- Mattiace Tetro LLC
A Primer On Tip Credits In The Hospitality Industry
Updated: Jul 21, 2022
It is common for employers to pay tipped employees less than the hourly minimum wage by taking what is known as a “tip credit” made up of the tips that its employees receive for providing their services to customers. The idea is that employers could rely on customer tips to relieve some of their responsibility to compensate their workers under federal wage and hour law.
This article discusses the basics of the “tip credit,” the relatively new rules applicable to tip credits, and some of the pitfalls where liability may be found.
Federal Tip Credit Basics
The tip credit provision was added by Congress to the Fair Labor Standards Act (“FLSA”) in 1966 and originally allowed employers to take a credit of up to half of the minimum wage. Since then, the federal minimum tip credit wage has been set to $2.13 an hour with the difference between that and the minimum wage made up by customer tips, i.e., the “tip credit”.
A tip credit may be taken by an employer for employees who qualify as “tipped employees” which are defined as those workers who customarily and regularly receive more than $30 a month in tips. Moreover, a tip credit may only be taken for time spent “engaged in” a tipped occupation, with time spent working outside that occupation required to be paid at the federal minimum wage. In addition, if an employer decides to utilize a tip credit, a notice must be provided to employees with specific information about the credit.
What Constitutes Time “Engaged In” a Tipped Occupation
Since a tip credit may only be taken for the time that an employee is “engaged in” a tipped occupation, it is important to understand that this includes both “tip-producing work” and work that “directly supports tip-producing work”, provided that the latter is not performed for a “substantial amount of time.”
The U.S. Department of Labor’s (“DOL”) “functional test” is explained in detail in the DOL’s “final rule” which became effective on December 28, 2021. See Final Rule. Tipped work is defined as “any work performed by a tipped employee that provides service to customers for which the tipped employee receives tips.” For a server in a restaurant, for instance, this would generally “encompass all aspects of the customer service for which a tipped employee receives tips.” This specifically includes obvious work like taking orders and serving food and drinks, but also includes work that is supportive of those things, including adding garnishes to plates, toasting bread, and processing credit card payments.
Of course, workers may, during the course of their workday, engage in some work that is not customer service that produces tips. In a restaurant, some examples would be things like refilling salt and pepper shakers, rolling silverware, and sweeping or vacuuming under tables. The law permits employers to take a tip credit for work like this if it is not performed for a “substantial amount of time.” It is considered “substantial” if these tasks take up more than 20% of the employee’s workweek, or are carried out for a continuous period of more than 30 minutes.
The Challenge of Drawing the Line
Employers who utilize the tip credit need to be careful how they track and categorize the tasks that its tipped workers perform. This is particularly true in the restaurant industry where tasks could be characterized as either “tip producing” or as “directly supporting” and are often carried out in close succession during a busy shift. Moreover, many restaurants have had to shift a portion of their business to a delivery service model where servers are carrying out tasks that may look more like food preparation as opposed to table service. How is an employer supposed to handle these difficult situations? Is the rule flexible enough to address new business models?
The DOL tries to tamp down concerns about difficulties of applying its new rule by reiterating its “functional” nature. The DOL explains that it has intended tip producing work to encompass “any task logically included within the scope of that tip producing work.” For instance, even though a server wouldn’t ordinarily be doing “tip-producing” work when carrying out cleaning tasks in the restaurant, that same server would be doing “tip-producing” when cleaning a spill at a customer table. Moreover, the DOL has explained that it has intended that directly supporting work encompass that kind of work that is “generally more foreseeable to employers,” and is “either performed in preparation of or otherwise assists  tip producing customer service work.”
What about dealing with new business models? For example, how should companies handle a more robust “to-go” business that in some cases constitutes a “new-normal” for the industry in light of the COVID-19 pandemic? Rather than make an exhaustive list of tasks that fall into the tip-producing or directly supporting categories, the DOL makes what may serve as a critical statement: that “employers and employees can apply the flexible definitions as needed if and when the landscape of tip-producing work changes.” The DOL specifically adds that “[i]f during the COVID–19 pandemic, a server receives tips from serving customers by taking their phone orders and providing them with carry-out meals, employers can properly categorize those tasks as tip-producing.”
Reviewing Your Situation
If a tip credit is being utilized, one of the most important things a business must account for is whether it is being properly applied to avoid liability. In that regard, the DOL’s commentary on the new rule gives helpful guidance as to how certain types of tasks should be categorized. However, much gray area remains where a deeper analysis should be done to determine whether there is compliance with the tip pooling regulations. Some things to look for include:
Check state law to see what the requirements for tip credits are in your area. We will be publishing more on this in future posts.
Has there been a proper tip credit notice given to employees?
Are employees being actively limited in the amount of “directly supporting” work they are doing? Is it less than 20% of their workweek? Is it ever longer than 30 minutes? For example, the latter can be an issue if there is a lot of time between when customers are in an establishment and there is downtime, especially after opening and before closing.
Is the company aware of the tipped work and non-tipped work being done? For instance, are employees told to report inordinate amounts of work that is not “tip producing” or is considered “side work”? Is there training on what that type of work is?
These are just a few of the questions that employers and employees alike should be asking. If you have any additional questions or want an individualized review of your situation in regard to tip credits, please contact Mattiace Tetro LLC.
 86 FR 60114-60158.  29 C.F.R. § 531.56(f)(2).  86 FR 60126.  29 C.F.R. § 531.56(f)(1)(ii).  29 C.F.R. § 531.56(f)(4).  86 FR 60126.  Id. at 60128.  Id. at 60126.  Id.  Id.  Id.