The National Women’s Law Center (the Center) writes in response to the Department of Labor’s (the Department) Notice of Proposed Rulemaking (NPRM), whereby the Department seeks to align its tip regulations with the new section 3(m)(2)(B) of the Fair Labor Standards Act (FLSA), enacted in the Consolidated Appropriations Act of 2018 (CAA), and withdraw the prior rulemaking on the subject that the CAA amendments to the FLSA were intended to block.
Since 1972, the Center has worked to remove barriers based on gender, to open opportunities for women and girls, and to help women and their families lead economically secure, healthy, and fulfilled lives. The Center advocates for improvement and enforcement of our nation’s employment and civil rights laws, with a particular focus on the needs of women with low incomes and their families, communities of color, and others who face historic and systemic barriers to equality and economic security. These communities are overwhelmingly represented in the tipped workforce, and the Center consistently advocates for policies that will improve and stabilize pay in tipped jobs.
The Center supports the legislative compromise reflected in the CAA amendments—which makes clear that tips belong to workers, not their employers—and appreciate the Department’s efforts to implement the new law, although we believe that the Department should clarify the definition of managers and supervisors and certain other elements as detailed in our comments below.
We strongly oppose, however, the Department’s additional proposals in this rulemaking—namely, to codify its abandonment of the “80/20 rule” regulating employers’ use of the tip credit for non-tipped work, and to make it harder for the Department to impose civil money penalties for willful violations of a wide range of labor laws. These components of the proposed rule run counter to the avowed purpose of this rulemaking, the Fair Labor Standards Act, and the Department: to protect working people and their wages. As explained in the comments that follow, the Department should withdraw the proposed changes to the willfulness standard and the dual jobs regulation—and it should implement a standard no less protective than the 80/20 rule to ensure that employers do not regularly pay their employees less than the full minimum wage when they are performing work for which they will not earn tips.
I. The Department should clarify that tips—including shared tips—are meant to solely benefit employees who do not hold managerial or supervisory positions, and ensure that the definition of managers and supervisors aligns with this intention.
In March of 2018, tipped workers across the country won critical new protections in the FLSA with the addition of section 3(m)(2)(B), which states unequivocally that an “employer may not keep tips received by its employees for any purposes.” In this amendment, Congress made clear that the Department’s prior proposed rulemaking on the subject—which would have resulted in employers legally pocketing an estimated $5.8 billion of their employees’ tips each year4—was contrary to congressional intent. The FLSA now bars employers from using tips to, for example, “make capital improvements to their establishments” or simply to increase profits, as would have been expressly allowed under the rule originally proposed by the Department in 2017.
The FLSA now does authorize employers to establish tip pools between tipped restaurant workers in the “front of the house,” such as bartenders and servers, and those who work in the “back of the house,” such as line cooks and dishwashers. Such a tip pool is only permissible, however, if two conditions are met: 1) the employer pays all employees at least the full minimum wage, before tips (rather than taking a “tip credit” that counts a portion of employee tips toward its minimum wage obligation), and 2) the employer, managers, and supervisors do not keep any portion of employees’ tips.
In these limited circumstances, allowing employers to require tip sharing between front- and back-of-house employees has the potential to improve pay for both customarily tipped employees (who will be able to rely on at least $7.25 per hour before tips instead of the $2.13 per hour that federal law permits when employers take a tip credit) and cooks, dishwashers, and others who also contribute to the customer experience but are typically very low paid and do not traditionally receive tips. In the present rulemaking, the Department should make clear that Congress did not authorize employers to simply take a tip credit in another form by reducing the wages it pays back-of-house staff, then supplementing them with the earnings of tipped employees. The Department’s suggestion in the proposed rule that such activity is permissible runs contrary to Congress’s intent to ensure that tips inure to the benefit of employees rather than their employers, and the Department must ensure that the final rule makes no such suggestion. The Department should also make clear in the final rule that employers cannot withhold from an employee’s tips the credit card transaction fee associated with liquidating the employee’s credit card tips—a cost the employer chooses to incur, and one that it must not, under the CAA amendments to the FLSA, use employee tips to subsidize.
The Department also must ensure that employers do not similarly subsidize the pay of managers and supervisors by allowing them to capture a portion of employee tips. Preventing employers, managers, and supervisors from participating in tip pools intended to benefit lower-paid employees is at the core of the legislative compromise in the CAA, and appropriately defining the terms “manager” and “supervisor” is thus a key component of the present rulemaking. We appreciate that the definition the Department has proposed is not an unduly narrow one that would clearly exclude only high-level management from tip pools, and we agree that the executive duties test at 29 C.F.R. § 541.100(a)(2)-(4) outlines core principles of managerial and/or supervisory responsibilities.
However, we are concerned that this duties test may in fact be overbroad, and could be interpreted to exclude individuals who should be permitted to participate in tip pools. An employer might incorrectly identify as a supervisor, for example, a more experienced line cook who “manages” the line and “customarily and regularly directs the work” of two other cooks—but who spends most of their time cooking, and is paid only $28,000 a year. Such employees lack the bargaining power and authority that the statute intended to attribute to the managers and supervisors who should be barred from sharing tips.
As the Department has recognized in the overtime context, a compensation-based test can be a useful tool to help clarify the contours of a duties-based exemption, on the basis that employees paid less than a specified level are unlikely to be bona fide exempt employees. Here, too, a compensation level test would help to ensure that individuals who are categorically excluded from tip pools are bona fide managers or supervisors. Therefore, in addition to the duties test borrowed from the overtime rules, we recommend that the Department incorporate a compensation level test into the definition of manager or supervisor for purposes of the rule implementing section 3(m)(2)(B). Given that tip pooling typically arises in the restaurant context, we propose that the Department tailor the pay threshold accordingly—specifically, by setting a threshold that corresponds to the median wage for “supervisors of food preparation and serving workers” (35-1010) based on the most recent National Occupational Employment and Wage Estimates from the U.S. Bureau of Labor Statistics, Occupational Employment Statistics (OES), which could be met on an annual or hourly basis. This level should be defined in regulation by reference to the OES source so that it is automatically adjusted each year; the current level, based on May 2018 data, is $33,890 annually or $16.30 per hour.
We recognize that $33,890 is similar to the salary test the Department recently established at 29 C.F.R. § 541.100(a)(1) (i.e., $35,568 as of January 1, 2020); the latter level thus could be an acceptable alternative test for the rule at hand. Should the Department adopt this approach, however, we urge it to incorporate the $35,568 standard itself rather than a general reference to the test at section 541.100(a)(1), and allow it to be met on an hourly basis. If and when the Department again raises the overtime EAP salary threshold, the Department should separately evaluate whether it remains a reasonable proxy for the compensation level indicative of whether an employee is a bona fide manager or supervisor who should be excluded from any tip pool.
II. The Department should incorporate the 80/20 rule—or a more protective standard—in the dual jobs regulation, not repeal it.
With the modifications noted above, the proposed rule’s provisions implementing the FLSA’s revised section 3(m) will take important steps to ensure that employers fairly compensate their employees. The proposed amendments to the “dual jobs” regulation codifying the Department’s repeal of the “80/20 rule” do just the opposite, and will particularly harm the women and people of color who comprise the majority of the tipped workforce. The Department should abandon its effort to enshrine its ill-conceived guidance in regulations, and instead affirm or strengthen the longstanding 80/20 rule, which is aligned with the overarching goal of the CAA amendments to the FLSA: to improve economic security for tipped workers.
A. The proposed repeal of the 80/20 rule is inconsistent with the purpose of the dual jobs regulation and the intent of the FLSA.
As the Department recognizes, the FLSA at section 3(m) only allows employers to take a tip credit for a “tipped employee,” defined at section 3(t) as an “employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips”—a definition that requires further explanation to ensure that employers understand when an individual employee is employed in both a tipped occupation (for which the employer may take the tip credit) and a non-tipped occupation (for which the employer must pay at least the full minimum wage). Indeed, the “fair day’s pay for a fair day’s work” promised by the FLSA “can only be guaranteed if employers’ ability to take the tip credit is limited to when their employees are actually ‘engaged in a tipped occupation.’”
The “dual jobs” regulation at 29 C.F.R. § 531.56(e) thus distinguishes between an employee who holds both a non-tipped and a tipped occupation (e.g., “a maintenance man in a hotel also serves as a waiter”) and a person in a tipped occupation who performs some related non-tipped tasks, such as a “waitress who spends part of her time cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.” However, as one court recently explained, “[b]y not defining what, precisely, the temporal limits on related work for tipped employees are, the Dual Jobs regulation ‘only produces more questions.’” Accordingly, between 1988 and 2018, guidance from the Department clarified the dual jobs regulation with the “80/20 rule,” which provided that necessary temporal limit: when an employee spends more than 20 percent of their time during a work week on activities that do not produce tips, the employee is no longer a tipped employee who “occasionally” performs non-tipped related work and is instead an employee who is engaged in two occupations, only one of which is a tipped occupation (and only one of which permits an employer to take the tip credit).
Notwithstanding the 80/20 rule’s consistent use and acceptance by employers, courts, and the Department itself over a 30-year period, the Department now asserts that the 80/20 rule “was difficult for employers to administer and led to confusion.” The alternative proposed in this rule, however—which the Department recently issued in guidance15 and seeks to formalize here—is sure to produce far greater confusion. As numerous courts have already recognized in refusing deference to the identical policy in guidance, replacing the longstanding 80/20 standard with vague “reasonable time” language removes any meaningful temporal limit on the time spent on non-tipped duties for which an employer may claim a tip credit.Indeed, the proposed rule only supplements the vague temporal terms in the existing dual jobs regulation—“occasionally,” “part of [the] time,” and “takes a turn”—with a “reasonable amount of time” standard that is equally vague and overly broad. If 20 percent is not a “reasonable” limit, what is? The lack of a bright line answer to that question will sow confusion for employers and employees alike and could be abused even by well-intentioned employers.
In addition to the lack of any clear temporal limitation on non-tipped work, the proposed rule’s reference to tasks listed in O*Net to define duties “related” to tip-producing occupations invites abuse. For example, O*Net tasks for waiters and waitresses include “cleaning duties, such as sweeping and mopping floors, vacuuming carpet, tidying up server station, taking out trash, or checking and cleaning bathrooms”— when from 1988 until 2018, the Department’s Field Operations Handbook specified as an example that “maintenance work (e.g., cleaning bathrooms and washing windows) [is] not related to the tipped occupation of a server; such jobs are non-tipped occupations. In this case, the employee is effectively employed in dual jobs.”
A 20 percent limit on related but non-tipped duties for which an employer may take a tip credit provides concrete guidance to both employers and employees that is “tremendously useful in evaluating whether employees are in fact employed in a tipped ‘occupation.’” The Department employed this standard in the dual jobs context for three decades, and also uses “a 20 percent threshold to delineate the line between substantial and nonsubstantial work in various contexts within the FLSA.” The Department has offered no explanation other than confusion for its repeal—an explanation that is groundless given the greater confusion the more vague rule will surely engender.
Abandoning decades of consistent agency policy without a rational explanation is arguably arbitrary and capricious in its own right. Doing so with no attempt to quantify the human impact, however, makes this action far worse.
B. The elimination of the 80/20 rule will have far-reaching harms to working people, especially women and people of color—but the Department once again has failed to quantify these harms.
Women—disproportionately women of color—represent more than two-thirds of tipped workers nationwide. In 38 states, at least 7 in 10 tipped workers are women. Median hourly earnings for people working in common tipped jobs like restaurant server and bartender are less than $11, including tips, and poverty rates for tipped workers are more than twice as high as rates for working people overall—with tipped workers who are women at a particular disadvantage and women of color disadvantaged yet further. Reducing the pay that working people can take home to their families will undoubtedly harm this already low-paid workforce, especially the women and people of color who disproportionately hold these roles.
Yet this is precisely what the proposed rule would do. As the Department concedes, tipped employees could “lose tipped income by spending more of their time performing duties where they are not earning tips, while still receiving cash wages of less than minimum wage.” A server who formerly could spend no more than 1.2 hours of a six-hour shift, on average, doing non-tipped work like rolling silverware, cleaning tables, or sweeping floors can now be required to spend two hours—or four hours, or whatever the manager deems “reasonable”—doing such side work, foregoing tipped income while still being paid just $2.13 an hour. This scenario has already played out in workplaces across the country in which unscrupulous employers ignored their obligations under the 80/20 rule. With the regulatory barriers to abuse of the tip credit—and tipped employees—all but removed, millions of working people will undoubtedly be required to do more work for less pay.