They Worked Hard for Their Money

On Monday, October 7, 2019, the Department of Labor (DOL), under new appointee Labor Secretary Eugene Scalia, proposed a new 80-20 Rule and tip pooling regulation which mirrors a previously withdrawn 2009 opinion letter detailing how “tipped” employees can divide the gratuity amongst various personnel. The reliance on the 2009 opinion letter effectively withdraws enforcement guidance under the Fair Labor Standards Act (FLSA) for tipped employees who spend more than 20% (hence the 80-20 Rule) of their time performing non-tipped duties, such as refilling salt shakers or folding napkins.

Under the FLSA, employers are required to pay employees an hourly minimum wage, but the FLSA provided an exemption for “tipped” employees. Tipped employees are those who customarily receive at least $30/month in tips. Under the theory that tipped employees receive substantial compensation through tips, the FLSA permits employers to pay a direct wage that is lower than the federal minimum wage and subsequently apply a “tip” credit to compensate for the delta between the direct hourly wage and the federal minimum wage. If the combined tipped amount and the direct hourly wage still do not meet the minimum wage standard, the employer is then required to make up the difference.

Under the 80-20 Rule, employers, particularly in the hospitality industry, were required to recreate the daily activities of their tipped employees and separate the duties into two tipping categories: tip generating/related duties and non-tip-generating duties. Critically, the non-tip-generating duties cannot account for more than 20% of the shift. If the non-tip-generating duties created more than 20% of the employee’s duties and responsibilities, the employer was required to compensate the employee at the full hourly minimum wage. Employers chaffed at the 80-20 Rule as it created an administrative burden in accounting for an accurate percentage of the duties undertaken by each employee. As a result, the 80-20 Rule, its interpretation, and its enforcement created extensive litigation leading employers to seek continued guidance from the DOL.

As a result, the new proposed rules would simply require that the non-tipped work be done “contemporaneously” or “within a reasonable time immediately before or after” the tipped work. So long as an employer meets this undefined criteria, there would be no precise cap on the scope of non-tipped work.

Moreover, current law requires that all tipped employees exclusively retain their gratuities unless they are distributed through a valid tip pool. The tip pool prohibits employees such as managers and supervisors. However, under the proposed rules, “back of the house” employees, such as dishwashers and cooks, would be able to participate in a tip pool system. The DOL states that back-of-the-house employees contribute to the dining experience but typically receive less compensation than “front-of-the-house” employees, i.e. servers and bartenders. The DOL believes that by permitting back-of-the-house employees from participating in tip pooling, any wage disparity will be redressed through their inclusion in the tip pool.

Ultimately, the DOL believes that the proposed rule will clarify an employer’s obligations related to the tip credit for any amount of time an employee performs related, non-tipped duties. While the public has 60 days, ending on December 9, 2019, to provide comments on the proposed regulation, employers, especially those in the hospitality industry, should be cognizant of the minimum wage laws within their own state and in some cases cities before any changes to the compensation structure for tipped and non-tipped employees occur.

If you have any questions regarding the proposed changes or any other wage & hour issues, please contact Robert A. Orozco. Robert is Counsel with Leech Tishman and a member of the firm’s Employment Practice Group. He is based in Leech Tishman’s LAX office, and can be reached at 424.738.4400 or via email at rorozco@leechtishman.com.

Sally Griffith Cimini is a Partner with Leech Tishman and chairs the firm’s Employment Practice Group. Based in Leech Tishman’s Pittsburgh office, Sally is highly regarded for her experience in the areas of employment law and can be reached at scimini@leechtishman.com.