The use of tip credits by employers involves the crediting of tips an employee earns toward their hourly pay and, as a result, reducing the amount the employer contributes toward meeting the relevant minimum wage threshold. Pursuant to the Missouri Minimum Wage Law (MMWL), an employee can take a tip credit of up to 50% of the applicable minimum wage. However, if the tipped employee does not make up the other half of the minimum wage in tips, the employer is required to pay the difference so that the tipped employee is paid at least the applicable state minimum wage (currently $8.60 per hour in Missouri). Pursuant to the federal Fair Labor Standards Act (FLSA), an employer is permitted to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the current federal minimum wage of $7.25 minus the minimum required cash wage of $2.13).
Under the 80/20 rule previously endorsed by the U.S. Department of Labor (DOL), employers were required to pay tipped employees with the full minimum wage rather than in part through a tip credit for any duties related to the tipped occupation if those duties exceeded 20% of their overall work time. Under the 80/20 rule, employers could still utilize the tip credit for all time worked by their tipped employees in a tipped occupation if the duties performed related to the tipped occupation did not exceed 20% even though such duties are not by themselves directed toward producing tips. The DOL Field Operations Handbook listed examples of a restaurant servers related duties as including preparatory or closing activities, roll[ing] silverware and fill[ing] salt and pepper shakers while the restaurant is open, clean[ing] and set[ting] tables, mak[ing] coffee, and occasionally wash[ing] dishes or glasses.
However, the DOL recently moved away from the 80/20 rule in a November 2018 Opinion Letter. This was a welcome change for employers who were legitimately concerned about applying the 80/20 rule to tipped employees as it created an arguably unworkable standard by essentially requiring employers to track what employees are doing each minute of each work day if they still wanted to utilize the tip credit. In the Opinion Letter, the DOL indicated an intention to ensure a level of clarity that will allow employers to determine up front whether their actions are in compliance with [the FLSA] . . . . Among other things, the Opinion Letter indicated [w]e do not intend to place a limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties and all other requirements of [the FLSA] are met. The Opinion Letter also sets forth the principles the DOL believes should be applied when making a determination regarding whether a particular duty is part of a tipped occupation.
Nonetheless, a recent opinion from the U.S. District Court for the Western District of Missouri has created additional confusion in this area as the Court rejected the DOL’s position and indicated that the 80/20 rule previously endorsed by the DOL is a reasonable interpretation of the FLSAs dual jobs regulations. In this lawsuit asserted against a Buffalo Wild Wings franchisee involving FLSA collective action and MMWL class action allegations, the Court stated the November 2018 Opinion Letter was unpersuasive and unworthy of deference.
The uncertainty regarding the proper methods for paying tipped employees hopefully will be clarified in subsequent decisions by appellate courts as payment of tipped employees remains a significant source of dispute and litigation. In the meantime, it is a best practice to be as careful as possible in tracking the time worked and work performed by tipped employees to whom a tip credit is applied. In addition to detailed time records, employers should conduct observation studies, use employee surveys regarding how they spend their time, and have discussions with employees covering details about how they spend their time throughout the work day.
The St. Louis employment law attorneys at McMahon Berger have been representing employers across the country in labor and employment matters, including wage and hour investigations and litigation, for over sixty years, and are available to discuss these issues and others. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation or issue. The choice of a lawyer is an important decision and should not be based solely on advertisements.