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Department of Labor Reissues 2009 Opinion Letter Regarding Tip Credits Under FLSA

11.19.2018

In 2009, the U.S. Department of Labor issued an opinion letter which clarified the DOL’s position regarding the application of “tip credits” to employees who performed multiple job functions for an employer. However, shortly after the issuance of that opinion, the DOL withdrew it “for further consideration.” Nearly a decade later, on November 8, 2018 the DOL reissued its 2009 opinion letter. Particularly for those employers in the hospitality and food service industries, the DOL’s opinion sets forth a much more tenable approach for determining whether a sub-minimum wage may be applied to employees who perform both tip and non-tip producing duties.

The Fair Labor Standards Act (FLSA) currently requires employers to pay a minimum wage of $7.25 per hour to non-exempt employees. However, Section 3(m) of the FLSA permits an employer to pay its tipped employees a sub-minimum wage of not less than $2.13 per hour, and to take a “tip credit” equal to the difference between that sub-minimum wage and the federal minimum wage. A “tipped employee” is defined by the FLSA as any employee engaged in an occupation in which he or she “customarily and regularly” receives not less than $30.00 a month in tips. If an employer utilizes an employee to perform “dual jobs” (e.g., a hotel waiter who also serves as a maintenance worker), the DOL has taken the position that the tip credit may only be applied with respect to the employee’s time spent in the tipped job. But what if an employee in a single job performs some non-tip generating duties which are related to the employee’s tip-producing duties?

According to past enforcement guidance of the DOL, this question was addressed by the so-called “20 Percent Rule.” Under that rule, an employer could apply the tip credit for time spent in duties “related” to the tipped occupation, even though such duties are not by themselves directed towards producing tips – provided that the tipped employee spent no more than 20% of his or her time performing such related duties. For example, a waiter who spends some time cleaning and setting tables, occasionally washing dishes, etc., could be paid subject to the tip credit, provided that such cleaning and other non-tipped duties did not exceed 20% of the employee’s total work time. However, the 20 Percent Rule created confusion and was difficult to apply unless the employer maintained precise time records regarding all duties performed by the tipped employee. The DOL’s 2009 opinion letter attempted to address these difficulties by setting forth a more practical way for an employer to determine “on the front-end which duties are related and unrelated to a tip-producing occupation.” In so doing, the 2009 opinion letter rejected the 20 Percent Rule in favor of the following approach:

A list of job duties associated with various tip-producing occupations is set forth in the Tasks section of the Details report in the Occupational Informational Network (O*NET) found at https://www.onetonline.org/. The DOL considers all such duties listed in that report as “directly related” to the tip-producing duties of the corresponding occupation. As long as the employee performs such duties contemporaneously with his or her regular tip-producing duties, (or for a reasonable time immediately before or after performing such tip-producing duties), the employer may apply the tip credit to that employee regardless of the amount of time that is devoted to such non-tip producing duties.
The employer may not apply the tip credit to an employee for time spent performing any job duties not contained in the O*NET task list.

The DOL’s November 8, 2018 opinion letter effectively restores the earlier guidance set forth in the 2009 opinion. Thus, the DOL now takes the position that the so-called 20 Percent Rule is no longer applicable. This is good news for employers, since the O*NET Task List makes it much easier to determine whether all of a tipped employee’s non-tip producing job duties are subject to the tip credit. Employers should carefully review the job descriptions of their tipped employees to make sure all job functions are included within the O*NET Task List.

Of course, the DOL’s opinion letter only addresses tip credits under the FLSA. Employers should be aware that certain states prohibit or limit the use of tip credits. Therefore, employers should consult the laws of the states in which they operate in order to determine whether their pay practices are in compliance.