On October 28, 2021, the U.S. Department of Labor (DOL) released a final rule that may cause many employers in the restaurant, hospitality, and service industries to rethink and/or end their use of tip credits under the federal Fair Labor Standards Act (FLSA). Under the FLSA, an employer that meets certain requirements may count a limited amount of the tips its tipped employees receive as a credit toward its federal minimum wage obligation—a practice which is known as a “tip credit.” Currently, federal law caps the tip credit an employer may take at $5.12 per hour, and the lowest subminimum wage that an employer may pay is $2.13 per hour. The FLSA defines a “tipped employee” for whom an employer may take a tip credit as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”

The new so-called Dual Jobs final rule, which was published in the Federal Register on October 29, 2021, and which will become effective 60 days after publication (at the end of December), largely mirrors the notice of proposed rulemaking (NPRM) published in June 2021. The Dual Jobs final rule modifies some definitions, clarifies implications, and answers questions that were underlying the NPRM. Although the DOL, in the final rule’s preamble, states that it is sensitive to the impact the pandemic has had on the restaurant, hospitality, and service industries, the final rule likely will create more challenges in the form of higher costs and administrative headaches for employers in these sectors. Notably, the DOL’s Dual Jobs final rule rejects the approach taken by the Trump administration for determining which hours can be paid at the subminimum wage.

Summary of Differences Between the Dual Jobs Final Rule and NPRM

In both the NPRM and the Dual Jobs final rule, the DOL has taken the position that employers may take a tip credit for “tip producing work” and work that “directly supports” tip producing work, provided that the directly supporting work is not performed for a “substantial amount of time.” The DOL also has taken the position, in both the NPRM and the Dual Jobs final rule, that a “substantial amount of time” would be analyzed using an “80/20” percentage of hours limitation and a continuous 30-minutes limitation.

The Dual Jobs final rule is different from the NPRM in the following ways:

1. clarifies that its definition of “tip-producing work” was intended to be broadly construed to encompass “any work performed by a tipped employee that provides service to customers for which the tipped employee receives tips” and provides more examples illustrating the scope of what constitutes tip-producing work;

2. amends the definition of “directly supporting work” “to reflect that this category of work is either performed in preparation of or otherwise assists the tip-producing customer service work”;

3. modifies the definition of work that is not part of the tipped occupation; and

4. clarifies the 80/20 calculation and modifies the 30-minute rule.

The Dual Jobs Final Rule

Under the Dual Jobs final rule, an employer may take a tip credit for the employee’s performance of work that (1) “produces tips” or (2) “directly supports” tip-producing work, provided “the directly supporting work is not performed for a “substantial amount of time.”

Tip-Producing Work

The Dual Jobs final rules defines work that produces tips as “any work performed by a tipped employee that provides service to customers for which the tipped employee receives tips.” The DOL used a similar definition in its NPRM, but in the Dual Jobs final rule, adds the phrase “that provides service to customers” to the definition of “tip-producing work.” Under the Dual Jobs final rule, tip-producing work “includes all aspects of the service to customers for which the tipped employee receives tips.” Critically, the Dual Jobs final rule clarifies that an employer may take a tip credit when a worker is performing tip-producing work even if the worker is also performing directly supporting work. The following are the DOL’s examples:

• A bartender is performing tip-producing work of preparing drinks when he or she is talking to the customer seated at the bar and ensuring that a patron’s favorite game is shown on the bar television.

• A server is performing tip-producing work when bringing a highchair and coloring book for an infant seated at a table.

• A nail technician is performing tip-producing work when helping his or her customer pick out a complementary shade of polish or taking his or her own customer’s payment.

• A bartender who retrieves a particular beer from the storeroom at the request of a customer sitting at the bar is performing tip-producing work. However, a bartender who retrieves a case of beer from the storeroom to stock the bar in preparation for serving customers would be performing directly supporting work.

• A server adding a garnish to a plate of food in the kitchen before serving the prepared food to the customer, or wiping down a spill on a customer’s table, is performing the tip-producing customer service work of serving tables. However, a server assigned to clean around a beverage station is performing work in preparation of or otherwise assisting tip-producing work and thus is performing directly supporting work.

Directly Supporting Work

Work that “directly supports” tip-producing work is a category of work that is performed by a tipped employee “in preparation for or otherwise assists in the provision of tip-producing service work,” according to the DOL.  The Dual Jobs final rule further explains that directly supporting work is work that is part of the tipped occupation, provided it is not performed for a substantial amount of time.

Critically, the Dual Jobs final rule makes clear that if a tipped employee has down time, has not started a shift, or is otherwise not providing service to customers for which the tipped employee receives tips, that time cannot be categorized as tip-producing work under the revised definition. Again, this is a modified definition that is arguably more narrow than what was contained in the NPRM, but the DOL also includes additional examples of directly supporting work, such as the following:

• When performed in preparation of or to otherwise assist tip-producing customer service work, a bartender’s directly supporting work “includes work such as slicing and pitting fruit for drinks, wiping down the bar or tables in the bar area, cleaning bar glasses, arranging bottles in the bar, fetching liquor and supplies, and vacuuming under tables in the bar area,” or “cleaning ice coolers and bar mats, and making drink mixes and filling up dispensers with drink mixes”;

• When performed in preparation of or to otherwise assist tip-producing customer service work, “a server’s directly supporting work includes dining room prep work, such as refilling salt and pepper shakers and ketchup bottles, rolling silverware, folding napkins, sweeping or vacuuming under tables in the dining area, and setting and bussing tables.”

Despite comments urging the DOL to set out a fixed list of tip producing and directly supporting duties, such as through use of the O*NET database, the DOL declined to do so, stating the test is a “functional test” and allows for “better flexibility.”

Work Not Part of Tipped Occupation

Under the Dual Jobs final rule, work that is not part of the tipped occupation is any work that does not provide service to customers for which tipped employees receive tips, and does not directly support tip-producing work. The DOL’s examples of work that falls within this definitional category are:

• “preparing food, including salads, and cleaning the kitchen and bathrooms, is not part of the tipped occupation of a server”;

• “Cleaning the kitchen or bathrooms is not part of the tipped occupation of a busser”;

• “Cleaning the dining room and bathrooms is not part of the tipped occupation of a service bartender.”

Substantial Amount of Time

The Dual Jobs final Rule states that an employee has performed work that directly supports tip-producing work for a substantial amount of time if the tipped employee’s directly supporting work either (1) exceeds a “20 percent workweek tolerance” or; (2) the directly supporting work exceeds 30 minutes for any continuous period of time.

Incorporating the modified definitions above, the DOL provides the following examples in the Dual Jobs final rule:

• “if a server takes customer orders at a table, sets the table she is serving, brings beverages to a third table, picks up a slice of pie, adds ice cream, and delivers it to the first table, and puts on a fresh pot of coffee at the beverage station for all of her tables, before heading back to the second table to take customer orders, the server is performing tip-producing work for the entire time. Accordingly, there is no need for the server’s employer to count any of this work toward the 20 percent or 30-minute limits.”

• “If a bartender takes a customer’s order and prepares them a drink, takes a second customer’s order and leaves the bar area to retrieve a particular wine for the customer, returns to the bar area and wipes down the bar where customers are seated, the bartender is performing tip-producing work for the entire time and there is no need to count any of this work toward the 20 percent limit or 30-minute limit.

a. 20 Percent of the Workweek

The Dual Jobs final rule clarifies that once “employee[s] spends more than 20 percent of their workweek performing directly supporting work, the employer cannot take a tip credit for any time” spent on directly supporting work in that workweek and must pay a direct cash wage equal to the full minimum wage for that time. (Emphasis added.) Importantly, the Dual Jobs final rule expressly states that “work paid at the full minimum wage would not count towards the 20 percent workweek tolerance.” (Emphasis added.) Any time that is compensated at the full minimum wage because it exceeds the 20 percent limit is not excluded from the workweek in calculating the 20 percent tolerance.

Employers calculate 20 percent by subtracting the hours in that workweek for which an employer does not take a tip credit, “either because the employee is engaged in a non-tipped occupation, the employer decides not to take the tip credit for those hours, or because, as explained below, those hours exceed the 30-minute threshold.” However, time that is compensated at the full minimum wage “because it exceeds the 20 percent limit is not excluded from the workweek in calculating the 20 percent tolerance.” The DOL’s examples include:

“Example 1. A server is employed for 40 hours a week and performs 5 hours of work that is not part of the tipped occupation, such as cleaning the kitchen, for which the server is paid a direct cash wage at the full minimum wage. The server also performs 18 minutes of non-tipped directly supporting work twice a day, for a total of three hours a week. The employer may take a tip credit for all of the time the employee spends performing directly supporting work, because this time does not exceed 20 percent of the workweek. Because this employee has been paid the full minimum wage for a total of five hours a week, the employee could perform up to seven hours of directly supporting work (35 hours × 20 percent = 7 hours) without exceeding the 20 percent tolerance.” (Emphasis added.)

“Example 2. A server is employed for 40 hours a week and performs 5 hours of work that is not part of the tipped occupation, such as cleaning the kitchen, for which the server is paid a direct cash wage at the full minimum wage. The server also performs 10 hours a week of nontipped directly supporting work, in increments of time that do not exceed 30 minutes. The 5 hours of work paid at the minimum wage is excluded from the workweek for purposes of the 20 percent calculation. Therefore, the employer may take a tip credit for 7 hours of the directly supporting work (35 hours × 20 percent = 7 hours), but must pay the server a direct cash wage equal to the minimum wage for the remaining three hours.” (Emphasis added.)

b. Excess of 30 Consecutive Minutes

Under the Dual Jobs final rule, an employer may not take a tip credit once an employee has performed more than 30 minutes of continuous nontipped, directly supporting work. In other words, as opposed to the NPRM, under the Dual Jobs final rule employers may take a tip credit for time that does not exceed 30 minutes, subject also to the 20 percent workweek limit. By way of example:

“If a tipped employee is required to perform directly supporting work continuously for two hours after the establishment is closed to customers, the employer may take a tip credit for the first 30 minutes, but must pay the full Federal minimum wage for the remaining hour and a half. The first 30 minutes of directly supporting work, for which the employer took a tip credit, would count toward the 20 percent workweek limit.” (Emphasis added.)

The Dual Jobs final rule also clarifies, as noted above, that “time in excess of 30 minutes, which is paid at the full minimum wage, is excluded from the hours worked in the workweek before calculating the 20 percent tolerance.” (Emphasis added.) The DOL’s example is this:

“A tipped employee who works five eight-hour shifts (40 hours a week) and who is required to perform one continuous hour of directly supporting work at the beginning and end of each shift must be paid a direct cash wage of the full minimum wage after the first 30 minutes of each hour. In this situation, a total of five hours per week (30 minutes x 2 blocks x 5 shifts) is excluded from the total hours worked for the purposes of calculating 20 percent.”

Next Steps

The effective date of the rule is 60 days after publication, which will be at the end of December 2021. Although court challenges to the Dual Jobs final rule are likely, employers that make use of the tip credit may want to start considering what sort of changes they may need to make to comply with this rule if it does become effective before the end of the year. Notably, although the Dual Jobs final rule does not include a recordkeeping requirement for consecutive minutes of directly supporting work, employers that do not to pay the full minimum wage for such blocks of work will need to consider how they will track and document such time, as pre-shift and post-shift work for tipped employees often will be the focal point of inevitable litigation.

Employers should keep in mind that many states and localities have their own rules regarding tip credits, and the FLSA does not trump or preempt more protective state and local laws. For example, some states have differing versions of the 80/20 rule, and some apply their 80/20 rule on a daily, rather than weekly, basis.  Additionally, some jurisdictions do not allow employers to take a tip credit and some have a higher sub-minimum wage for tipped employees and/or a higher minimum wage for non-tipped work. Many state and local minimum wage levels and tipped minimum wage levels increase annually on December 31 or January 1, so employers also want to be aware of any adjustments that need to be made in terms of state and local law compliance.