL’s proposed rule addresses these questions.

The proposed regulation permits an employer to take a tip credit for employees who perform some work that produces tips and some work that “directly supports the tip-producing work”—but only so long as the “supporting work is not performed for a substantial amount of time.”  The DOL further explains that an employee performs tip-supporting work for a substantial period of time when the work either exceeds 20 percent of the employee’s shift or is performed for a continuous period of time exceeding 30 minutes.

The DOL’s proposed rule is not without controversy.  In fact, it seeks to reverse employer-friendly regulations recently developed under the Trump administration, which permit employers to take a credit for tipped employees performing some non-tipped work (so long as the non-tipped duties were performed for a reasonable time immediately before or after the tipped duties).

Advocates of the DOL’s proposed rule note that it protects workers: it places clear limits on when an employer can take a tip credit and therefore prevents employers from shorting an employee’s wages by shifting a lot of non-tipped work to tipped employees.  Opponents point out, however, that the regulation imposes a substantial burden on companies and requires employers to track tipped employees’ job duties down to the minute.

The DOL’s proposed rule will not be finalized until sometime after August 23, 2021,when the period for public comment on the regulation comes to a close.  The DOL’s rulemaking can nonetheless serve as an immediate reminder to employers to review current FLSA requirements—which relate to minimum wage obligations, overtime premiums, and record-keeping requirements.

Frank George is an attorney at the Cleveland, OH-based law firm McCarthy, Lebit, Crystal & Liffman Co., LPA.