The Department of Labor announced a finalized rule on December 22, 2020, that will amend section 3(m) of the Fair Labor Standards Act (FLSA) to protect the tips of employees. This final rule clarifies how businesses must operate under the Consolidated Appropriations Act (CAA) of 2018, an omnibus spending bill signed by President Trump in March of 2018.

The final rule makes two major changes to the FLSA. It clarifies ownership of tips and also effectively ends the “80/20” rule for when an employee works both tipped and non-tipped jobs. The finalized rule implements guidance on how employers must pay their employees for tipped and non-tipped duties.

Employers are prohibited from keeping tips, or a portion of tips, made by employees regardless of whether the employer institutes tip credits or not. For employers that collect tips for a mandatory tip pool, the rule amends the regulation creating guidance on how the employer must redistribute those tips and requires a new recordkeeping policy to ensure the employer hasn’t overtly or inadvertently kept the tips.

As a result of the CAA, there is no longer a “regulatory restriction on an employer’s ability to require tip pooling when it does not take a tip credit; those employers may now implement mandatory, ‘nontraditional’ tip pools” for employees that regularly receive tips. Those that pay a direct wage of at least the minimum wage to their employees are now able to institute these non-traditional tip pools, assisting in recruitment measures by employers to hire non-traditionally tipped positions.

While an employer may now require tip pooling if they pay their employees a full minimum wage, the final rule does not change any regulations on employers that apply tip credits under the FLSA for their tipped employees. The final rule states “an employer may take a tip credit only for ‘tipped employees’ and only if, among other things, its tipped employees retain all their tips,” clarifying that an employer cannot retain any of the tips made by an employee.

Furthermore, the amendments made by this final rule do not “preclude an employer that takes a tip credit from implementing a tip pool in which tips are shared only among those employees who ‘customarily and regularly receive tips.’” This continues to exclude occupations that don’t normally receive tips but assist in providing the customer service experience of a restaurant, such as cooks and dishwashers.

Under the FLSA, employers are permitted to credit some of the tips made by employees toward the federal minimum wage, known as a tip credit. The current federal minimum wage is $7.25 per hour, but if an employer chooses to take advantage of the tip credit system, they are only liable for paying a lower direct cash wage that can be as low as $2.13 per hour.

Before the CAA, an employer who pays at least the federal minimum wage in direct wages was restricted from requiring a tip pooling system. The finalized rule removes this restriction. Employers may now implement “nontraditional” tip pools that include employees “who do not customarily and regularly receive tips” such as the back-of-the-house workers.

Cheryl Stanton, the Wage and Hour Administrator, commented that this rule could increase the pay for “back-of-the-house workers” through a “newly allowed tip sharing” procedure created by the finalized rule. She further comments that this rule could reduce any disparity in wages in types of jobs performed in the foodservice industry, such as cooks and dishwashers.

Previously, the FLSA put a cap on the amount of non-tipped duties a worker could perform to still be eligible for the tip-credit toward their wages. These non-tipped duties could not be more than 20% of their work and included jobs such as rolling silverware, running food, or assisting with preparing food and drinks for the entire restaurant. Now with the passing of this finalized rule, if an individual is employed in a tip-producing occupation, there is no longer a 20% limit to the amount of non-tipped duties an employee can perform, such as side work, as long as they are performed “contemporaneously” with their tipped duties.

President-elect Joe Biden ran his 2020 presidential campaign with the promise to raise the federal minimum wage from $7.25 per hour to a “decent wage” of $15 per hour. While Biden has mentioned ending the tip credit system in the past, it is uncertain whether the Biden administration will work to end it for all employees, especially after the unstable economic situation the COVID-19 pandemic has brought about for foodservice industries throughout 2020. Many in-house dining options were severely curtailed in most states, leading to reduced income for most restaurants impacted by the curfews and stay-at-home orders, leaving even less revenue to pay their employees.