DOL Seeks Delay of Effective Date for Trump-Era Tip Regulations

In December 2020, the U.S. Department of Labor (DOL) announced a final rule (the Rule) which, according to the DOL, is intended to implement changes made by the Consolidated Appropriations Act of 2018 to Section 3(m) of the Fair Labor Standards Act (FLSA). The Rule would allow employers to include employees who do not customarily and regularly receive tips in mandatory tip pools, provided the employer does not take a tip credit toward minimum wage obligations. The Rule would also eliminate the so-called "80/20 rule" that prohibits employers from taking tip credits for time that an employee spends more than 20 percent in a workweek on non-tipped duties.

The Rule is scheduled to take effect March 1, 2021. However, on Feb. 5, 2021, the DOL published a notice in the Federal Register proposing a delay of the effective date to April 30, 2021, to allow for further review, with the comment period expiring on Feb. 17, 2021. Employers are cautioned to closely monitor potential action from the Biden Administration to modify, or roll back, the Rule.

Under the New Rule, Employers Could Mandate Tip Pools That Include Employees Who Do Not Customarily and Regularly Receive Tips

Under existing DOL regulations, an employer can mandate "traditional" tip pools that include employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel who serve customers, bussers and service bartenders. However, employers currently cannot mandate "nontraditional" tip pools that include employees who do not customarily and regularly receive tips, such as dishwashers, cooks and other "back-of-house" positions.

The Rule removes this limitation, and will allow employers to include employees who do not customarily and regularly receive tips in mandatory "nontraditional" tip pools, provided that the employer does not take a tip credit toward minimum wage obligations.

The Rule makes clear that managers and supervisors cannot be included in any tip pool arrangements. The Rule defines a manager or supervisor as any employee 1) whose primary duty is managing the enterprise or a customarily recognized department or subdivision of the enterprise, 2) who customarily and regularly directs the work of at least two or more other full-time employees or their equivalent and 3) who has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring or firing are given particular weight. A manager or supervisor also includes any individuals who own at least a bona fide 20 percent equity interest in the enterprise in which they are employed and who are actively engaged in its management.

Elimination of "80/20 Rule" in Favor of Less Restrictive Rule Regarding Application of Tip Credits to Non-Tipped Duties

The FLSA allows an employer to take a tip credit toward minimum wage obligations for tipped employees that is equal to the difference between the required cash wage – at least $2.13 – and the current $7.25 federal minimum wage, for a maximum of $5.12 per hour.

Currently, an employer may not take a tip credit for non-tipped duties related to an employee's tipped occupation if the time spent on those non-tipped duties exceeds 20 percent of the employee's workweek. This is commonly referred to as the "80/20 rule."

The Rule dispenses the "80/20 rule" in favor of a less restrictive rule where an employer may take a tip credit for all non-tipped duties an employee performs provided two requirements are met: 1) the duties must be related to the employee's tipped occupation, and 2) the employee must perform the related duties contemporaneously with the tip-producing activities or within a reasonable time immediately before or after the tipped activities.

The Rule details the type of non-tipped duties that are related to a tipped occupation, and also sets forth various recordkeeping requirements for employers that do, and do not, take tip credits toward minimum wage obligations.

DOL Seeks to Delay Effective Date of Rule From March 1 to April 30, 2021, Signaling a Potential Rollback

The Rule was a welcome development for businesses that wish to utilize non-traditional tip pool arrangements or to have increased flexibility for applying tip credits. However, it remains to be seen what actions Marty Walsh – President Joe Biden's nominee for U.S. Secretary of Labor – will take should he be confirmed, a confirmation which appears highly likely. President Biden has been openly critical of tipped wages, and has also made it a known priority to target Trump-era regulations, particularly those that did not take effect by the start of Biden's presidency on Jan. 20, 2021.

There are already several events that suggest potential modifications to, or rollback of, the Rule and other regulations promulgated by the DOL toward the end of the Trump Administration.

• On Jan. 26, 2021, the DOL withdrew several Trump-era opinion letters including FLSA 2021-4, on the basis that the letter relied on the Rule and the Rule has not yet taken effect.
• On Feb. 5, 2021, the DOL published a notice in the Federal Register proposing a delay of the effective date to April 30, 2021, to allow for further review. The comment period on the proposed delay closes on Feb. 17, 2021.
• Additionally, on Jan. 19, 2021, Pennsylvania, Illinois, Delaware, Maryland, Massachusetts, Michigan, New Jersey, New York and the District of Columbia filed suit to challenge various aspects of the Rule.

The DOL is seeking a similar delay for a Trump-era independent contractor classification rule that was set to go into effect on March 8, 2021. Holland & Knight will provide a separate alert on the fate of the independent contractor classification rule once DOL clarifies its position.

With the fate of the new Rule up in the air, employers are cautioned to await further updates on the Rule before implementing any substantive changes to tip pool practices.

For more information or questions on the DOL's tip regulation rule, contact the authors or another member of Holland & Knight's Labor, Employment and Benefits Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.