The Department of Labor Issues Final Rule on Handling Tips and Eliminating the 80/20 Rule

  • Home
  • /
  • Blog
  • /
  • The Department of Labor Issues Final Rule on Handling Tips and Eliminating the 80/20 Rule
Attorney Harrison Oldham

The United States Department of Labor (DOL) issued a final rule (the Rule) on December 22, 2020, addressing tipped employees and the Fair Labor Standards Act (FLSA).  The Rule will become effective 60 days after it is published in the Federal Register. The rule discusses two important areas:

The Rule eliminates the confusing 80/20 Rule at the federal level, prohibits employers from keeping tips received by their employees, and forbids managers and supervisors from participating in tip pools and keeping any portion of employees’ tips. Further, it adopts the DOL’s 2018 opinion letter that discusses the scope of the dual job regulation and eliminated the 80/20 Rule.

Tip Credits

Before reading any further it’s important to understand a little bit about “tip credits.”  Under certain circumstances, the FLSA permits an employer to take a tip credit towards its minimum wage obligations for employees who customarily and regularly receive tips.

Now the Rule clarifies that employers may only take a tip credit when the employer first provides the employee some vital facts and information, such as:

  • The amount of the tip credit;
  • If all tips received by the employee must be retained by the employee except those that are contributed to a tip pool;
  • If the employee’s cash wage and tips do not equal the minimum wage for all hours worked, the employer will pay the difference; and
  • The fact that a tip credit cannot be taken unless the employee has been informed of the above.

In addition, the Rule eliminated the prior, very confusing, 80/20 rule.

What is the 80/20 rule?

The 80/20 rule mandated that when a tipped worker was assigned “non-tip-generating” side work that took up more than 20 percent of their time, the employer could not take the tip credit and must instead pay the worker the full minimum wage. The 80/20 rule was very difficult to actually apply and lead to a ton of confusion and litigation over what work constituted “non-tip producing work,” and what work was ancillary to tip-producing work. Now, all non-tipped work will be considered “related” to tip-producing work, and thus employees performing such work will be eligible for a tip credit to be taken, as long as the duty at issue is listed as a task of the tip-producing occupation in the Occupational Information Network (O*NET).

This change should come as a nice New Year’s Eve gift to employers, who will now have more flexibility in applying a tip credit to tipped employees who may be required to perform some non-tipped work. However, employers should note that state 80/20 rules, such as those in New York, remain in place and are not impacted by the Rule.

Tip Ownership/Sharing

In 2018, Congress amended the FLSA in the Consolidated Appropriation Act (CAA) to provide guidance saying that, “an employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees tips, regardless of whether or not the employer takes a tip credit”. It also allows employers that did not take the tip credit to mandate its’ employees to share tips with back-of-the-house employees or other non-managers by doing a mandatory tip pool.

Now, the Rule resembles the previously amended CAA, allowing an employer to have limited control over tips in situations where an employer: (1) promptly distributes tips to the employees who received them; (2) requires employees to share tips with other qualified employees; or (3) organizes tip pooling by collecting and giving out tips to eligible employees in a tip pool by the next scheduled payday. In these situations, the employer does not unlawfully “keep” tips.

Furthermore, the rule states that a “supervisor” and “manager” are defined as those managers who meet the duties test of the FLSA’s executive overtime exemption under 29 CFR §541.100(a)(2)-(4). This Rule also disallows forced sharing of tips with anyone owning 20% or more of the business.

Finally, the Rule adopts the Department of Labor’s 2018 guidance stating that employers are allowed to encourage tipped employees who are paid at least minimum wage (and thus no tip credit taken) to share tips with non-tipped employees (such as cooks, dishwashers, and people in the back), so long as the tips are not shared with supervisors, managers, or the employer itself. Violation of the tip ownership provision can subject employers to penalties for repeated and willful violations.

Want even more advice, given just to you? Sign Up for an annual membership today and receive unlimited advice from SPHR Certified pros & our “Ask An Attorney” blog found only with our Annual Membership. Learn More Here



About Harrison Oldham

Harrison grew up in Mansfield, Texas. He attended Texas A&M University for his bachelor’s degree, where he met his wonderful wife, Kelsey. After graduating magna cum laude from Texas A&M, he attended SMU Dedman School of Law, graduating with honors in 2012. Today, Harrison and his wife live in Dallas, Texas with their son, Teddy.

Since graduating from SMU Law, Harrison has worked exclusively in the field of business law. He has spent time in private practice and in-house, working with clients of every size; from single person startups to Fortune 250 companies. Today his practice focuses on serving the diverse needs of businesses and individuals throughout Texas. You can learn more about Harrison by visiting his website, at: http://lonestarbusinesslaw.com/.

Log in or Register to save this content for later.