With no clear definition of what constitutes tip-generating work from the Department of Labor (DOL), you could be required to pay tipped employees the federal minimum wage for duties that are not directly aimed at generating tips. Implementing proactive policies will put you in a better position to avoid or reduce this result.
The Fair Labor Standards Act (FLSA) requires employers to pay nonexempt employees at least the federal minimum wage, which is currently $7.25 per hour. Employers may, however, take a tip credit for employees who customarily and regularly receive more than $30 a month in tips as long as they pay at least $2.13 per hour in direct wages.
If a worker was hired by one employer for both a tipped and nontipped position (as a server and a hostess, for example), then the tip credit is available only for the hours the employee spends in the tipped job. In contrast, if the tipped employee performs some duties incidental to his or her tip-producing work, such as cleaning and setting tables, making coffee and washing dishes, the employer may still take the tip credit. The issue arises when these incidental duties are more than occasional. According to the DOL’s handbook, if tipped employees spend in excess of 20 percent of their time performing general preparation work or maintenance, “no tip credit may be taken for the time spent in such duties.”
Pointing to the DOL’s 20 percent interpretation, in Fast v. Applebee’s, a class of Applebee’s servers and bartenders for whom Applebee’s took the tip credit argued that the restaurant should pay them full minimum wage for the time they spent performing work that did not produce tips, such as cleaning, taking inventory and rolling silverware. The Eighth Circuit Court of Appeals agreed with the employees and the DOL in holding that the employees are entitled to minimum wage in accordance with the 20 percent rule. The Court of Appeals did not, however, determine which duties are “general preparation and maintenance”—nontipped work that may require higher compensation. Earlier this year, the U.S. Supreme Court declined to review the Eighth Circuit’s decision.
In its brief supporting Applebee’s unsuccessful petition to the Supreme Court, the National Restaurant Association (NRA) argued that allowing the DOL to proceed with its interpretation would “create a nightmare from a practical standpoint” for restaurateurs by forcing operators to track the exact amount of time each tipped employee spends on every duty to verify that the time spent by tipped employees on non-tip-producing activities does not exceed the 20 percent rule. For most restaurants, recording employee activities is simply unworkable and impractical. Moreover, the distinction between tip-producing and non-tip-producing activities performed by tipped employees remains unclear.
In addition to the practical problems associated with the 20 percent rule, the Supreme Court’s failure to consider that the Fast case gives the DOL a green light to more aggressively enforce the agency’s controversial interpretation of the law. Thus, restaurants are well advised to establish mechanisms to prevent or minimize challenges.
As NRA points out, for most restaurants, tracking daily duties would prove impractical. Employers can, however, draft policies that prohibit tipped employees from spending in excess of 20 percent of their time performing duties that do not customarily generate tips. The policies can also require these employees to report any manager who asks them to perform work in violation of this rule. Such a policy will likely reduce the employer’s chance of facing a 20 percent challenge and will require employees who raise a 20 percent challenge to carry the burden of proof. Overall, the policies should reduce the chance of a large class claim.
Laura O’Donnell is a partner at Haynes and Boone, LLP in San Antonio, Texas. She is Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization.