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Restaurant and Hospitality Employers Beware: The Fight Over the 80/20 Rule Continues

On May 9, 2022, the Fifth Circuit Court of Appeals heard arguments regarding the Department of Labor’s (“DOL”) Dual Jobs Final Rule (the “New Rule”), which regulates when employers may take a tip credit against their employees’ wages under federal law.  Under the Fair Labor Standards Act, employees who “regularly and customarily” receive tips need not be paid the full minimum wage in the form of hourly wage payments.  Instead, employers may take a “tip credit” against their minimum wage obligations, and pay tipped employees an hourly rate as low as $2.13 per hour (under federal law).  Whether the tip credit applies depends on the amount of time employees spend performing “tipped work” versus “non-tipped work.”  The 80/20 rule is a historic DOL guideline to assist employers in making such determinations; however, it has been hotly debated over recent years.

The New Rule became effective on December 31, 2021, and essentially restores the “80/20” rule, which the prior administration rescinded.  Under the New Rule, employers must pay employees at least the minimum wage if they spend more than 20% of their time working on tasks that do not specifically generate tips (duties referred to in the industry as “side work”).  Specifically, the New Rule declares that a tipped employee’s work duties must be divided into three categories: (1) tip-producing work; (2) directly supporting work; and (3) work that is not part of a tipped occupation.  Employers may take advantage of the tip credit if employees are performing tip-producing work.  Tip-producing work is work that provides services to customers which tipped employees receive tips.  As for the second category, tipped employees can perform no more than 30 minutes of continuous work that directly supports tip-producing work.  If the employee performs more than 30 minutes of continuous work, then the employer must compensate the employee the full minimum wage for any time spent over those 30 minutes.  Such work includes dining room prep work, rolling silverware, and folding napkins.  Finally, for the third category of work, any time spent on work that is not part of the tipped occupation must be compensated at full minimum wage.  Such work includes cleaning bathrooms, preparing or cooking food, or performing other similar tasks.  The New Rule also creates a “functional test to determine when a tipped employee is engaged in their tipped occupation.” 

The 80/20 rule constantly evolves and changes, depending on the administration in charge.  For example, in 2018, the Trump-era DOL rescinded the 80/20 rule established during the Obama administration and subsequently issued an interpretation that utilized a “reasonable time” standard. The Trump-era rule permitted employers to take a tip credit so long as the duties completed were performed contemporaneously with direct customer service duties, or for a reasonable period of time immediately before or after the performance of direct customer service duties.  The Trump-era rule was challenged by workers’ advocacy groups who claimed that it reduced the overall pay of tipped employees.  The New Rule is the DOL’s most recent attempt to settle this issue by reverting back to the 80/20 rule, but that is not the end of the debate.

The New Rule faces opposition from employer groups, particularly in the restaurant industry.  In February 2022, the Restaurant Law Center (“RLC”), an independent public policy organization affiliated with the National Restaurant Association, sought a preliminary injunction to stop the nationwide enforcement of the New Rule.  A U.S. District Court denied the motion and the RLC appealed.  During the May 9, 2022 hearing, the RLC argued that the rule is illegal and hurts the restaurant industry and urged the Fifth Circuit to overturn the lower court’s decision.

As we wait for the Fifth Circuit’s decision, restaurants and other hospitality industry employers should ensure that they are in compliance with the requirements of the New Rule, keeping in mind that state and local laws may vary on this issue.  Employers can also:

  • Review operations (including their scheduling and timekeeping practices, written job descriptions, and assignment of side work to tipped employees) to ensure that tipped employees are spending at least 80% of their time on tipped work;
  • Train managers on the New Rule’s requirements;
  • Consider paying tipped employees the full minimum wage for time worked before and after service (where permitted by state and local law) and/or modifying their hours and hiring non-tipped employees to perform side work; and
  • Consult with counsel regarding any changes to existing policies, practices, or procedures necessary to comply with the new tip credit regulations.

Honigman will continue to monitor and report any further notable updates.

  • Mahja D. Zeon
    Associate

    Mahja D. Zeon is an associate in the firm’s Labor and Employment department. She focuses her practice on employment counseling, litigation, and strategic workforce planning.

    • First and second-chair experience in jury and ...
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