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Department of Labor Changes Course and Ends “80/20 Rule” for Tipped Employees

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This month, the Department of Labor’s Wage and Hour Division (“Division”) issued an opinion letter that, once again, reversed the Division’s position as to which service industry employees may be subject to the “tip credit.” For those who do not know, the tip credit permits an employer to pay its tipped employees not less than $2.13 per hour and take a “tip credit” equal to the difference between the hourly wage paid to the employee and the federal minimum wage.

Confusion has arisen over when an employer may take a tip credit for an employee that performs both tip-generating and non-tip-generating duties. In March 2009, the Division issued guidance that has come to be known as the “80/20 rule,” which essentially was interpreted by employers to mean that, for tipped employees who spent more than 20% of their working time on non-tipped work, the employer could not take the tip credit for that employee. While that rule seems to be fairly black-and-white on its face, service industry employers were placed in the untenable position of having to continuously track the duties being performed by tipped employees and assess what percentage were tip-generating versus non-tip-generating. This rule was unworkable for most employers facing this issue who wished to take the tip credit.

After significant complaints from the employer community, the Division issued a welcome opinion letter that effectively withdrew the prior March 2009 guidance and reaffirmed the Division’s prior position. The opinion letter confirms that there is no limit on the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties. In other words, an employer does not have to separately track the time that a server spends cleaning and setting tables, making coffee or occasionally washing dishes, as those duties are related to the server’s tip-generating duties. (Of course, if the duties are unrelated to the tip-generating duties, such as assigning a server at a hotel to perform vehicle maintenance, the time spent on those unrelated duties is not subject to the tip credit and should be compensated separately.)

Employers may want to continue to carefully monitor the job duties of tipped employees to ensure they are properly subject to the tip credit. Still, the Division’s new position and the abolishment (at least for now) of the 80/20 rule should come as a welcome relief to service industry employers with tipped employees.

A copy of the opinion letter can be found here.