DOL Delays Tip Credit and Independent Contractor Rules

March 9, 2021

The U.S. Department of Labor (“DOL”) recently announced the delay of the effective date of a pair of important regulations published at the end of the Trump administration.  These regulations were propounded in December, 2020, and early January, 2021, respectively, right before President Biden’s inauguration.  Just when the pandemic seemed to be coming under control and employers thought they might have more certainty about the future, the DOL’s action suggests the potential for more changes in the near future.

Tip Credit Regulations

The Federal tip credit regulations propounded at the end of 2020 contain three essential elements. Here are the essential elements of the regulations as they are currently written:

First, the December 2020 tip credit regulations prohibit employers from keeping tips received by their employees, regardless of whether the employer takes a tip credit under the Fair Labor Standards Act.

Second, they also eliminate the longstanding 20% rule (prohibiting an employer from taking a tip credit toward the minimum wage if the employee spends more than 20% of time on non-tipped duties), and replace it with a rule that an employer may take a tip credit on ANY AMOUNT OF TIME an employee in a tipped occupation performs non-tipped duties, SO LONG AS they are related to and performed contemporaneously with the tipped duties, and they are performed for a reasonable time immediately before or after performing the tipped duties.  The regulations also clarified that a non-tipped duty shall be construed as related to a tip-producing duty (and therefore payable at the tip-credit wage) if it is either listed in the dual jobs regulations propounded by the Department of Labor OR if it is listed as a task of a tip-producing occupation in the Occupational Information Network (“O*NET”). Other duties must be paid at the full minimum wage, unless the time spent in the task is de minimis.

Third, the regulations also allow employers to include in tip pools, employees who do not customarily receive tips (like cooks and dishwashers) only if none of the employees are paid the lower tip-credit wage, i.e., they are all paid at least full minimum wage. Back-of-the-house employees CANNOT participate in a tip pool with service workers who are paid the lower, tip credit hourly wage.

These tip credit regulations were scheduled to become effective on March 1, 2021.  The DOL has now delayed the effective date until April 30, 2021. What the Biden Administration may change in the meantime remains to be seen.

Independent Contractor Regulations

The DOL has also delayed the effective date of the revised independent contractor regulations. These regulations were propounded on January 7, 2021, and they address when a worker is an employee who has to be paid in accordance with the minimum and overtime wage requirements of the FLSA, or an independent contractor who does not. As presently revised, here is an overview of what these regulations provide:

First, the revised independent contractor regulations clarified that the actual practice of the parties, rather than any contract language or theoretical possibility, shall determine whether a worker is an independent contractor.

Second, the revised regulations also affirm that the “economic reality test” (i.e., is the worker actually economically independent from the employer) determines when an individual is an independent contractor or an employee, and identifies the “core” factors relevant to the test:  1) the nature and degree of control over the individual’s work; 2) the worker’s opportunity for profit or loss and other guiding factors;  3) the amount of skill required for the work; 4) the duration/degree of permanence of the working relationship between employer and worker; and 5) whether the work is part of an integrated unit of production.

The revised independent contractor regulations were scheduled to become effective on March 8, 2021.  The DOL delayed the effective date until May 7, 2021.  The stated reason for the delay was to “give the [DOL] additional opportunity to review and consider the Independent Contractor Rule.”

“Certainty is generally illusory . . .”

The DOL’s activities in this regard suggest at least the possibility that the DOL may have further revisions to the tip credit and independent contractor rules.  Employers are therefore well-advised to delay making any major changes to their policies and procedures in these areas.  It is also a good idea for employers to monitor for updates to ensure that they are aware of the latest developments regarding tip credits, minimum wage/overtime issues, and other employment laws.  Know and comply with your applicable state wage and hour laws too, as the federal regulations do not affect those obligations. In short, keep watch for developments, as Oliver Wendell Holmes, Jr. noted, “certainty is generally illusory, and repose is not the destiny of humankind.”