Labor Department’s proposed rule would change how employers pay tipped employees for non-tipped duties.
Up to 2 million workers in the United States could face a pay cut under a new rule proposed by the U.S. Department of Labor.
These 2 million affected workers occupy the gap between tipped and non-tipped employees in that they perform both tipped and non-tipped tasks. Some restaurant workers, for example, receive tips for serving customers but do not receive tips for cleaning, filling saltshakers and ketchup bottles, or sorting cutlery. “Dual job” status affects how tipped workers are paid.
The Labor Department’s proposal, issued under the authority of the Fair Labor Standards Act, would target these dual job workers. Although federal law imposes a minimum wage of $7.25 per hour, employers need not pay that minimum to tipped employees—waiters, bartenders, and any other workers who consistently receive over $30 per month in tips.
Employers need only pay tipped employees a required cash wage of $2.13 rather than the federal minimum wage, with the understanding that tips the worker receives directly from customers make up the difference. Employers who pay their tipped workers a cash wage of less than $7.25 take what is known as a tip credit. If an employer takes a tip credit but their employee does not earn at least $7.25 per hour when the lower cash wage is combined with tips, the employer must pay the difference.
But with its new proposed rule, the Labor Department aims to clarify how the tip credit should apply to dual job workers following a 2018 policy shift. The Labor Department’s Wage and Hour Division first formalized guidance on wages for employees performing dual jobs in 1988, stating that when tipped workers spent over 20 percent of their time engaged in non-tipped tasks, employers could not claim a tip credit for that employee. This formula is often referred to as the 80/20 rule. The 80/20 rule remained agency policy until November 2018, except for a two-month period in 2009 when the Bush Administration withdrew the guidance and then the Obama Administration reinstated it.
In 2018, the Labor Department once again withdrew the 80/20 policy using the same language as in 2009, stating that employers wanting to claim a tip credit for a dual job employee can do so regardless of how much time that employee spends performing non-tipped tasks. Current departmental guidance states that employers may take a tip credit for all hours a dual job employee works so long as workers perform non-tipped tasks “contemporaneously with the tipped duties—or for a reasonable time immediately before or after.”
Now, the Labor Department proposes to formalize its new policy by issuing it not merely as guidance but in rule form, clarifying that the agency—and the courts—will no longer enforce a 20 percent cap.
Critics of the proposed rule say it will facilitate wage theft. House Committee on Education and Labor Chair Bobby Scott (D-Va.) expressed concern that the new rule would take “leverage away from a vulnerable group of workers while empowering bad-faith employers to take advantage of their employees.” Even though employers taking a tip credit must ensure their employees receive at least $7.25 per hour in combined cash and tips, Scott noted that error and wage theft frequently prevent this adjustment in compensation.
The inevitable result of the rule, critics say, would be an increase in the number of employers taking tip credits and thus an increase in the number of workers being paid a lower base wage. For example, Judy Conti, a director for the National Employment Law Project, has claimed that the rule “would make it possible for employers to assign some workers excessive amounts of non-tip-generating work, while still paying them a subminimum wage of only $2.13 per hour, robbing them of the opportunity to make the best wages possible during their shifts.”
The Labor Department counters that the proposed rule would eliminate confusion caused by the 80/20 rule. The agency cites a 2007 federal trial court decision calling the 80/20 rule “infeasible,” requiring employers to “keep the employee under perpetual surveillance” so as to ensure that non-tipped tasks did not consume more than 20 percent of the workday.
Federal trial courts’ continued application of the 20 percent cap may have also motivated the agency’s decision to formalize its policy. Federal judges have declined to defer to the Labor Department’s new policy in six 2019 district court decisions.
Judge Anita Brody of the U.S. District Court for the Eastern District of Pennsylvania called the Labor Department’s rejection of the 80/20 rule “unreasonable” and not reflective of “fair and considered judgment.” Only a single 2019 district court decision has supported the employer’s right to take a tip credit for an employee regardless of the portion of his work time spent performing non-tipped tasks.
As the federal minimum wage and growing earning gaps continue to occupy a center stage position leading up to the 2020 election, a proposal that would cut workers’ pay could be polarizing to voters. The impact of this proposal—whatever its final version—remains to be seen.
The proposed rule’s comment period closed on December 9, 2019.
