How Does the 20 Percent Tip Credit Rule Impact Your Business

The Department of Labor has numerous polices-many of which employers are unaware of or simply do not understand. One of the biggest and most controversial issues affecting the hospitality industry’s workforce today is the 20 percent tip credit rule. The Department of Labor has yet to create fine-tuned guidelines that help hospitality and restaurant management individuals understand what constitutes tip-generating work and what does not. Already numerous lawsuits have been filed by employees against major hotel chains and restaurants for unfair use of the 20 percent tip credit rule, but the Department of Labor has yet to create specific guidelines to prevent further courtroom battles.

What is the 20 Percent Tip Credit Rule?

In the hospitality and food service industry, there are tipped employees and hourly wage workers. Non-tip generating employees must be paid the federal minimum wage during their work hours. Employers can, however, deduct a tip credit from employees who regularly earn $30 or more in tips-as long as they pay out a minimum of $2.13 to the employee per hour in wages.

The Tipped and Non-Tipped Dilemma

Some employees are hired for tipped and non-tipped work. Bellhops, for example, may also serve as desk clerks in a hotel. Waitresses, on the other hand, may second as hostesses for a restaurant. According to the Fair Labor Standards Act, employers can only use the tip credit on hours the employee works in her tipped job. That means if she spends six out of eight hours working in her non-tipped position-such as a hostess rather than a waitress-the employer cannot deduct payment based on the 20 percent tip credit rule. For the two hours she works as a waitress, however, he can.

So what happens when an employee is required to perform non-tip-related work while still working in her tipped work position? This is where many employers and employees have discrepancies with the tip credit rules laid out by the Department of Labor. For example, if the tipped employee spends hours washing dishes, occasionally seating guests, setting tables, or expediting food in the kitchen, the employer can still deduct the tip credit. The issue grows, however, when these temporary, incidental duties become established as part of the tipped worker’s daily job responsibilities. The Department of Labor handbook states that tipped employees who perform more than 20 percent of their tipped work on non-tipped job duties cannot have a tip credit removed for those hours worked. Unfortunately, not all employers feel this is a hard-and-fast rule.

The Impact on the Food Service and Hospitality Industry

The tip credit rule is greatly impacting the food service and hospitality industry. According to the National Restaurant Association (NRA), the 20 percent of work rule creates additional time-tracking and accountability issues for employers and employees. Not only do employees have to monitor non-tipped work hours closely, but employers have to be able to verify that the employee did in fact spend the stated amount of time doing non-tipped work. This creates additional man hours spent on administrative work, additional costs for hiring supervisors to watch hospitality and food service staff, and opens the door to employee lawsuits and litigations if a discrepancy arises.

A Potential Solution for the Tip Credit Rule

It is difficult for a food service worker or hospitality employee to track her daily duties and time spent accurately. Rather than require accurate time-tracking, employers can create work policies that prohibit employees hired for tipped work to spend more than 20 percent of their time working on non-tipped duties. This policy may reduce an employer’s risk for large class claims and lawsuits, and will require employees who challenge the 20 percent tip credit rule to prove their claims against the employer-which puts the liability on the employee, rather than the employer.

Beyond implementing policies, there is now a powerful tool available to eliminate the hassle, confusion, and extra time and cost spent as a result of the 20 percent tip credit rule. By automating the entire tipping process with a product known as TipCentral, a highly flexible and innovative tip management system that streamlines operations for businesses that handle tips, companies can improve productivity and increase profits.