Department of Labor Modifies Stance on Obama Era 80/20 Rule for Tipped Employees

by James L. Rudolph and Robert P. Rudolph

On November 8, 2018 the Department of Labor (“DOL”) issued Opinion Letter FLSA 2018-27 which rolls back the Obama-era’s enforcement of what is commonly referred to as the “80/20 Rule.” Many states allow an employer to pay a lower tipped rate to tipped service employees, such as waiters and bussers. For example, in Massachusetts, the basic minimum wage is currently $11 per hour, but tipped employees can be paid a lower service rate of $3.75 per hour, so long as the sum of the tipped rate and the tips received by the employee equal or exceed the basic minimum wage. In other words, employers receive a “tip credit” of $7.25 per hour.

The 80/20 Rule, contained in section 30d00(f) of the DOL’s internal Field Operations Handbook, acted as a limit on the use of the lower tipped rate. The 80/20 Rule stated that no tip credit could be taken on “related duties” where a tipped employee spends more than 20 percent of working time performing duties related to the tipped occupation, but not directly producing tips, such as cleaning and setting tables, rolling silverware, making coffee, etc.

The Opinion Letter recognizes that the 80/20 Rule has resulted in confusion and that it would be difficult, if not impossible, for employers to account for the exact amount of time each employee spends on every “related” task performed. The Opinion Letter significantly retracts the 80/20 Rule, stating that going forward, “[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 consumer-service duties…” In other words, as long as the duties are performed contemporaneously with duties involving direct service to customers or for a reasonable time immediately before or after such direct-service duties, it does not matter whether a service employee spends more than 20 percent of working time performing related, non-tipped work. This should help curtail inconsistent application of the 80/20 rule, which has previously resulted in litigation throughout the country.

Notwithstanding the foregoing, employers would be ill advised to change their compensation structures based solely on the Opinion Letter. Instead, employers should wait and see how the change plays out in the courts and the legislature, both state and federal. Massachusetts law provides a prevailing employee in a wage claim with a statutory entitlement to three times single damages and attorney’s fees. All employers, whether or not using the tipped rate, must be familiar with and insist on strict compliance with the Massachusetts Wage Act.

The November 8, 2018 Opinion Letter FLSA 2018-27 can be found here.