The U. S. Department of Labor (DOL) introduced the 80/20 rule in 1988 which stated that an employee was no longer a “tipped employee” when they spent more than 20% of their time in a workweek performing side work. After litigation and court opinions in the subsequent years, the DOL began dismantling the 80/20 rule in 2018. The DOL issued a rule in December 2020 which would have done away with the 80/20 rule. However, the DOL withdrew this rule prior to its effective date and in June 2021 issued a proposal to strengthen the 80/20 rule. The final rule has been published.
Effective December 28, 2021 employers that wish to claim a minimum wage tip credit will soon need to make sure their employees don't spend too much time performing tasks that don't directly serve customers.
The final rule establishes three categories of work:
Under the new rule, employers will be able to claim a tip credit only during the time their employees spend on tip-producing work or on directly supporting work that takes up no more than 20% of their workweek and no more than 30 continuous minutes at any one time.
The rule used the example of a restaurant server to explain that directly-supporting work is performed either in preparation for, or to otherwise assist, an employee's tip-producing work for customers (check the rule for additional examples).
For example, 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.
On the other hand, if the server folds napkins for the dinner rush after lunch customers leave, or rolls silverware for 15 minutes at the end of the night while waiting for a final table of customers to pay their bill, this would be categorized as directly supporting work and would count against the 20 percent and 30-minute limits.
Under the rule, once an employee spends more than 20% of their workweek on directly-supporting work, the employer cannot take a tip credit for any additional time spent on such work within the same workweek. Instead, the employer must pay a direct cash wage equal to the full minimum wage for that time. To calculate 20% of directly supporting work, only calculate 20% based on the workweek, and any work paid at full minimum wage is excluded from the workweek calculation.
The DOL provided some guidance on how to determine the workweek for the purposes of calculating the 20 percent tolerance. To illustrate, the DOL provided the following examples:
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.
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.
Because this new rule can be challenging for employers in the service industry, options include:
At a minimum, you will want to ensure that your tipped employees do not perform directly supporting work for more than 30 minutes when no tip-producing work is happening. Consider developing a process where tipped employees can notify management of directly supporting work in excess (so you can adjust compensation as appropriate). For instance, an end-of-shift attestation confirming whether or not the employee did directly-supporting work and for how long.
Questions remain that will continue to cause employers to struggle with tip credit compliance. Employers should also keep in mind any state and local rules regarding tip credits. With these new requirements and current staffing difficulties, some employers may be asking if it is really worth doing the tip credit. Employers have until December 28 to prepare for the final rule.