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In the Consolidated Appropriations Act of 2018 ("CAA"), Congress amended section 3(m) of the Fair Labor Standards Act ("FLSA") to prohibit employers from keeping tips received by their employees, regardless of whether the employers take a tip credit under section 3(m). Congress also amended section 16(e) of the FLSA to allow the Department to impose civil money penalties ("CMPs") when employers unlawfully keep employees’ tips. On December 30, 2020, the Wage and Hour Division ("WHD") published Tip Regulations Under the Fair Labor Standards Act (the "2020 Tip final rule") in the Federal Register to address these amendments and to codify guidance regarding the FLSA tip credit’s application to employees who perform tipped and non-tipped duties. The effective date of the 2020 Tip final rule was March 1, 2021, but the Department extended that date until April 30, 2021, in accordance with the Presidential directive as expressed in the memorandum of January 20, 2021, from the Assistant to the President and Chief of Staff. The Department further delayed three portions of the 2020 Tip final rule until December 31, 2021: two portions addressing the assessment of CMPs and the portion addressing the application of the FLSA tip credit to tipped employees who perform tipped and non-tipped duties. The Department proposed to withdraw these three portions of the 2020 Tip final rule and proposed new language addressing these three issues. On September 24, 2021, a Department final rule (CMP final rule) was published in the Federal Register, which among other things, adopted language upholding the Department’s statutorily-granted discretion with regard to section 3(m)(2)(B) CMPs, and aligned the Department’s regulations with the FLSA’s statutory text. On June 23, 2021, the Department published an NPRM (Dual Jobs NPRM) in the Federal Register, 86 FR 32818, proposing to withdraw and repropose the portion of the 2020 Tip final rule addressing when a tipped employee performs both tipped and non-tipped duties under the FLSA. The comment period closed on August 23, 2021. The Department published a final rule on October 29, 2021 to finalize its proposal to withdraw one portion of the Tip Regulations Under the FLSA (2020 Tip final rule) and finalize its proposed revisions related to the determination of when a tipped employee is employed in dual jobs. Specifically, the Department amended its regulations to clarify that an employer may only take a tip credit when its tipped employees perform work that is part of the employee’s tipped occupation.

Statement of Need:

Upon review of the portion of the 2020 Tip final rule addressing when a tipped employee performs both tipped and non-tipped duties under the FLSA, the Department was concerned that the lack of clear guidelines in the rule regarding when a tipped employee who is performing non-tipped duties is still engaged in a tipped occupation, such that an employer can continue to take a tip credit for the time the tipped employee spends on such non-tipped work failed to achieve its goal of providing certainty for employers and created the potential for the misuse of the FLSA tip credit. Among other things, the 2020 Tip final rule would have permitted an employer to take a tip credit for time that an employee in a tipped occupation spends performing related, non-tipped duties contemporaneously with tipped duties, or for a reasonable time immediately before or after performing the tipped duties. The Department believes that because the 2020 Tip final rule did not define these key terms, the 2020 Tip final rule will invite rather than limit litigation in this area, and thus may not support one of the rule’s stated justifications for departing from established guidance. The Dual Jobs final rule clarifies that an employer may only take a tip credit when its tipped employees perform work that is part of the employee’s tipped occupation.

Summary of the Legal Basis:

The Fair Labor Standards Act (FLSA or Act) generally requires covered employers to pay employees at least the federal minimum wage, which is currently $7.25 per hour. See 29 U.S.C. 206(a)(1). Section 3(m) of the FLSA allows an employer that meets certain requirements to take a credit toward its minimum wage obligations of a limited amount, currently up to $5.12 per hour, of the tips received by employees (known as a tip credit). See 29 U.S.C. 203(m)(2)(A). Section 3(t) of the FLSA defines a tipped employee for whom an employer may take a tip credit under section 3(m) as any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips. See 29 U.S.C. 203(t). The FLSA regulations addressing tipped employment are codified at 29 CFR 531.50 through 531.60. See also 29 CFR 10.28 (establishing a tip credit for federal contractor employees covered by Executive Order 13658 who are tipped employees under section 3(t) of the FLSA).

Alternatives:

The Department issued this final rule upon a reasoned determination that its benefits justify its costs; and that it is tailored to impose the least burden on society, consistent with obtaining the regulatory objectives; and that, in choosing among alternative regulatory approaches, the agency has selected those approaches that maximize net benefits. Executive Order 13563 recognizes that some costs and benefits are difficult to quantify and provides that, when appropriate and permitted by law, agencies may consider and discuss qualitatively values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts. The analysis in the final rule outlines the impacts that the Department anticipates may result from this rule.

Anticipated Costs and Benefits:

The Department believes that the revisions to its regulations regarding when a tipped employee is employed in dual jobs provides increased clarity to employers and workers and ensures workers are paid the wages they are owed. In the Dual Jobs final rule, the Department estimated that these changes would lead to costs for Year 1 that will consist of rule familiarization costs, adjustment costs, and management costs, and would be $224,882,399 ($23,827,236 + $23,827,236 + $177,227,926). For the following years, the Department estimates that costs will only consist of management costs and would be $177,227,926. Additionally, the Department estimated average annualized costs of this rule over 10 years. Over 10 years, it will have an average annual cost of $183.6 million calculated at a 7 percent discount rate ($151.1 million calculated at a 3 percent discount rate). All costs are in 2019 dollars.

Risks:

This action does not affect public health, safety, or the environment.