Federal Court Rejects Restaurant Industry’s Request to Temporarily Ban New Tipping Credit Regulations: Next Steps for Restaurant and Hospitality Employers

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This GT Alert covers the following:

  • Western District of Texas holding in Restaurant Law Center c. US Department of Labor denying motion to ban new DOL rule governing when employers can take tip credit from employee wages.
  • DOL tip credit regulation.
  • Next steps for employers in the restaurant and hospitality industry.
  • Litigation over new tip credit regulations continues.

On February 22, 2022, the U.S. District Court for the Western District of Texas denied the Texas Restaurant Association’s widely followed emergency motion to enjoin nationwide enforcement of the U.S. Department of Labor’s new rule ( DOL) governing when employers may deduct a tip from the wages of their employees under federal law.

Restaurants and other businesses employing tipped workers (many of whom may have taken a “wait and see” approach in light of the litigation) must now review their credit and tip pooling practices. The DOL’s regulatory changes pose significant practical challenges for operators seeking tip credit and, if not followed, could lead to costly litigation and significant liability.

DOL Tip Credit Regulations

Generally, under the Fair Labor Standards Act (FLSA), employers can deduct a tip from their employees’ wages and pay them lower hourly wage rates, provided the employees usually receive and regularly tip at least $30 a month, receive tip credit notices, and receive enough tips to earn at least full minimum wage. Currently, 43 states and the District of Columbia provide tip credit. Only Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington prohibit tip credits.

The DOL has historically limited the amount of non-tipping work that employees can do at a tip credit rate to 20% of their work time (commonly referred to as the “80/20” rule). In November 2018, the DOL – under the Trump administration – claimed to overturn the 80/20 rule in favor of a more flexible standard, but new regulations implementing the standard never went into effect.

The DOL – under the Biden administration – initially delayed implementation of the Trump administration rule, but then engaged in a separate rule-making process that ultimately led to new regulations on the tip credit. These regulations, which took effect on December 28, 2021, effectively restore the “80/20” rule, but place even more restrictions on employers seeking to take credit for tips.

Now, under federal law, employers can only take tip credit for time that tipped employees spend performing work that:

  • Tipping (eg, providing service to customers, such as a restaurant server who takes customers’ orders and serves them food and drinks); Where
  • Directly supports tip-generating work (for example, preparing or assisting with customer service work, such as rolling a restaurant server’s silverware, folding napkins, and setting tables; this may also include time stop to perform customer service).

Importantly, employers can no longer take tip credit if an employee performs “direct support work” for a “substantial length of time”, i.e. no tip credit can be taken for “direct support work” that goes beyond:

  • 20% of the employee’s weekly hours paid at a tip credit rate; Where
  • 30 minutes continuously.

In other words, an employer must pay full minimum wage for any “direct support work” that exceeds 20% of an employee’s weekly hours paid at the tip credit rate or exceeds 30 continuous minutes. Any “directly auxiliary work” of more than 30 continuous minutes is excluded from the calculation of the 20%, since the employer must now pay for this time at full minimum wage.

Significantly, work that is “non-tipped occupation” (i.e. does not tip or directly support) must also be paid full minimum wage. If tipped employees perform work that is not considered part of a “tipped occupation”, employers cannot take tip credit for the time employees spend performing those tasks, even if ‘they spend less than 20% of their time or less than 30 continuous minutes doing this job without tipping.

This means that a restaurant cannot take tip credit from a server’s salary for time spent by the server cleaning the kitchen or bathrooms or preparing food, including salads (although the preamble to the rule contains exceptions, such as adding dressing to salads). If a server performs these tasks, the restaurant must pay the server full minimum wage for any time spent on these activities.

Next steps for employers in the restaurant and hospitality industry

In light of the recent court ruling and the compliance challenges posed by the DOL’s new tip credit regulations, restaurants and other hospitality industry employers should consider taking the following actions immediately:

  • Review operations (including their scheduling and timekeeping practices, written job descriptions, and the assignment of secondary work to tipped employees) to ensure appropriate work assignments and tracking of time spent performing eligible work to tip;
  • Consider paying tipped employees full minimum wage for time worked before and after service (where state and local law permits) and/or altering their hours and hiring non-tipped employees to perform ancillary work ;
  • Review applicable wage and hour practices (including tip credit notices, tipping policies, pay discrepancy reporting procedures, and wage statements);
  • Train managers on DOL requirements; and
  • Consult an attorney regarding any changes to existing policies, practices, or procedures necessary to comply with new tip credit regulations.

Employers should also keep in mind that the DOL rule relates only to the employer’s obligations under the FLSA. Employers may be subject to different or additional restrictions applicable to tipping employees under state and local laws, such as the New York Hospitality Industry Wages Ordinance. The DOL’s new tip credit regulations do not supersede these laws, and covered employers must comply with both the FLSA and all applicable state and local laws.

Stay Tuned: Litigation Over New Tip Credit Rules Continues

Although some operators may view the court’s decision as a setback, it is not the “final word”. In rejecting the preliminary injunction, the court disregarded the merits of the plaintiffs’ claims. Instead, the court simply found that the plaintiffs failed to establish the likelihood of irreparable harm, which is a fundamental requirement for issuing an injunction.

As the court has not ruled on the merits of the case, the legal challenge to the DOL’s new tip credit regulations will likely continue.

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