On November 8, 2018, the Department of Labor published an Opinion Letter (FLSA2018-27) reissuing its January 16, 2009 guidance (Opinion Letter FLSA2009-23) and reversing the agency’s Obama-era position on the 20% tip credit rule. The letter marks another significant shift in Department of Labor policy, and among the first major changes in federal tip credit policy over the last decade.

The tip credit generally permits employers in tip-producing industries to compensate employees at a minimum rate of $2.13 per hour, and to take a credit against the tips an employee receives equal to the difference between this minimum rate and the federal minimum wage. To the extent an employee’s tips do not amount to at least $5.12 per hour—i.e., the difference between the federal minimum wage of $7.25 per hour and the $2.13 tipped worker minimum—an employer is responsible for the remainder of the employee’s wages between what the employee earned in wages and tips combined and the federal minimum wage.

Under the Obama Administration, the Department of Labor withdrew Opinion Letter FLSA2009-23 and followed a 20% tip credit rule contained within the Department of Labor Field Operations Handbook at Section 30d00(e) (and Section 30d00(f)(3) under the 11/17/2016 revisions). That rule restricted employers from claiming the tip credit for employees who spent 20% or more of their working time performing non-tipped duties, even if those duties were related to their core tip-producing activities. As a result, employees engaged in some maintenance or other non-tipped activities—for example, restaurant servers who occasionally washed glasses or tables between waiting on patrons—were at times entitled to both the regular federal minimum wage and tips received. In addition, the pay due to a particular employee under the 20% rule could be difficult to discern if the employee’s engagement in customer-facing and back-of-house activities fluctuated significantly, or the employee’s time in specific tasks was not adequately monitored so as to determine whether or not they exceeded the 20% threshold.

The Department of Labor’s opinion letter adopts a different approach, under which the availability of the tip credit will no longer be tied to a strict percentage cut-off delineating time spent on tip-producing versus non-tip-producing activities. Instead, the tip credit will be available for all hours a tipped employee works so long as the employee’s related duties, such as back-of-house responsibilities, “are performed contemporaneously with the duties involving direct service or for a reasonable time immediately before or after performing such direct-service duties.”  Given that work of this type is performed “contemporaneously” in many workplaces, many employers will no longer need to pay the full minimum wage for time tipped employees spend in cleaning, maintenance, or other activities that relate to their primary, customer-facing service roles, even if those activities amount to more than 20% of the employees’ working time.

Although the reversal is a welcome change for employers in the restaurant and other tip-producing industries, employers should remain conscious of the following:

• Employers cannot claim the tip credit for time employees spend in activities that are not related to their core tip-producing duties. That means that employees engaged in wholly peripheral activities may be entitled to receive the minimum wage for hours spent performing those activities, regardless of the proportion of time the employee spends performing separate tip-producing duties.
• State laws may impose additional restrictions in terms of when employers can claim a tip credit or the amount of such a tip credit, which the new opinion letter does not modify.
• The Eighth and Ninth Circuits had previously issued decisions applying the Obama-era tip credit rule that are presumptively invalid, given the reliance in those cases on principles of agency deference.  Nonetheless, employers should continue to monitor how courts interpret and apply the Department of Labor’s new guidance moving forward.