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United States Department of Labor Rescinds 80-20 Rule for Tipped Employees

Employers in the restaurant industry are all familiar with the “80/20 Rule.” If an employee works in an occupation that customarily and regularly generates a certain minimum amount of tips per month, the Fair Labor Standards Act permits employers to pay that employee less than minimum wage (i.e., take a “tip credit”), provided that the combination of actual wage and the amount earned in tips is at least the minimum wage. For example, a server who waits on patrons at a restaurant—taking their orders, delivering their food, and addressing any needs that arise during the meal, works in a “tipped occupation.” The U. S. Department of Labor (DOL) has issued regulations to make clear that if that same server engages in work “unrelated” to waiting tables, such as cleaning restrooms or performing maintenance, then the employer cannot take the tip credit for time spent on those unrelated duties. The employee in those situations is deemed to work two jobs—one tipped and one untipped—and the tip credit applies only to the tipped job.

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But as anyone in the industry knows, servers perform numerous tasks that are “related” to waiting tables but do not generate tips directly, such as cleaning and setting tables, making coffee, rolling silverware, or filling salt and pepper shakers. These tasks do not produce a tip in and of themselves, but they are necessary and incidental to the tipped work.

Enter the 80/20 Rule. The 80/20 Rule originated in the DOL Wage and Hour Division’s Field Operations Handbook in 1988, and the DOL has adhered to it ever since. Essentially, the 80/20 Rule provides that as long as a server does not spend more than 20 percent of his or her time working as a server doing the related tasks, the employer may take the tip credit both for time spent serving and for the time spent on related tasks. This means that employers must track how much time servers spend every week preparing for customers, closing down, or keeping tables clean and well stocked to make sure that the incidental work does not exceed 20 percent of any server’s time. Otherwise, the employer could face wage-and-hour violations for failure to pay the full hourly minimum wage.

Last year, however, the DOL decided to chuck this tried and true recipe and dish up new advice. In an opinion letter from November 2018, the DOL adopted a position it had previewed in 2009. The 2018 opinion letter states that the DOL did “not intend to place a limitation on the amount of duties related to a tip-producing occupation that may be performed, so long as they are performed contemporaneously with direct customer-service duties.” In other words, servers are not limited to spending 20 percent of their time on related tasks. The DOL opinion letter directs employers to the Occupational Information Network website for a list of core or supplemental tasks that the DOL will consider “directly related” to the tip-producing duties of the occupation. The opinion letter also indicates that it supersedes the Field Operations Handbook statement on the 80/20 Rule and that the DOL intends to issue a revised Field Operations Handbook statement soon.

This revision came February 15, 2019, in Field Assistance Bulletin No. 2019-2. The Bulletin states that the Wage and Hour Division “will no longer prohibit an employer from taking a tip credit based on the amount of time an employee spends performing duties related to a tip-producing occupation that are performed contemporaneously with direct customer-service duties or for a reasonable time immediately before or after performing such direct-service duties.” In other words, the 80/20 Rule has officially expired.

This new position bodes well for restaurateurs looking to loosen their supervision of servers, though there is still reason for caution. Early reviews suggest some courts may hesitate to give the DOL’s new advice four-star ratings. In a decision issued last month, a federal district court in Western Missouri refused to defer to the DOL’s new position. The district court noted that the DOL has not, to date, followed through on its promise to revise the Field Operations Handbook, and therefore its new position directly contradicts the decades-old 80/20 Rule guidance. The district court further noted that the DOL reaffirmed its support for the 80/20 Rule in 2016 edits to the Field Operations Handbook and in amicus briefs before the Eighth Circuit Court of Appeals in 2011, the 10th Circuit Court of Appeals in 2017, and the Ninth Circuit Court of Appeals last year. Indeed, just months before the DOL issued the opinion letter, the full panel of the Ninth Circuit concluded in Marsh v. J. Alexander’s LLC that the DOL’s 80/20 Rule was entitled to judicial deference. The Eighth Circuit had reached a similar conclusion in 2011. The federal district court therefore concluded that deferring to the DOL’s new opinion letter would result in “unfair surprise” to the plaintiff employees who had initiated their litigation three years earlier. The upshot? The district court applied the 80/20 Rule.

This leaves employers with a dog’s breakfast of conflicting legal advice, at least in the short term. Although reliance on the 2018 opinion letter should provide a defense in a DOL wage-and-hour audit, it might not protect employers sued by employees in federal court for wage-and-hour violations, particularly in ongoing litigation. We recommend that employers keep the 80/20 Rule on tap and let it slowly run dry as the legal landscape continues to develop.

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