Department of Labor ends 20% rule and challenges current tip pooling standards

Department of Labor ends 20% rule and challenges current tip pooling standards

In November of 2018, the Department of Labor (DOL) brought an end to the 20% rule (also referred to as the 80/20 rule), giving employers more power over the wages they set for their employees. Now, the DOL is proposing amendments surrounding tip pooling. These developments mainly concern employers in the hospitality and service industry.

These rules were set up to essentially protect employee wages, but many find them to be half-baked, difficult to regulate and unfair. This has resulted in several lawsuits over the past two decades.

Most employers (depending on the state), as required by the Fair Labor Standards Act (FLSA), must pay their employees minimum wage. There are, however, exceptions to the rule. In the service industry, many restaurant owners are not required to pay servers minimum wage because they already earn a substantial amount of money via tips. This is where the 20% rule and tip pooling come into play.

Let's define these two regulations

  • The 20% rule: If an employee spends 20% or more of their time doing "non-tipped work," then the employer is required to pay them the minimum wage. So if a waiter spends six hours waiting tables and two hours doing inventory daily, then they are legally entitled to the full minimum wage, which varies depending on the state.
  • Tip pooling:  When the total amount of earned tips are collected and redistributed among other members of the staff, such as runners, hosts and line-cooks. Most accept this as fair practice, due to the likelihood that a customer may tip their waiter because they loved the restaurant's food, not just their service. In that particular example, the cooks agreeably deserve a portion of the waiter's earnings.

Here are some of the issues that inspired the DOL to propose changes to these regulations:

The 20% rule is filled with grey areas

It is important to note that this rule does not apply to certain states, because they have passed state laws that prohibit employers from paying employees a sub-minimum wage in the first place. These states include Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington. So if you own or manage a restaurant outside of any of these states, the following knowledge is good to have.

The 20% rule was first introduced by the DOL in 1988, but it was very vague. Employers had to separate task into three buckets: 1) Tip-generating; 2) unrelated; 3) related, but non-tip generating.

This was painfully subjective and therefore nearly impossible to regulate, especially since employers were given very little guidance from the DOL. As a result, on November 8, 2018, the DOL abandoned the rule.

Employers are currently excluded from tip pooling

During the Obama Administration, employers were prohibited from requiring tipped workers to pool their gratuities with non-tipped workers. (again, with the exception of certain states). Instead, it was to be left up to the employees themselves. This resulted in many lawsuits, mainly stemming from employees who felt they were being unfairly left out of tip pools. 

Then, in February of 2018, the DOL proposed a new regulation to the White House that would give employers more autonomy over tip pooling. However, Bloomberg Law discovered that this regulation would allow companies to skim more than $600 million in gratuities from their workers each year. This proposal was shot down, sending the DOL back to the drawing board. Now, they are back with a new proposal, which should come to a final ruling in early 2020. 

What is at stake?

The DOL's new regulation would allow employers to mandate tip sharing among tipped and non-tipped workers, so long as the employer does not take a tip credit. In other words, if a server is already being paid minimum wage, then their manager could require them to share their gratuities with non-tipped workers such as line cooks.

In addition, since the 20% rule has been abandoned, workers in the hospitality industry may see a change to their payment structure in the upcoming years. Employers in the industry, such as restaurant owners and managers, could have the freedom to pay employees less than minimum wage, even if a good chunk of their time is spent working in a non-tippable capacity. 

To learn more about how these changes may affect you or your business, connect with us at Triton today. 

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