On August 23, 2024, the United States Court of Appeals issued a ruling that effectively voided the Department of Labor’s tip credit rule under the Fair Labor Standards Act (FLSA). This came after an appeal of the original district court’s ruling that upheld the rule previously, resulting in some key changes for businesses with tipped positions.
How Tip Credits Work Under FLSA
Under the Fair Labor Standards Act, businesses are permitted to claim a tip credit that essentially allows them to pay tipped employees significantly less than the federal minimum wage of $7.25 per hour, provided that these employees regularly make more than $30 per month in tips and their pay works out to at least the federal minimum wage when tips are accounted for. If this is the case, the employer can pay the tipped employee as little as $2.13 per hour and thus take advantage of the FLSA tip credit.
On the other hand, if a tipped employee makes less than the federal minimum wage with tips included, the employer forfeits this credit and must compensate the employee for the difference.
Understanding the “80/20” Tip Credit Rule
Under the tip credit, the Department of Labor also enacted a so-called “80/20” rule back in 1988. This rule stated that if an employee spends more than 20% of their time during the work week performing job duties that are non-tipped (such as cleaning bathrooms or rolling silverware), the employer cannot claim the tip credit and must pay the employee the full federal minimum wage for those hours worked.
In 2021, this rule was expanded on to include three categories of “work” that determined whether an employer could apply the tip credit or not. These categories are:
- Tip-producing work, such as providing direct service to a table of customers.
- Tip-supporting work, such as setting tables.
- Non-tipped work, such as cleaning restrooms.
Under this expanded rule, the tip credit rule could not be applied by an employer if an employee spent more than 30 minutes on tip-supporting work at any given time. For this work, employers were required to pay the full federal minimum wage.
Recent Overturning of the District Court’s Ruling
There has been a lot of controversy over the tip credit rule over the years, along with many lawsuits. In one lawsuit, Restaurant Law Center vs. U.S. Department of Labor, a Texas district court upheld the use of the tip credit rule in 2022. However, the decision was appealed and overturned by the Fifth Circuit.
Specifically, the rule was found to be unlawful because it drew on arbitrary and capricious distinctions between tip-producing and tip-supporting work.
What This Means for Employees and Employers
So, what does this mean for businesses with tipped employees? At the end of the day, the revocation of the 80/20 tip credit rule should be welcome news for employers who have struggled with tracking employee activities, calculating hours worked in each category, and determining when/if to claim the tip credit.
Instead, employers can save themselves the hassle of tedious tracking and focus on the original tip credit rule, which states that tipped employees do not need to be paid the federal minimum wage (in most states) so long as they regularly make $30 per month in tips and their actual hourly wage meets or exceeds $7.25 per hour.
On the other hand, it is still worth noting that minimum wage laws and regulations regarding tipped employees can vary from one state to the next. Therefore, business owners need to be knowledgeable of their respective state laws and follow them appropriately. Otherwise, they run the risk of running into legal troubles.
Need More Guidance with Tip Credits and Taxes?
Tip credits and minimum wage laws for tipped workers can be confusing for even the savviest of business owners. Therefore, it’s ideal to have a knowledgeable accounting professional experienced in the restaurant industry to help you navigate the ins and outs of tip credit laws and taxes. If you have any questions or would like additional information, please contact us.