Final rule: DOL limits, defines non-tipped work when employers take tip credit

Posted November 4, 2021

On October 28, the U.S. Department of Labor (DOL) announced publication of a final rule that limits the amount time for which an employer may take a tip credit when a tipped worker isn't doing tip producing work (like serving customers).

The Tips Dual Jobs final rule states an employer may take a tip credit only when an employee is performing work that is:

• Part of a tipped occupation,
• Tip producing, or
• In direct support of work that is tip producing for a limited amount of time.

The time limits for when an employer may take a tip credit include when:

• A tipped employee performs work that directly supports tip producing work for less than 20 percent of the hours worked during the employee’s workweek. Therefore, an employer may not take a tip credit for any of the time that exceeds 20 percent of the workweek. Time for which an employer does not take a tip credit is excluded in calculating the 20 percent tolerance.
• A tipped employee performs directly supporting work for not more than 30 minutes. Therefore, an employer may not take a tip credit for any of the time that exceeds 30 minutes.

In addition, the final rule also amends the provisions of the Executive Order 13658 regulations, which address the hourly minimum wage paid by contractors to workers performing work on or in connection with covered federal contracts consistent with the amendments to the dual jobs regulations.

How does a tip credit work?

Under federal law, the FLSA requires covered employers to pay nonexempt (“hourly”) employees a minimum wage of at least $7.25 per hour. A section of the law allows an employer to satisfy a portion of its minimum wage obligation to a tipped employee by taking a partial credit, known as a “tip credit,” toward the minimum wage based on the amount of tips an employee receives provided that the employer meets certain requirements.

An employer that elects to take a tip credit must pay the tipped employee a direct cash wage of at least $2.13 per hour. Provided that the employer meets certain requirements, the employer may then take a credit against its wage obligation for the difference, up to $5.12 per hour, if the employees' tips are sufficient to fulfill the remainder of the minimum wage.

The bottom line

It's important to note, that not all states allow employers to take a tip credit (e.g., Alaska). Employers in those states must pay all workers the full minimum wage or higher, regardless of any tipped versus nontipped work. Also, other states may have different versions of the 80/20 rule. States or localities with more protective laws in place must adhere to those laws. The FLSA final rule doesn’t supersede those.

Between now and the end of the year, employers in the hospitality industry need to review their pay practices. It’s likely this final rule will bring legal challenges and administrative angst for some employers in those segments.

The Tip final rule becomes effective December 28. 

This article was written by Michelle Higgins of J. J. Keller & Associates, Inc.