Labor department withdraws tip credit rule

Published: December 17, 2024 | by Emily Scace, JD, Senior Legal Editor at Brightmine

The Department of Labor has formally rescinded a 2021 rule that made it more difficult for employers to claim a minimum wage tip credit under the Fair Labor Standards Act (FLSA).

The impact on employers is expected to be minimal, as the rule was vacated by the 5th Circuit Court of Appeals in August. The Final Rule, effective December 17, 2024, officially removes the vacated regulatory text and restores the regulation as it existed prior to the 2021 rule.

Under the FLSA, up to $5.12 per hour of tips received may be claimed as credit toward the federal minimum wage of $7.25 per hour. If an employee’s tips combined with the direct cash wage of at least $2.13 per hour do not equal $7.25 per hour, the employer must make up the difference.

Not all jobs are eligible for a tip credit. An employee must customarily and regularly receive more than $30 a month in tips, among other requirements.

When an employee works for one employer in both a tipped and non-tipped occupation, such as an employee who works both as a maintenance person and a wait person, the tip credit is available only for the hours the employee spends in the tipped occupation. However, employers may claim the tip credit for some of the time that a tipped employee spends in duties related to the tipped job — often referred to as sidework — even though the duties are not by themselves directed toward producing tips.

For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip-producing.

This situation was the subject of the vacated 2021 rule. Often referred to as the “80/20 plus 30 rule,” the regulation allowed employers to claim a tip credit only during the time their employees spent on tip-producing work or on directly supporting work that took up no more than 20% of their workweek and no more than 30 continuous minutes at any one time.

The 2021 rule having been vacated, the regulatory text no longer contains these time limits. However, sidework duties must still be related to a tipped occupation in order for a tip credit to apply.