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U.S. Labor Department Changes Position on Use of Tip Credit

    Client Alerts
  • November 19, 2018

As previously reported in EmployNews, litigation involving pay for tipped employees continues to vex employers in the hospitality industry. Many of these cases involve varying interpretations of the Fair Labor Standards Act’s tip credit provision. The tip credit allows employers to pay employees who receive gratuities a sub-minimum wage and count their tips toward the difference with the full minimum wage. In recent years, tipped employees have complained that the tip credit and sub-minimum wage should not apply to non-tipped work performed by them, such as preparation for service.

On November 8, the federal Department of Labor’s Wage and Hour Division released an opinion letter reversing the agency’s previous position on this issue. In 1988, DOL issued an opinion stating that non-tipped job tasks could not exceed 20 percent of an employee’s total work for him or her to remain eligible for payment using the tip credit. After a wave of collective action lawsuits followed this opinion, in early 2009, DOL finally withdrew this guidance, only to see it reinstated by the new Obama administration a few weeks later.

By reverting to the pre-1988 rule, DOL now disclaims any quantitative limit to non-tipped work that will disqualify employers from claiming the tip credit. Presumably, at some point, a tipped employee’s non-tipped work will result in a determination that they no longer qualify for payment of less than the full minimum wage. However, by removing the bright line 80/20 rule, DOL may help end collective action claims if every circumstance requires review of the individual employee’s work allocation.