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Important Tips on Tips for Employers

EverythingHR Staff | 11/02/2021 | Blog

A hot HR tip is to keep a close eye on tips.  Recent development at the state and federal level will impact employers and employees in the restaurant and food delivery industries.

On October 6th, California Governor Gavin Newson signed into law AB 286, which prohibits a food delivery platform from retaining any portion of amounts designated as a tip or gratuity. Instead, it requires that any tip or gratuity for a delivery order be paid in its entirety, to the person delivering the food or beverage.  Further, any tip or gratuity for a pickup order, in its entirety, must be paid to the food facility. Beyond the compensation components, AB 286 also makes it unlawful for a food delivery platform to charge a customer any purchase price for food or beverage that exceeds the price posted by the food facility on the food delivery platform’s internet website at the time of the order.  Good news for consumers!  The third piece of the legislation is that going forward, the platform must disclose to the customer and the food facility certain specified information related to fees, commissions, and costs charged to both parties.

While this particular law will impact California, similar laws exist in New York and Illinois.  On the federal side, please continue to our blog for a detailed overview of the US Department of Labor’s new rule (taking effect on December 28th) regarding the employer’s ability to take a “tip credit” against employees’ earnings.

Employers of Tipped Workers Advised to be Ready for More Recordkeeping

Employers that take advantage of the “tip credit” will have to monitor and document their tipped employees’ tasks much more closely than they have in the past under a new rule from the U.S. Department of Labor (DOL).

The new rule, which takes effect December 28, says employers may take a tip credit only for the hours an employee is doing tip-producing work or engaged in tasks that directly support tip-producing work. Also, the rule places limits on how much time an employer can have a worker spend on tasks that support tip-producing work if the employer uses the tip credit.

The Fair Labor Standards Act (FLSA) requires covered employers to pay workers at least $7.25 an hour, but it also allows employees who earn tips to be paid as little as $2.13 an hour if the worker’s tips bring the pay up to at least the federal minimum wage of $7.25.

The rule aims to remedy the problem of tipped employees spending too much time on work that doesn’t produce tips while they earn the lower wage, but attorneys who advise employers expect the rule to create new monitoring and recordkeeping burdens.

Monitoring, Tracking Challenge

Grant T. Collins, an attorney with Felhaber Larson in Minneapolis, Minnesota, says the new rule recognizes three types of work:

  • Work that produces tips, such as waiting on customers in a restaurant;
  • Work that supports tip-producing work, such as rolling silverware and filling salt and pepper shakers; and
  • Work not related to tip-producing work, such as preparing food, sweeping floors, and cleaning restrooms.

Under the new rule, an employer can take the tip credit only when an employee is performing (1) tip-producing work or (2) non-tip-producing work that doesn’t exceed a continuous period of 30 minutes or more than 20% of the employee’s workweek. Any time spent on non-tip-producing work or not supporting tip-producing work must be paid at the full minimum wage.

Collins says the new rule will make compliance more difficult for employers since they will have to closely monitor what tipped employees do and make sure they are being paid at the proper rate for any work they do. That means employers will have to note the time spent on work that produces tips, work that supports tipped work, and tasks unrelated to tipped work.

“From an administrative standpoint, it would make a general manager’s head spin,” Collins says.

Mark M. Schorr, an attorney with Erickson | Sederstrom, P.C., in Lincoln, Nebraska, says employers taking the tip credit will “have to basically keep track of what a tipped employee does every hour they work” to ensure the individual will earn the proper wage.

“I really do think that we’re talking about a significant, very significant, additional amount of time and attention in recordkeeping required of employers to monitor every employee,” Schorr says.

Also, managers will need to be aware of what can be considered tipped work or work supporting tipped work, and it will require more recordkeeping to track what each employee does throughout the workday, Schorr says.

Mitchell J. Herring, an attorney with Sniffen & Spellman, P.A., in Tallahassee, Florida, says the new rule is largely a codification of 80%/20% guidance widely accepted by federal courts with the additional 30-minute limitation tacked onto it, but “it will represent a dramatic change” for any employers that relied on the old DOL guidance or a tip rule issued in 2020 that was withdrawn.

“While we have some questions from employers, the new rule should not represent a significant change for most employers,” Herring says, “though employers that regularly have tipped staff performing ‘closing’ duties, such as sweeping the floors, emptying trash, etc., should pay close attention to the amount of time they spend performing these activities, which may cause them to exceed the 30 minutes that an employee may spend performing nontipped activities.”

Advice for Employers

Collins advises employers that want to continue using the tip credit to put processes in place to ensure time is properly entered for workers doing tipped and nontipped work.

Collins points out not all employers of tipped workers choose to use the tip credit, and some states (including his state of Minnesota) don’t allow employers to pay a reduced wage for tipped work.

For employers that do use the tip credit, Collins says they may want to compartmentalize duties so tipped workers don’t perform work that doesn’t produce tips or support such work. Even then, they need to make sure any work supporting tipped work doesn’t exceed 30 continuous minutes or more than 20% of the workweek.

Schorr advises employers to try to structure staffing so they don’t have a lot of employees transferring back and forth between tipped and nontipped work. He says employers need to get all the information they can on the rule and work to put systems in place to track workers’ activities.

“Each employer will have to look at their own operation to determine what steps they can take to more easily track the activity of wait staff,” Schorr says.

Article courtesy of content partner BLR.  Author Tammy Binford writes and edits news alerts and newsletter articles on labor and employment law topics for BLR web and print publications.