The U.S. Department of Labor (DOL) issued new regulations last year addressing when employers may take a tip credit against employees’ wages under federal law. The rule changes pose practical challenges for taking a tip credit and, if not followed, could result in costly litigation and significant liability. Accordingly, restaurants should review their tip credit and pooling practices.
The DOL’s tip credit regulations
Under the Fair Labor Standards Act (FLSA), employers may take a tip credit against tipped employees’ wages, provided they customarily and regularly receive at least $30 per month in tips, receive proper notice of the tip credit, and earn enough tips to reach the full minimum wage. At present, 43 states – including Colorado – and the District of Columbia provide for a tip credit.
The DOL historically has limited the amount of non-tip-producing work tipped employees can perform at a tip credit rate to 20% of their work time (the 80/20 rule). In November 2018, the DOL purported to rescind the 80/20 rule in favor of a more flexible standard, but new regulations implementing the standard never took effect.
The Biden administration delayed implementation of the November 2018 rule before engaging in a separate rulemaking process that led to the new tip credit regulations. These regulations, which went into effect Dec. 28, 2021, effectively reinstate the 80/20 rule and impose even more restrictions on employers taking a tip credit.
Now, under federal law, employers...
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