Nov 19, 2018

Department of Labor Ends Its 20% Tip Credit Rule In Long-Awaited Opinion Letter

On November 8, 2018, the Department of Labor’s Wage and Hour Division issued an opinion letter intended to clear up “confusion and inconsistent application” stemming from previous Department of Labor (DOL) guidance regarding the use of the tip credit to pay regularly tipped employees.

The tip credit provision contained in the Fair Labor Standards Act permits an employer to pay its tipped employees not less than $2.13 per hour in cash wages and take a “tip credit” equal to the difference between the cash wages paid and the federal minimum wage.  A “tipped employee” is defined by the Act as an employee engaged in an occupation in which he or she customarily and regularly receives not less than $30 a month in tips.

Under the previous guidance, the tip credit could not be used if an employee spent over 20% of the hours in a workweek performing duties related to the tipped occupation but not themselves tip-generating.  The opinion letter, that can be found here, provides long-awaited clarity as to when and how often a tipped employee may perform non-tipped work.

The opinion letter clarifies that “no limit is placed on the amount of [related but non-tipped] duties that may be performed, whether or not they involve direct customer service, as long as they are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.” (emphasis added).  Thus, the opinion letter withdraws the DOL’s previous 20% tip credit rule.

To determine whether a particular job duty is related to the tipped occupation, the opinion letter directs readers to the Occupational Information Network (O*NET), which is a database sponsored by the DOL.

The guidance comes as a huge relief for employers, who for decades have faced collective and class action litigation by servers and bartenders paid under the tip credit who claimed that they spent more than 20% of their workweek on side work that did not produce tips.

If you have any questions regarding the Department of Labor’s guidance, please contact your labor and employment counsel at Smith, Gambrell & Russell, LLP.