Restaurants did not fare well during shutdowns, with around 110,000 shut down because of the pandemic as of January 2021. Hopefully, some of these are up and running again, and to make it more difficult, on June 21, 2021 the Department of Labor announced a proposed rule change around the tip credit.

What is tip credit?

Under federal law (some states have higher minimum wages), the minimum wage is $7.25 per hour, but if your employee receives $30 or more per month in tips, you can pay $2.13 per hour and have the rest made up by tips. The employee has to receive at least $7.25 per hour, but only $2.13 has to come from the employer's pocket if they get enough tips.

Employers can use the tip credit only when employees spend 80 percent of their time in tipped tasks, like waiting tables. So, if you have a server who also does maintenance work 25 percent of the time, you have to pay at least $7.25 per hour for the maintenance work, even if the employee received $1,000 in tips that week.  

The DOL proposal 

Under the current rules, as long as 80 percent of the employee's time is spent on tip-producing activities, you can use the tip credit for all work done. The new proposal changes the 80/20 rule to 30 continuous minutes of non-tipped work or 20 percent of weekly work.

So, while it's OK to have your servers clean up the dining room at the end of the night if that task takes more than 30 minutes, you need to pay at least minimum wage for that time under the new proposal.

Why you should pay attention

If you use the tip credit, this is a nightmare to track. If an employee takes 30 minutes to do a task that normally takes 15, you'd be obligated to pay them minimum wage and not deduct the tip credit from that time. Or, you need to interrupt their work and send them back out to wait tables for a few minutes, so there aren't 30 minutes of uninterrupted time in non-tipped work.

Wage and hour division principal deputy administrator Jessica Looman explains, "This proposed rule provides more clarity and certainty for employers while better protecting workers. It helps ensure that tipped workers are treated with dignity and respect, and that they receive wages appropriate for the work they perform."

It's great for tipped workers but not for paperwork. As employment attorney Eric Meyer says, "It's the 80/20 rule on steroids."  

If you want to comment on the proposed rule, you can do so on the government regulations webpage. But Meyer believes that absent a lawsuit, this will go into effect in August. Prepare now for how you'll track non-tipped hours.