DOL Issues More Guidance on Tip Credits

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APPLIES TO

All Employers with Tipped Employees

EFFECTIVE

March 3, 2023

  

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Quick Look

  • The DOL revised two fact sheets addressing the 80/20 rule, tip credits, notice to tipped employees, tip pooling, and the prohibition on managers and supervisors receiving tips.
  • In addition, the DOL updated its Field Operations Handbook to reflect this updated guidance.
  • The fact sheets and Field Operations Handbooks include examples which are useful to employers with tipped employees.

Discussion

In November and December 2021, the U.S. Department of Labor (DOL) issued two rules governing tipped employees and expanding the agency’s authority to assess penalties for violations. The rules also clarified the circumstances under which managers and supervisors can receive tips. Most notably, the rules reinstated the “80/20” rule – tipped employees must perform tip-producing work at least 80% of the time and supporting work that does not produce tips should take up the remaining 20%. On March 3, 2023, the DOL issued two revised fact sheets providing additional guidance in addition to updated examples in the Field Operations Handbook to meet the minimum wage and overtime requirements under the Fair Labor Standards Act (FLSA).

Fact Sheet #15 reiterates several points employers with tipped employees should already know. In addition to the below main points, it also addresses credit card fees, service charges, and recordkeeping along with common problems.

  • Tip Credit. The FLSA permits an employer to take a tip credit toward its minimum wage and overtime obligations for tipped employees. Employers claiming a tip credit must make sure an employee receives enough tips from customers and direct wages per workweek to equal at least the minimum wage and overtime requirements under the FLSA.
  • Notice. Employers must provide oral or written notice to tipped employees prior to taking a tip credit. The notice must include: 1) the amount of the direct (or cash) wage the employer is paying a tipped employee, which must be at least $2.13 per hour; 2) the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required direct (or cash) wage of $2.13 and the current minimum wage of $7.25); 3) the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee; 4) all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and 5) the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.
  • No Tips for Managers. Employers, including their managers and supervisors, cannot keep or require a tipped employee to give any portion of employees’ tips either directly or through a tip pool. Managers and supervisors can only keep tips directly received for service directly and solely provided.
  • Tip Pools. In a traditional tip pool, participation is limited to employees in occupations in which they customarily and regularly receive tips, and the employer takes a tip credit. If an employer pays all its employees direct wages of at least the federal minimum wage, then they can create a mandatory tip pool that includes employees who are not employed in an occupation in which employees customarily and regularly receive tips. Tip pools still exclude managers and supervisors.

Fact Sheet #15A addresses employees who perform both a tipped and non-tipped occupation for the same employer, also known as a dual job. An employee performs work that is part of a tipped occupation if it is any work performed that provides service to customers for which the tipped employee receives tips or the employee performs work that directly supports tip-producing work for a limited time. Examples of work directly supporting tip producing work include, but are not limited to, dining room prep work, such as refilling salt and pepper shakers and ketchup bottles, rolling silverware, folding napkins, and setting tables.

In order to claim a tip credit, the employer must make sure the tipped employee is not performing directly supporting work for a substantial amount of time. A substantial amount of time is more than 20% of the hours in a workweek for which the employer has taken a tip credit or a continuous period of time that exceeds 30 minutes. Time spent cleaning the restaurant kitchen and bathrooms must be paid at least the full minimum wage per hour and is not subject to a tip credit. This fact sheet also includes examples illustrating the limitations which employers should review and understand for their own specific situations.

 

Action Items

  1. Review the DOL Fact Sheets and corresponding updates in the Field Operations Handbook.
  2. Review work performed in tipped and nontipped roles.
  3. Review and update payroll and timekeeping processes.
  4. Have appropriate personnel trained on tipping and tip credit requirements.
  5. Subscribers can call our HR On-Call Hotline at (888) 378-2456 for further assistance.

Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2023 ManagEase