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Restaurant Employers Face Uncertainty With the Future of Tip Credit in Limbo

January 27, 2021

An estimated one in four U.S. jobs lost during the COVID-19 pandemic have been in restaurants and bars. According to a study by the National Restaurant Association, as of December 2020, 17% of the nation’s restaurants have closed permanently or long-term due to the pandemic. That’s about 110,000 establishments. A troubled industry faces even more uncertainty as the new administration suggests major changes to how many restaurants handle tips for their workers.

Many employers use tip credits to pay workers.

Under the Fair Labor Standards Act (FLSA), many restaurants and hospitality industry employers can use the tip credit method of paying their employees. Employers can pay tipped workers less than the minimum wage if their tips bring their hourly earnings up to at least the minimum amount. This method allows employers to lower their payroll costs. However, using the tip credit properly can be complicated, and mistakes can result in liability and expensive litigation. 

The DOL allowed limited tip sharing with back of house workers in December.  

In the waning days of 2020, the Trump administration’s Department of Labor changed its rules. This was designed to provide what it described as “clarity and flexibility to employers” on how “tip pooling” or “tip sharing” under the FLSA could include so-called “back of the house” employees, such as cooks and dishwashers, who do not usually receive tips. The final rule also maintained the prohibition on employers keeping any of the tips and also offered other guidance. The rule change is set to take effect Feb. 20. 

Rules Freeze and Tip Credit in Jeopardy

On President Biden's first day in office, his administration ordered federal agencies, including the Department of Labor, to freeze any such pending rules until they could be reviewed. As a potential harbinger of what is to come, on Jan. 26, the Department of Labor announced that a previously released opinion letter, based on the yet to be enacted final rule on tip sharing, was being withdrawn. Prior to that, on Jan. 19, eight states and the District of Columbia also filed a lawsuit challenging the new rule, claiming it would lower wages for tipped workers.   

Restaurant employers also have reason to follow the issue of continued use of the tip credit. While on the campaign trail last fall, then-candidate Biden openly supported getting rid of the tip credit and backed a $15 minimum wage. 

With the future of the tip credit uncertain, restaurant employers and others in the hospitality industry should review their current pay structure and seek counsel to learn their options if the tip credit is notably curtailed or eliminated.

Please contact Mark Fijman or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice and guidance.