DOL Proposes New Rule on Server Side Work, Reviving the 80/20 Rule and Including a new 30 Minute Cap

July 15, 2021

Back in March we warned that the U.S. Department of Labor might make further revisions to the tip credit rules promulgated at the end of the Trump administration.  That warning has now become reality.  Late in June 2021, the DOL announced yet another proposed new rule to the Federal regulations governing when an employee may pay an employee a tip credit wage.  This newly proposed rule (“the 2021 Proposed Rule”) would change the Federal tip credit regulations that were propounded at the end of 2020 by reviving the well-known 80/20 rule (with modifications) and adding a new 30 minute-cap on continuous side work.

As background, the Fair Labor Standards Act permits an employer to take a “tip credit” from the hourly wage of employees who customarily receive tips of at least $30 per month.  When applied, the tip credit allows an employer to pay tipped employees a direct wage that is less than the full statutory minimum wage so long as those tips, when added to the direct wage, amount to at least the full statutory minimum wage.  Importantly, the tip credit can only be taken for “tip producing work”.  If a tipped employee is engaged in non-tipped work, that employee must be paid at least the full statutory minimum wage for the time spent doing that work, without any credit taken from it to be filled in by tips.

For years there has been debate and litigation regarding the limits of the tip credit.  The issue has been how to decide what tasks performed by tipped employees are “tip-producing work” and which are not, and what standard should be applied to determine when and how to cap the amount of time spent on non-tip producing tasks when a worker gets paid the lower, tip credit wage.  Federal tip credit regulations propounded at the end of 2020 (“the 2020 Regulations”) sought to address these issues once and for all.  They contained three essential elements:

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

Second, the 2020 Regulations eliminated the longstanding 20% rule (which prohibited an employer from taking a tip credit toward the minimum wage if the employee spent more than 20% of working time on non-tipped duties).  They replaced the 80/20 standard with a rule which provided 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 those non-tipped duties are nevertheless related to and performed contemporaneously with tipped duties, and so long as such non-tipped duties are performed for a “reasonable time” immediately before or after performing the tipped duties.  These regulations specified that a non-tipped duty would be construed as related to a tip-producing duty (and therefore payable at the tip-credit wage) if such duty is either listed in the dual jobs regulations propounded by the Department of Labor OR if such duty is listed as a task of a tip-producing occupation in the Occupational Information Network (“O*NET”).  All other duties under the 2020 Regulations must be paid at the full minimum wage, unless the time spent in the task is de minimis.

Third, the 2020 Regulations allowed that tip pools established by employers may include employees who do not customarily receive tips (like cooks and dishwashers) only when all employees, including the service workers, are paid at least full minimum wage and none are paid the lower tip-credit wage.  Under these regulations, back-of-the-house employees CANNOT participate in a tip pool with service workers who are paid the lower, tip credit hourly wage.

Earlier this year, the DOL delayed effective date of the 2020 Regulations.  The DOL has issued its new, 2021 Proposed Rule that contains even more potential changes to the tip credit regulations.  Briefly, the 2021 Proposed Rule has 2 main features: 1) it revives the old 80/20 rule and 2) it includes a 30 minute cap on continuous side work.

Under the 2021 Proposed Rule, the time employees spend on tip producing duties remains eligible for the tip credit.  But, as far as other duties, the 2021 Proposed Rule permits the employer to take a tip credit only for work that directly supports tip-producing work and, even then, only if that work is not performed for a substantial amount of time.  This contrasts with the 2020 Regulations which permitted employers to take a tip credit for non-tip generating duties that were merely related to tip-producing work.

The 2021 Proposed Rule calls for eliminating the application of the task list of a tip-producing occupation in the Occupational Information Network (“O*NET”) that had been incorporated by the 2020 Regulations to determine what work could be considered to tip-producing work eligible for tip credit pay.  In lieu of the task list, the 2021 Proposed Rule sets out examples of work that can be considered directly supporting tip-generating work.  One example mentions preparing items for tables so that servers can more easily access them and clearing tables.  This suggests a much stricter standard for determining work can be treated as “side work” which may be compensable by the tip-credit wage.

The 2021 Proposed Rule revives the 80/20 rule to serve as the standard for determining when non-tip producing work becomes too “substantial” to be compensated by the tip credit wage.  Work that is not tip producing work, even if it directly supports tip-producing work, will under the 2021 Proposed Rule be considered too “substantial” (and therefore not eligible for the tip-credit) if the time spend on such work exceeds 20 percent of the hours worked during the workweek.

On top of the 80/20 rule, the 2021 Proposed Rule also adds a 30-minute cap for continuous side work.  This means that, in addition to the 80/20 requirement, an employer will not be allowed to take a tip credit if an employee performs non-tip producing work (including work that is “directly supporting” of tip-producing work) for a continuous period that exceeds 30 minutes.

The 2021 Proposed Rule retains the standard from the 2020 Regulations regarding tip pooling. It calls for continuing the prohibitions against employers from keeping tips received by their employees, regardless of whether the employer takes a tip credit under the FLSA.

It remains to be seen whether and if the 2021 Proposed Rule will be finalized.  Comments may be submitted to the DOL until August 23, 2021.  In the meantime, employers are well-advised to delay making any major changes to their policies and procedures.  Remember, also that employers must continue to comply with applicable state laws regarding tip credits, which can be stringent than their federal counterpart.