Tag: tip credit

State and Local Hourly Minimum Wage Rate Increases are “Coming to Town” on January 1, 2024

As 2023 comes to a close, employers should be aware of the hourly minimum wage rate increases set to take effect in various jurisdictions on January 1, 2024. 22 states and more than 40 local jurisdictions will ring in the New Year with new minimum wage rates.

Minimum wage employee in the following states will be impacted by the upcoming increases: Alaska, Arizona*, California*, Colorado*, Connecticut, Delaware, Hawaii, Illinois*, Maine*, Maryland*, Michigan, Minnesota*, Missouri, Montana, Nebraska, New Jersey, New York, Ohio, Rhode Island, South Dakota, Vermont, and Washington*. Those states identified with an asterisk also have local jurisdictions with minimum wage increases effective January 1, 2024, which are higher than the applicable state minimum wage.

Employer should confirm that any minimum wage rates are adjusted properly.  In addition, employers with tip credit employees should review their tip credit notices to ensure full compliance with applicable laws (including cash wage being paid to the tipped employee and amount of tip credit claimed by employer).

© Polsinelli PC, Polsinelli LLP in California
For more news on 2024 Minimum Wage Increases, visit the NLR Labor & Employment section.

District of Columbia to Eliminate the Tip Credit: a Specter of the Future?

Currently, employers in the District of Columbia (like the majority of states) are permitted to count customer tips toward the minimum hourly wage they must pay to certain service employees. This practice is often referred to as taking a “tip credit.” Said differently, an employer is allowed to pay particular service employees a cash wage that is less than the minimum wage by relying on tips the employee receives from customers to make up the difference between the subminimum wage paid directly by the employer and the applicable federal or state minimum wage. In the District of Columbia, employers currently are allowed to pay their tipped workers a subminimum wage of $5.35 per hour, with the expectation that customers’ tips will cover the balance of the $16.10–per-hour minimum wage.

In early November 2022, nearly 74 percent of D.C. voters approved Initiative 82, the “District of Columbia Tip Credit Elimination Act of 2022,” which will gradually eliminate use of the tip credit in the District of Columbia by 2027. In 2027, the District will join the small group of states that currently prohibit use of the tip credit (Alaska, California, Minnesota, Montana, Nevada, and Oregon). In 2018, 55 percent of D.C. voters approved a different initiative, which would have phased out the tip credit, but the Council of the District of Columbia overturned the voter-approved initiative. Since then, the composition of the D.C. Council has changed, and the council is expected to implement Initiative 82.

Under Initiative 82, starting in January 2023, the District of Columbia’s minimum cash wage (i.e., the subminimum wage paid by the employer when an employer utilizes a tip credit) of $5.35 will increase by a dollar or two every year until it reaches minimum wage. Correspondingly, the maximum tip credit an employer can take in the District of Columbia will be reduced gradually until 2027 when the tip credit is eliminated. It is worth noting that the D.C. Council has not yet implemented Initiative 82, so employers may want to monitor what cash wage rates and tip credits are officially implemented to ensure compliance with the District of Columbia’s wage laws and tip credit notice requirements. As the end of the year approaches, employers may also want to review any changes to state minimum wage and minimum tip credit amounts that may become effective on December 31 or January 1.

The “DC Committee to Build a Better Restaurant Industry” was the campaign committee behind Initiative 82. The fact that voters approved the tip credit elimination initiative by nearly 20 percentage points more than the 2018 initiative shows that the campaign committee may indeed impact the fate of the tip credit. Other groups like “One Fair Wage” have also taken aggressive lobbying action to convince lawmakers and voters in other states to eliminate the tip credit. In early 2022, One Fair Wage announced a $25 million campaign to try to convince twenty-five states to remove the tip credit by 2026. According to One Fair Wage’s website, “One Fair Wage policy would require all employers to pay the full minimum wage with fair, non-discriminatory tips on top.” In addition to the District of Columbia, the group has campaigned in Illinois, Maine, Massachusetts, Michigan, and New York.

As we discussed in a June 2021 article, employers already are under siege with respect to the tip credit at the federal level. One of President Biden’s objectives has been to eliminate the tip credit on a nationwide basis, but because the tip credit exists in the statutory text of the Fair Labor Standards Act (FLSA), the U.S. Congress would need to amend the FLSA to accomplish that goal. However, through regulatory action that was finalized late last year, the U.S. Department of Labor (DOL) burdened the service industry with a harsh standard for maintaining compliance with tip credit regulations. In late 2021, the DOL released a rule that restored the pre-Trump-era 80/20 rule and added a new thirty-minute rule. Compliance with the new rule effectively created its own deterrent against continued use of the tip credit.

Ironically, a significant percentage of service industry employees actually oppose these initiatives to eliminate use of the tip credit because of the potential negative impact it will have on their total income. The U.S. Bureau of Labor Statistics indicates that, as of May 2021 (the most recent data available), individuals working as waiters and waitresses earned on average nearly $14 per hour. This is nearly twice the current federal minimum wage $7.25.

Many service industry employees advocate against elimination of the tip credit because they anticipate that employers may seek to offset the additional hourly labor costs by shrinking the workforce, decreasing hours, or recovering the added expense through higher menu prices or service charges, which may eat into the tips customers are willing to leave their servers. Many employers that have stopped utilizing the tip credit pay full minimum wage by automatically tacking a service fee onto customer bills. Unlike tips, employers can keep all, or portions of, an automatic charge, so long as the employer complies with local or state laws requiring adequate notice to customers about how the charge will be used.

Once the 118th Congress is sworn in this coming January, it is unlikely that employers will see much change regarding use of the tip credit at the federal level. Nevertheless, some state legislators may press forward with their efforts to eliminate use of the tip credit at the state level. For service industry employers that operate nationwide, there are mounting challenges to complying with federal and state tip regulations. Employers may want to continue to monitor states where legislation is targeting elimination of the tip credit and may wish to consider measures to address the additional labor costs that will follow.

© 2022, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.
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U.S. Department of Labor Rescinds Guidance Regarding “Side Work” and the FLSA’s Tip Credit in Restaurants

Under the Fair Labor Standards Act (“FLSA”), employers can satisfy their minimum wage obligations to tipped employees by paying them a tipped wage of as low as $2.13 per hour, so long as the employees earn enough in tips to make up the difference between the tipped wage and the full minimum wage. (Other conditions apply that are not important here.) Back in 1988, the U.S. Department of Labor’s Wage and Hour Division amended its Field Operations Handbook, the agency’s internal guidance manual for investigators, to include a new requirement the agency sought to apply to restaurants. Under that then-new guidance, when tipped employees spend more than 20% of their working time on tasks that do not specifically generate tips—tasks such as wiping down tables, filling salt and pepper shakers, and rolling silverware into napkins, duties generally referred to in the industry as “side work”—the employer must pay full minimum wage, rather than the lesser tipped wage, for the side work.

This provision of the Handbook flew largely under the radar for years. This was partly because the Department did not publicize the contents of the Handbook, and party because the Department did not bring enforcement actions premised on a violation of this 20% standard. And historically, virtually nobody in the restaurant industry maintained records specifically segregating hours and minutes spent on tip-generating tasks as compared to side work.

In 2007, a federal district court in Missouri issued a ruling in a class action upholding the validity of the 20% standard, and that decision received an enormous amount of attention and publicity. In the years that followed, a wave of class actions against restaurants flooded the courts across the country, all contending that the restaurants owe the tipped employees extra money because of the Department’s 20% standard in the Handbook.

In January of 2009, in the waning days of the George W. Bush Administration, the Department issued an opinion letter rejecting the 20% standard, superseding the Handbook provision, and stating that there is no limit on the amount of time a tipped employee can spend on side work. Six weeks later, however, in March of 2009, the Obama Administration withdrew that opinion letter. In subsequent years, the Department filed several amicus curiae briefs in pending court cases endorsing the 20% standard, and the Department even modified the Handbook provision to make the requirements even more difficult for employers to satisfy.

In late 2017, a divided three-judge panel of the U.S. Court of Appeals for the Ninth Circuit concluded, in nine consolidated appeals presenting the same issue, that the Department’s 20% standard is not consistent with the FLSA and thus was unlawful. A few months later, however, a divided 11-judge en banc panel of the same court reached the opposite conclusion, ruling by an 8-3 vote that the 20% standard is worthy of deference.

In July of 2018, the Restaurant Law Center, represented by Epstein Becker Green, filed a declaratory judgment action against the Department in federal court in Texas challenging the validity of the 20% standard under the FLSA, the Administrative Procedure Act, and the U.S. Constitution. Roughly a month before the employers’ deadline to file a certiorari petition with the Supreme Court regarding the en banc Ninth Circuit ruling, and just days before the government’s response is due in the Texas litigation, the Department reissued the 2009 opinion letter.

This opinion letter, now designated as FLSA2018-27, once again rejects the 20% standard and clarifies that employers may pay a tipped wage when employees engage in side work so long as the side work occurs contemporaneously with, or in close proximity to, the employees’ normal tip-generating activity. This opinion letter should put an end to the many pending cases, including numerous class actions, that depend on the 20% standard.

The overall take-away for employers is that at least under federal law, side work performed during an employee’s shift, in between tip-generating tasks, should present no concern. The same should be true of side work performed at the start or end of an employee’s shift, so long as the side work does not take too long. An employee coming in fifteen or thirty minutes before the restaurant is open to help get the restaurant ready for the day, followed by the remainder of the shift in which the employee generates tips, seems to be consistent with the new opinion letter. Likewise for employees who spend some time at the end of the shift helping to close the restaurant for the day. But employers should use common sense and good judgment, as having tipped employees spend hours and hours performing side work may still give rise to risks. And it remains important to be aware of any state or local law requirements that may differ from federal law.

©2018 Epstein Becker & Green, P.C. All rights reserved.

This post was written by Paul DeCamp of Epstein Becker & Green, P.C.

Tip Credit Does Not Apply to Delivery Drivers Declares Connecticut Supreme Court

delivery drivers pizza tip creditIn a decision released on April 4, 2017, the Connecticut Supreme Court found that employers cannot take advantage of a “tip credit” for delivery drivers in order to meet the state minimum wage.

The case, Amaral Brothers, Inc. v. Department of Labor, addressed the issue of whether delivery drivers (in this case, drivers for a pizza chain) fall within the scope of employees who are eligible for a “tip credit.” Under Conn. Gen. Stat. § 31-60(b), a tip credit may be taken for “persons, other than bartenders, who are employed in the hotel and restaurant industry . . . who customarily and regularly receive gratuities.”

A tip credit allows businesses—namely, hotels and restaurants—to pay “service employees” salaries below the state minimum wage. This is because employees in some positions, on account of their service to customers, normally receive gratuities in addition to their base wages, making up any difference between their salaries and the minimum wage rate. Specifically, a “service employee” has been defined as “any employee whose duties relate solely to the serving of food and/or beverages to patrons seated at tables or booths, and to the performance of duties incidental to such service, and who customarily receive gratuities.”

The Connecticut Department of Labor (CT DOL), the agency responsible for enforcing the minimum wage requirement, determined that delivery drivers were not tip-credit eligible, primarily because it found their “service” was limited to passing food to customers at their door. The CT DOL rejected the plaintiff’s argument that a driver transporting pizza to a customer’s home in a car is comparable to a waiter carrying food to a customer at a table.

Upon appeal by the pizza restauranteur, the Connecticut Supreme Court affirmed that delivery drivers do not fall within the scope of the tip credit. The court held that it was “reasonable for the department to conclude that the legislature did not intend that employees such as delivery drivers, who have the potential to earn gratuities during only a small portion of their workday, would be subject to a reduction in their minimum wage with respect to time spent traveling to a customer’s home and other duties for which they do not earn gratuities.”

With this ruling by the Supreme Court affirming the position of the CT DOL, it can be expected that the agency will pay close attention to how delivery drivers are paid in Connecticut. Accordingly, those in the restaurant and hotel industries should take time to review how their delivery drivers are paid. In addition, if waitstaff are also utilized as delivery drivers, it is best practice to break out the time spent on each of those duties if the tip credit is being utilized, so as to have adequate records if challenged.

ARTICLE BY Ashley Totorica of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

© 2017, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.