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What is the 80/20 tip rule, and what does it mean for restaurants?

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On December 28th, the Department of Labor (DOL) put the 80/20 tip rule back into effect – with some changes. If you employ tipped staff and operate in a state that allows you to claim a tip credit, you should familiarize yourself with the revised 80/20 tip rule. We’ve made it easy for you by outlining and explaining the essentials below. We also explain what you can do to make following the revised rule easier for your business, including helpful tips from restaurant industry leader Jeremy Julian of CBS NorthStar.

But first, let’s review the concept of a tip credit. Understanding this concept is fundamental to understanding the 80/20 tip rule.

What is a tip credit?

By law, employers are required to pay federal or state minimum wage to their employees (whichever is higher). In states with a tip credit, a portion of received tips per hour may be credited against the minimum wage. This is known as a tip credit. In order for an employer to claim a tip credit, the tipped employee must receive at least the minimum wage amount each hour in combined wages and tips. The amount of the credit varies by state.

For example, in Texas the minimum wage is $7.25 per hour. Texas employers may pay their tipped staff $2.13 per hour, but only if those employees are making up the $5.13 difference in tips.

Most states allow employers to claim a tip credit. States that do NOT allow tip credit include Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. You can check out the full breakdown here.

What is the 80/20 tip rule?

The 80/20 tip rule states that employers must pay minimum wage instead of a lower tip credit wage if:

  • The tipped employee is performing duties that are not tip-generating and do not directly support their tipped work.
  • The employee does tip-supporting work for more than 20% of their overall time for the week.

At least 80% of their time must be dedicated to tipped work for the employer to take the tip credit. (This is where the “80/20” part of the name comes from.)

This means that there are 3 types of work that employers must keep track of for the 80/20 tip rule:

  1. Tip-generating work. This is any work for which the employee receives tips, such as serving guests at tables.
  2. Work that directly supports tipped work. Supporting work includes things like wiping down tables and prepping silverware for guests before they sit down.
  3. Work that does not generate tips or directly support tip-generating work. Work in this category includes things like washing dishes, prepping meals, and other tasks normally paid at minimum wage.

While the rule isn’t written into law, it is published in the Federal Register for the Fair Labor Standards Act (FLSA). The Department of Labor is responsible for upholding the FLSA, which means employers can still be penalized if they don’t follow the rules.

How has the 80/20 tip rule changed?

On December 28, the DoL added a third condition to the 80/20 tip rule. The rule now also states that the employer cannot take the tip credit if the employee does supporting work for more than 30 minutes.

Essentially, the DOL aims to ensure that tipped employees make at least as much per hour as non-tipped employees by ensuring that the tip credit is only taken if employees spend most of their time doing tip-generating work.

“This is undoubtedly inconvenient to employers, and can seem impossible without the right processes in place. Same as the Affordable Care Act, overtime calculations, and temp checks. It’s just part of doing business,” says Audrey Hogan, SHRM-SCP, Chief Operating Officer of TimeForge, a Texas-based labor management software company. “We, as an industry, understand the importance of creating a world class company culture that values and compensates employees fairly. It’s in employers’ best interests to take this stuff to heart. It’s just as important as food safety, since it will directly impact whether you have team members who drive return customers. There are ways to cut costs and minimize inconvenience, but cutting corners in wage calculations is not a healthy one – nor financially feasible long-term.” 

What do the changes mean for restaurants?

The new 30 minute condition means that restaurants may end up spending more on labor. Under the conditions described above, employees may be owed minimum wages instead of the lower tip credit amount. It also means that, in order to properly pay employees according to the new rule, employers will need to clearly track what kind of work employees are doing throughout the day and for how long.

It sounds like a lot, right? And it is. But there are a few upsides that can help make the revised rule less painful.

Because employers will have to pay closer attention to what their staff are doing and for how long, they’ll have more opportunity to identify areas where they can trim down on labor costs and become more efficient. For example, some restaurateurs may find that they can save money by scheduling servers differently. (We suggest some options below.)

Also, since employers will be paying more for non-tipped work, they can advertise this change to potential hires as a reason to get into or stay in the hospitality industry. With the ongoing restaurant labor shortage, anything that sweetens the deal for new or existing employees can benefit restaurants if approached in a constructive way.

What can employers do to make it easier?

The positives may not outweigh the negatives for many restaurateurs, but there are ways to make staying compliant easier. Here’s what we recommend to keep costs low and everyone on the same page:

  • Adjust your workplace policy to reflect the 80/20 tip rule and especially the new 30 minute rule.
  • Train your staff on the 30 minute rule. Make it as easy as possible for the team to keep track of what kind of work they’re doing and for how long. (TimeForge users: see options below.)
  • Make sure tipped employees don’t arrive more than 30 minutes before customers or stay more than 30 minutes after.
  • For some restaurateurs, it may be preferable to move more side work tasks to employees in non-tipped positions. This may make it easier to stay compliant.

And there’s one more thing you can do: integrate your labor management system with your POS. This will allow easier tracking, labor forecasting, and automated compliance.

“Without an integrated POS and labor management platform, it’s almost impossible to monitor your costs effectively,” says Jeremy Julian, Chief Operating Officer of CBS NorthStar. “With integrated sales and labor, you can see what job the team member is doing, as well as how much they are receiving in tips on a real time basis, allowing real time calculations if necessary.”

With ongoing labor market concerns and increasingly complicated regulations like the 80/20 tip rule, the necessity of integrated sales and labor can’t be overstated.

Additional options for TimeForge users

If you use TimeForge’s Scheduling and Attendance solutions: good news! You have some additional options for more easily tracking different types of work. You can:

  • Schedule supporting work with its own position; use rotating split shifts to distribute side work evenly across your team.
  • Use TimeForge’s ability to automatically switch positions to prevent your staff from having to hit the clock between scheduled jobs. Or, if you prefer not to auto switch employees between positions, you can enable an alert in TimeForge. The alert will notify you if your servers are spending too much time in non-tipped positions.
  • Run a Payroll Summary report to confirm how much time your staff spent in tipped versus non-tipped positions.                                       
  • Bonus: If you’re using TimeForge’s Human Resources solution, you can quickly and easily send policy documents to employees. Use these to educate employees on the policy, as well as require an e-signature acknowledgment.

Whatever you preferred approach, just remember: we’re here for you. It’s our job to make yours less tedious. If you have any questions or would like some help configuring your account, please don’t hesitate to reach out to us at [email protected]

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