Final tip credit rules: What hospitality businesses should know about credits for tipped vs. non-tipped services

With the U.S. Department of Labor Wage and Hour Division’s latest guidance on the “Tip Regulations Under the Fair Labor Standards Act,” better known as the “2020 Tip final rule,” due to become effective Dec. 28, 2021, it is now more important than ever that businesses in the hospitality industry keep detailed records of employee tips. The newest final rule, published Oct. 29, 2021, provides details for when an employer may take a tip credit for employees whose services are both tipped and non-tipped.

Current rule

Within the hospitality industry, employees often perform both services that are tipped and services that are non-tipped in nature. The Department of Labor allows a tip credit for both tipped and non-tipped services, but excludes non-tipped services that make up more than 20% of an employee’s time. A tip credit may not be taken for the time spent on these disqualifying services. This is commonly known as the 80/20 rule within the industry.

Final rule

The Department of Labor’s most recent guidance reiterates that an employer may take a tip credit not only when the tipped employee is performing services that will customarily generate a tip (“tip-producing work”), but also when they are performing services that directly support such work (“directly supporting work”), as long as the amount of time spent on supporting services is not substantial. In the Oct. 29 guidance, substantial is defined as either 1) directly supporting work that exceeds 20% of the hours in a workweek that the employer takes a tip credit for or 2) directly supporting work that is greater than 30 continuous minutes.

So practically speaking, what does this all mean?

Let’s say a waiter works a lunch shift that starts at 11 a.m. For the first 30 minutes, the waiter spends his time setting tables in his section. At 11:30 a.m. the waiter takes 30 minutes to eat lunch, and at 12 p.m. he attends a 30-minute staff meeting with the chef and manager to go over lunch specials. Lunch service begins at 12:30 p.m. and ends at 2:30 p.m.

After analyzing the time spent on the waiter’s shift, we can conclude the following: The employer is allowed a tip credit on the wages paid for the first 30 minutes since this time is not greater than 30 continuous minutes and it directly supports the waiter’s tip-producing work. The employer is also allowed a tip credit for the 30 minutes of time spent in the staff meeting for the same exact reason. A tip credit is clearly allowed for time spent during the lunch service shift from 12:30-2:30 p.m. since it represents tip-producing work.

The issue that arises and must be properly managed is where the waiter’s support related to tip-producing work exceeds 30 continuous minutes. Let’s use the same example as above, but instead say that the staff meeting is being held at 11:30 a.m., so the waiter skips lunch and attends the meeting right after spending 30 minutes setting tables. In this scenario, the employer is not allowed to take a tip credit for the staff meeting because the time spent supporting tip-producing work exceeded 30 continuous minutes.

It is also imperative to keep in mind the additional state and local tip rules and restrictions that can potentially exist in jurisdictions in which you operate. This latest Department of Labor guidance does not replace those state and local rules.

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