New DOL Guidance on Tip Credit: Elimination

of "80/20" Rule, Best Practices for Hospitality

Employers

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TUESDAY, FEBRUARY 19, 2019

Presenting a live 90-minute webinar with interactive Q&A

Mary Elizabeth Davis, Member, LeClairRyan, Richmond, Va.

Cheryl A. Luce, Attorney, Seyfarth Shaw, Chicago

Matthew R. Simpson, Partner, Fisher & Phillips, Atlanta

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Department of Labor Elimination of "80/20" Tip Credit Rule

Presented byMatthew R. Simpson, Fisher & Phillips, LLP

Cheryl A. Luce, Seyfarth Shaw LLPBetsy Davis, LeClairRyan

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Agenda• Overview of the Prior 80/20 Rule

• Analysis of Current Guidance on the Tip Credit

• Best Practices for Employment Counsel

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W W W . F I S H E R P H I L L I P S . C O M

Overview of the Prior 80/20 Rule

Matthew SimpsonFisher & Phillips, LLP

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FLSA Basics• Minimum Wage of $7.25 per hour for all hours worked

• Overtime premium for hours worked over 40 in a workweek

• Accurate time records for all non-exempt employees

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The Tip Credit• The FLSA permits employers to satisfy minimum wage

requirements by paying a “tipped employee”:• A cash wage of at least $2.13 per hour; plus• An additional amount on account of the tips received by the

employee which equals the difference between the cash wage (at least $2.13 per hour) and federal minimum wage ($7.25 per hour).

• To take the tip credit, the employer must inform the employee of the tip credit provisions, and all tips received by the employee must be retained by the employee, unless there exists a tip pool among employees who customarily and regularly receive tips.

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What Is a Tipped Employee?A tipped employee is “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”

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Dual Jobs and Related Duties• Where an employee works “dual jobs,” DOL states that

the employee may only take the tip credit for those hours worked in the job in which the employee is a “tipped employee.”

• For example, where an employee works as a waiter and as a maintenance man, the employee may only take the tip credit for hours worked as a waiter.

• In contrast, where a waitress spends part of her time cleaning and setting tables, toasting bread, making coffee, and occasionally washing dishes or glasses, she is merely performing “related duties” and may take the tip credit for all hours worked.

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DOL Enforcement Guidance• In its Field Operations Handbook, DOL affirmed that an

employer may take a tip credit where a tipped employee performs “related duties,” “provided such related duties are incidental to the regular duties of the tipped employees and are generally assigned to the tipped employee.”

• DOL then stated that where the tipped employee spends more than 20% of time “performing related duties, no tip credit may be taken for the time spent in those duties.”

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DOL Enforcement Guidance• To comply with DOL enforcement guidance, employers

were therefore expected to ensure that “tipped employees” spent at least 80% of their time performing “tipped duties.”

• Time spent performing preparatory or closing activities, rolling silverware and filling salt and pepper shakers, cleaning and setting tables, making coffee, and washing dishes or glasses could not exceed 20% of the employee’s total hours worked.

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Case Law Applying the 80/20 Rule• District and circuit courts were split on application of DOL

enforcement guidance.

• In Fast v. Applebee’s, the Eighth Circuit adopted DOL enforcement policy precluding tipped employees from spending 20% or more of their time on non-tip related duties.

• Most recently, in Marsh v. J. Alexander’s, the Ninth Circuit adopted DOL enforcement policy precluding tipped employee’s from spending 20% or more of their time on non-tip related duties.

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DOL (Almost) Withdraws 80/20 Rule• On January 16, 2009, DOL issued an opinion letter

rescinding the 80/20 rule.

• On March 2, 2009, the DOL withdrew the opinion letter “for further consideration” and stated that it would “provide a further response in the near future.”

• No further response was given by DOL until 2018.

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W W W . S E Y F A R T H . C O M

Elimination of the 80/20 Rule and the Tip Income Protection Act

Cheryl A. Luce Seyfarth Shaw LLP

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The DOL Eliminates the 80/20 Rule• DOL recognized that 20% rule is impracticable and bred litigation

• On November 8, 2018, DOL issued opinion letter taking position that: “no limit is placed on the amount of [related but non-tipped duties that may be performed … as long as they are” either:

1. “performed contemporaneously with the duties involving direct service” or

2. “for a reasonable time immediately before or after performing such direct-service duties”

• Noted that revised FOH would be forthcoming

• On February 15, 2019 the DOL issued a Field Assistance Bulletin noting that the WHD has a unified enforcement position that the 20% rule is laid to rest

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vs.

Dual Jobs

The Old Rule The New Rule

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How to Analyze Dual Jobs• What is tip producing? Doesn’t matter much

now

• What is inside versus outside the tipped occupation?

– See O*Net Summary Reports 35-3031.00 for Waiters and Waitresses and for 35-3011 Bartenders

– Broad definitions of those tipped occupations

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Broad Definitions for Tipped Occupations

All

ow

ed

Du

tie

s f

or

Se

rve

rs

Bus tables

Clean tables or counters after patrons have finishing dining

Prepare tables for meals, including setting up items such as linens, silverware, and glassware

Perform cleaning duties, such as sweeping and mopping floors, vacuuming carpet, tidying up server station, etc.

Roll silverware, set up food stations, or set up dining areas to prepare for next shift or for large parties

Stock service areas with supplies such as coffee, food tableware, and linens

Fill salt, pepper, sugar, cream, condiment, and napkin containers

Perform food preparation duties such as preparing salads, appetizers, and cold dishes, portioning desserts, and brewing coffee

Garnish and decorate dishes in preparation for serving

Allo

we

d D

uti

es

fo

r B

art

en

de

rs

Clean glasses, utensils, and bar equipment

Balance cash receipts

Clean bars, work areas, and tables

Stock bar with beer, wine, liquor, and related supplies such as ice, glassware, napkins, or straws

Slice and pit fruit for garnishing drinks

Arrange bottles and glasses to make attractive displays

Create drink recipes

Order or requisition liquor or supplies

Plan bar menus

Prepare appetizers such as pickles, cheese, and cold meats

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How will courts respond?• The 20% rule was followed by the Eighth and Ninth Circuit

Courts of Appeals and several lower courts

• But valid because the DOL’s interpretation of its own regulations was reasonable and entitled to deference

• In early January 2019, a federal district judge in the Western District of Missouri attempted to resurrect the DOL tip credit guidance

• This case is likely an anomaly that was would have come out differently had the litigation not been pending so long

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Tip Income Protection Act“An employer may not keep tips received by its employees for any purpose, including allowing managers or supervisors to keep any portion of the employees’ tips, regardless of whether or not the employer takes a tip credit.”

• Managers and supervisors can never participate in the pool

• Can back of the house employees participate in the pool?

• If the tip credit taken, no

• If no tip credit taken, legally allowed, unless state law says no

• Creates a remedy for violating this provision “in the amount of the sum of any tip credit taken by the employer and all such tips unlawfully kept by the employer, and an additional equal amount in damages” and imposes a civil penalty of up to $1,000 for each violation.

• Fundamentally changes the FLSA and creates a federal remedy for tips

• Makes it easier for tip retention cases to get nationwide certification

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Key Takeaways In general, more flexibility for hospitality employers, who no longer need to

track time spent on various tasks

No longer a focus on what is a tip-producing activity if it occurs contemporaneously or shortly before/after time when employees start performing tip-producing activities

Monitor whether employees are inside or outside a tipped occupation, and if outside, making sure that they don’t participate in the tip pool, because there are stronger remedies under TIPA

Even though the DOL changed its enforcement position, plaintiffs’ attorneys may still try to keep the 20% rule alive

Beware of state law issues and service charge issues

Make sure that the tip credit and tip pool requirements are met

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W W W . L E C L A I R R Y A N . C O M

Tipped Employees:Employer Best Practices

Betsy DavisLeClairRyan

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Why Do We Care?

Damages and Penalties

• FLSA private right of action for unpaid minimum wage and overtime

• Claims that an employer unlawfully kept employee tips (March 23, 2018)

• Individual claims

• Class action claims

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Why Do We Care?Employers that violate the tip retention provision “shall be” liable for:

All tips unlawfully kept by the employer plus the amount of any tip credit taken

Liquidated damages

Equitable relief

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Best Practices

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Best Practices Ensure that the employer, including its managers

and supervisors, do not keep any portion of employee tips

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Best PracticesEnsure tip credit requirements are satisfied by providing employees with the appropriate notice

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Best PracticesIf a tip credit is taken:

• Restrict participation in any mandatory tip pool to tipped employees

• Apply the tip credit to only those hours spent in the tipped occupation if a worker performs dual jobs

• Make up the difference in additional cash wages if an employee’s cash wages plus actual tips received equal less than the minimum wage per hour

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Best PracticesIf a tip credit is taken:

• Avoid unlawful deductions when the employer takes the maximum tip credit

• walk-outs

• breakage or

• cash register shortages

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Best PracticesCalculate overtime pay correctly:• Include in regular rate any portion of service charges

distributed to employees

• Use the full minimum wage (not cash wage) to calculate overtime pay

• Do not take a larger tip credit for overtime hours than for straight-time hours

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Best PracticesClearly communicate to customers the amount of any service charge that is:• Intended as an administrative fee• Retained by the employer to cover

overhead and other costs• Given to employees.Notify tipped employees of any required tip pool contribution amount.

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Best PracticesUnderstand applicable state and local law, including those that:

• Impose a higher minimum wage;

• Reduce or eliminate the available tip credit; or

• Limit or prohibit deductions for credit card fees.

Regularly audit tip credit, tip pooling, employee notice, and service charge policies and practices to ensure ongoing compliance.

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State Tip Credit and Tip Pooling Restrictions: OverviewJurisdiction Definition of “Tipped Employees” Mandatory Tip Pools Maximum Hourly Tip Credit/Minimum Hourly Cash

Wage

Federal Employees in occupations where they

customarily and regularly receive more than

$30 a month in tips (29 U.S.C. § 203(t)).

Mandatory tip pooling is limited to tipped

employees if the employer takes a tip credit

(29 U.S.C. § 203(m); 29 C.F.R. § 531.54; see

also Practice Note, Tipped Employees Under

the FLSA: Mandatory Tip Pooling).

Minimum cash wage is $2.13.

Based on a federal minimum wage of $7.25, the

maximum tip credit is $5.12.

Actual tips per hour must equal at least the tip credit

amount. Actual tips plus cash wages must equal at

least the federal minimum wage.

(29 U.S.C. § 203(m); 29 C.F.R. § 531.59.)Georgia Not specified. Not specified. Not specified.

Illinois Employees in occupations where tips are

customarily and usually part of an

employee’s compensation for hiring

purposes (820 Ill. Comp. Stat. § 105/4(c);

see also Driver v. AppleIllinois, LLC, 917 F.

Supp. 2d 793, 799-800 (N.D. Ill. 2013)).

Not specified.

Illinois courts have allowed mandatory tip

pooling arrangements (without analysis),

provided the employer does not retain any

portion of the tips (see, for example, Driver,

917 F. Supp. 2d at 795-96; Williams-Green v.

J. Alexander’s Rests., Inc., 277 F.R.D. 374,

376-79 (N.D. Ill. 2011)).

Maximum tip credit is 40% of the minimum wage.

Employers must provide “substantial evidence” that

actual tips equal at least the tip credit taken and no

tips were returned to the employer.

Employers must notify employees in writing if the tip

credit changes from the amount taken in the previous

pay period.

(820 Ill. Comp. Stat. 105/4(c); Ill. Admin. Code tit. 56,

§ 210.720; see also Driver, 917 F. Supp. 2d at 800;

Williams-Green, 277 F.R.D. at 378-79.)Virginia Not specified. Not specified. Maximum tip credit is employer-determined, as long

as actual tips equal at least that amount (and subject to

the federal maximum tip credit) (Va. Code. Ann. §§

40.1-28.9(D), 40.1-28.10).

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Final Questions

Matthew R. SimpsonFisher & Phillips LLP1075 Peachtree Street, Suite 3500Atlanta, Georgia 30309(404) 231-1400msimpson@fisherphillips.com

Betsy DavisLeClairRyan919 East Main Street, 24th Floor Richmond, Virginia 23219 (804) 783-2003betsy.davis@leclairryan.com

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Presented by

Cheryl A. LuceSeyfarth Shaw LLP233 South Wacker Drive, Suite 8000 Chicago, IL 60606-6448 (312) 460-5000cluce@seyfarth.com

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Thank You

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Matthew R. SimpsonFisher & Phillips LLP1075 Peachtree Street, Suite 3500Atlanta, Georgia 30309(404) 231-1400msimpson@fisherphillips.com

Presented by

Cheryl A. LuceSeyfarth Shaw LLP233 South Wacker Drive, Suite 8000 Chicago, IL 60606-6448 (312) 460-5000cluce@seyfarth.com

Betsy DavisLeClairRyan919 East Main Street, 24th Floor Richmond, Virginia 23219 (804) 783-2003betsy.davis@leclairryan.com

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