As restaurant operators are well aware, tipping laws have historically been convoluted, to say the least. In an effort to bring clarity, on Dec. 30, 2020, the Department of Labor published its final rule on employee tipping under the Fair Labor Standards Act (FLSA). This regulation has significant implications for hospitality employers and employees and restaurant owners should take the opportunity to reassess their tip payment policies and ensure they are operating within the law. Let's explore the three key changes and clarifications to tipping regulations in 2021 – and what it all means for the hospitality industry and its employers.
Under the FLSA, employers must pay non-exempt employees the federal minimum wage, which is $7.25 per hour. However, if employees regularly receive tips, employers can pay them a lower minimum wage (no less than $2.13 per hour) and count up to $5.12 per hour of tips toward the minimum wage requirement. This practice is typically referred to as taking a "tip credit." In order to ensure all tipped employees receive at least the federal minimum wage, either through direct cash wages or through tips, employers may set up a mandatory tip pooling. That means all tipped employees are required to contribute some portion of their tips into a pool, which is then divided evenly among the group of tipped employees.
Historically, nontipped employees could not be included in a tip pool. Nontipped employees are often back-of house staff, like chefs, line cooks, dishwashers and janitors. Since these workers do not actually interface with the guests, they would not have the opportunity to receive a tip. For the past few years, there has been a lot of discussion as to whether nontipped employees should be able to participate in mandatory tip pools. With the DOL's final rule, employers can now structure a tip pooling arrangement that includes both tipped and nontipped employees. However, there is a caveat employers who choose to include nontipped employees in a tip pool cannot take a tip credit.
How the restaurant chooses to proceed is ultimately the decision of the restaurant owner. While nontipped employees generally do not have direct interactions with the guests, they do contribute to the guest experience. Many proponents of the change believe this narrows the pay gap between tipped and nontipped employees, making things more fair for back of-house workers. On the other hand, labor lawyers and other employee advocates warn that these relaxed regulations around tip pooling could lead to manipulation of the tipping system, such as employers offering lower wages for nontipped employees and using pooled tips to make up for it.
The "80/20" rule stated that employees could spend up to 20% of their time performing nontipped duties, but still get paid the tipped minimum wage for their whole shift. For example, let's say a server who works 40 hours per week and receives $2.13 in direct cash wages, could spend no more than 8 hours a week on nontipped tasks, such as cleaning bathrooms, prepping food, setting up dining rooms. If more than 20% of a server's time on the clock was spent doing nontipped duties, then the employer could not take the tip credit.
Now, the 80/20 rule is gone. As a result, an employer can take a tip credit for all nontipped duties an employee performs if:
In order to determine which duties are related to an employee's tipped occupation the DOL eliminates guesswork by pointing employers to the Occupational Information Network (O*NET) system, a database of occupational characteristics and worker requirements.
Many employers are relieved that the old 80/20 rule has been done away with as the guidance was unclear, and it was difficult to keep track of whether nontipped duties added up to less than 20% of an employee's work week. However, workers' rights advocates are concerned that this change could be problematic, allowing employers to take advantage of tipped-employees and asking them to do more nontipped work.
Whether or not employers take a tip credit, the final rule explicitly prohibits employers, managers and supervisors from keeping any tips received from employees. The rule also provides extra clarity around who qualifies as a supervisor or manager. This means that tips belong to employees, not employers. Restaurants can only exert control over tips when they are distributing them or facilitating a tip pool - but the earnings are never theirs to keep. This affords extra protection to employees by ensuring they receiving proper payment for services rendered during employment.
As restaurants re-evaluate their own tipping policies and procedures, it is wise to consider both the letter and the spirit of the law. Despite the challenges the restaurant industry has experienced because of the pandemic, it is imperative that restaurant owners continually ensure their staff are compensated fairly to help reduce turnover and attract strong talent in a competitive labor market.
The final rule goes into effect March 1, 2021; however, restaurant operators must stay abreast of any updates to this policy, as the new administration could roll back some or all of these changes. Additionally, operators should bear in mind that existing state rules and regulations may supersede those that are set at the federal level.
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