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Employers in the hospitality industry will soon see three significant changes to the tipped employee regulations. On December 22, 2020, the United States Department of Labor issued a final rule revising its tip pooling regulations. The final rule will become effective February 28, 2021.

Expansion of non-traditional tip pools

The new rule allows employers that do not take a tip credit to implement a mandatory tip pooling arrangement that includes back-of-house employees along with front-of-house employees. The DOL’s prior regulations and guidance on tip pooling requirements permitted employers to take a tip credit (and thus pay tipped employees a sub-minimum wage); however, the tip pools were limited to employees that “customarily and regularly” receive tips.  

Under the new rule, employers that do not take a tip credit (i.e., employers that pay their tipped employees at least the full federal minimum wage) can implement more expansive mandatory “nontraditional” tip pools that include employees that do not “customarily and regularly” receive tips, such as cooks and dishwashers. However, employers must continue to pay the full minimum wage to the non-tipped employees who receive tips from the nontraditional pool.

Tip credits for “related,” non-tipped duties

The new rule amends the DOL’s regulations to allow an employer to take a tip credit for time that an employee in a tipped occupation spends performing “related,” non-tipped duties contemporaneously with tipped duties, or for a reasonable time immediately before or after performing the tipped duties. The final rule also addresses which non-tipped duties are related to a tip-producing occupation.

Previously, the “80/20 Rule” applied to prohibit an employer from claiming a tip credit for an employee’s “related-duties” time if such time exceeded 20% of the employee’s workweek. With this final rule, an employer may take a tip credit for all non-tipped duties an employee performs that meet two requirements: (1) the duties must be “related” to the employee’s tipped occupation; and (2) the employee must perform the related duties contemporaneously with the tip-producing activities or within a reasonable time immediately before or after the tipped activities.

The new rule also identifies related duties. For example, a server “may spend part of his or her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses,” and a counter attendant “may also prepare his or her own short orders or may, as part of a group of counter attendants, take a turn as a short order cook for the group.” In each case, the tip credit could be applied to all of those duties.

Additionally, the final rule specifies that a non-tipped duty is presumed to be related to a tip-producing occupation if it is listed as a task of the tip-producing occupation in the Occupational Information Network (O*NET), a publicly-available database of worker attributes and job characteristics available at www.onetonline.org.

New recordkeeping requirements for employers

The final rule includes recordkeeping requirements for employers that do not take a tip credit but still collect employees’ tips to operate a mandatory tip pooling arrangement, and it also incorporates new statutory language from Section 3(n)(2)(B) of the Consolidated Appropriations Act of 2018, which prohibits an employer, manager, or supervisor from keeping any portion of tips received by employees.

Under the new recordkeeping requirements, employers that do not take a tip credit but that collect employees’ tips to operate a mandatory tip pool must now (1) identify on their payroll records each employee who receives tips, and (2) keep records of the weekly or monthly amount of tips received by each employee, as reported by the employee to the employer, which may consist of reports made on IRS Form 4070. These recordkeeping requirements supplement the current recordkeeping requirements for employers that take a tip credit, as found in Section 516.28(a).

Next steps for employers

Employers who employ tipped employees should evaluate their practices under the new rule to identify any required or potentially beneficial changes. However, employers need to be cautious for two reasons. First, the new rule is likely to be challenged in court and it is not clear how the Biden administration will respond. Second, employers must consider applicable state laws, which could impose different, and even more restrictive rules for tipped employees. In general, when state and federal wage and hour laws diverge, employers generally must follow whichever law is more beneficial for the employee.