86756 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

1https://www.dol.gov/sites/dolgov/files/WHD/ 

legacy/files/fab2018_3.pdf. 

DEPARTMENT OF LABOR 

Office of the Secretary 

29 CFR Part 10 

Wage and Hour Division 

29 CFR Parts 516, 531, 578, 579, and 

580 

RIN 1235–AA21 

Tip Regulations Under the Fair Labor 

Standards Act (FLSA) 

AGENCY: Wage and Hour Division, 

Department of Labor. 

ACTION: Final rule. 

SUMMARY: 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). In this final 

rule, the Department of Labor 

(Department) amends its tip regulations 

to address these amendments. The final 

rule also codifies the Department’s 

guidance regarding the tip credit’s 

application to employees who perform 

tipped and non-tipped duties. 

DATES: This final rule is effective March 

1, 2021. 

FOR FURTHER INFORMATION CONTACT: 

Amy DeBisschop, Director of the 

Division of Regulations, Legislation, and 

Interpretation, Wage and Hour Division, 

U.S. Department of Labor, Room S– 

3502, 200 Constitution Avenue NW, 

Washington, DC 20210, telephone: (202) 

693–0406 (this is not a toll-free 

number). Copies of this final rule may 

be obtained in alternative formats (Large 

Print, Braille, Audio Tape, or Disc), 

upon request, by calling (202) 693–0675 

(this is not a toll-free number). TTY/ 

TDD callers may dial toll-free (877) 889– 

5627 to obtain information or request 

materials in alternative formats. 

Questions of interpretation or 

enforcement of the agency’s existing 

regulations may be directed to the 

nearest WHD district office. Locate the 

nearest office by calling the WHD’s tollfree help line at (866) 4US–WAGE ((866) 

487–9243) between 8 a.m. and 5 p.m. in 

your local time zone, or log onto WHD’s 

website at https://www.dol.gov/ 

agencies/whd/contact/local-offices for a 

nationwide listing of WHD district and 

area offices. 

SUPPLEMENTARY INFORMATION: 

I. Executive Summary 

The FLSA generally requires covered 

employers to pay their employees at 

least the Federal minimum wage, which 

is currently $7.25 per hour. See 29 

U.S.C. 206(a)(1). As amended, section 

3(m) of the FLSA allows an employer 

that satisfies certain requirements to 

count a limited amount of the tips 

received by its ‘‘tipped employees’’ as a 

credit toward its Federal minimum 

wage obligation (known as a ‘‘tip 

credit’’). See 29 U.S.C. 203(m)(2)(A). An 

employer may take a tip credit only for 

‘‘tipped employees’’ and only if, among 

other things, its tipped employees retain 

all their tips. Id. This requirement does 

not, however, preclude an employer that 

takes a tip credit from implementing a 

tip pool in which tips are shared only 

among those employees who 

‘‘customarily and regularly receive 

tips.’’ Id. 

In 2011, the Department revised its tip 

regulations to reflect its view at the time 

that, regardless of whether their 

employer takes a tip credit, the FLSA 

required that tipped employees retain 

all tips they received, except tips 

distributed through a tip pool limited to 

employees who customarily and 

regularly receive tips. (76 FR 18855) 

See, e.g., 29 CFR 531.52. On December 

5, 2017, the Department published a 

notice of proposed rulemaking (NPRM), 

82 FR 57395, which proposed to rescind 

the parts of its tip regulations that 

applied to employers that pay a direct 

cash wage of at least the full Federal 

minimum wage and do not take a tip 

credit. 

On March 23, 2018, Congress 

amended section 3(m) of the FLSA in 

the CAA, Public Law 115–141, Div. S., 

Tit. XII, sec. 1201, 132 Stat. 348, 1148– 

49 (2018). Among other things, the CAA 

revised section 3(m) by renumbering the 

existing tip credit language as section 

3(m)(2)(A) and adding a new section 

3(m)(2)(B). That new section prohibits 

employers from keeping their 

employees’ tips ‘‘for any purposes, 

including allowing managers or 

supervisors to keep any portion of 

employees’ tips’’ even if they do not 

claim a tip credit. In addition, the CAA 

amended sections 16(b) and 16(c) of the 

FLSA to permit private parties and the 

Department to recover any tips 

unlawfully kept by an employer in 

violation of section 3(m)(2)(B), in 

addition to an equal amount of 

liquidated damages. Finally, the CAA 

amended section 16(e) of the FLSA to 

give the Department discretion to 

impose civil money penalties (CMPs) up 

to $1,100 when employers unlawfully 

keep employees’ tips. On October 8, 

2019, the Department issued a new 

NPRM proposing, among other things, 

to update its tip regulations to 

incorporate the CAA amendments (84 

FR 53956). 

Congress specified in the CAA that 

the portions of the 2011 final rule that 

‘‘are not addressed by section 3(m) . . . 

(as such section was in effect on April 

5, 2011), shall have no further force or 

effect until any future action taken by 

[the Department of Labor].’’ CAA, Div. 

S, Tit. XII, sec. 1201(c). As the 

Department explained in a Field 

Assistance Bulletin (FAB) published 

shortly thereafter, that statement applies 

to those portions of the Department’s 

regulations—§§ 531.52, 531.54, and 

531.59—that restricted tip pooling by 

employers that pay tipped employees at 

least the full minimum wage as a direct 

cash wage and, therefore, do not claim 

a tip credit. See FAB No. 2018–3 (Apr. 

6, 2018).1 In light of the CAA’s 

amendments to the FLSA, the 

Department’s 2019 NPRM withdrew the 

2017 NPRM, which addressed the same 

topic as those amendments. 84 FR 

53956. 

This final rule revises the 

Department’s current tip pooling 

regulations in light of the 2018 CAA 

amendments. The CAA did not change 

the statutory requirements, now in 

section 3(m)(2)(A) of the FLSA, that 

apply to employers that take a tip credit. 

Those employers may continue to 

institute a mandatory ‘‘traditional’’ tip 

pool, that is, a tip pool limited to 

employees who ‘‘customarily and 

regularly’’ receive tips. In addition, the 

CAA removed the regulatory restrictions 

on an employer’s ability to require tip 

pooling when it does not take a tip 

credit; those employers may now 

implement mandatory, ‘‘nontraditional’’ 

tip pools, which include employees 

who do not customarily and regularly 

receive tips, such as cooks and 

dishwashers. 

The CAA also imposed a new 

prohibition, in section 3(m)(2)(B), that 

applies to all employers regardless of 

whether they take a tip credit: 

Employers may not keep employees’ 

tips and may not allow managers or 

supervisors to do so. Among other 

things, section 3(m)(2)(B) prohibits 

employers, managers, and supervisors 

from receiving employees’ tips as part of 

any tip pooling arrangement. It also 

prohibits employers from operating tip 

pools in any manner such that they 

‘‘keep’’ tips. 

This final rule updates the 

Department’s tip regulations to 

incorporate the CAA’s amendments to 

the FLSA. As explained above, the CAA 

renumbered the FLSA’s existing tip 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86757 

2Congress also amended section 3(m)’s tip credit 

language in 1977, 1989, and 1996. These 

amendments changed only the amount of tips 

received by employees that could be credited 

toward an employer’s minimum wage obligations. 

See Public Law 95–151, sec. 3(b), 91 Stat. 1245 

(1977); Public Law 101–157, sec. 5, 103 Stat. 938 

(1989); Public Law 104–188, sec. 2105(b), 110 Stat. 

1755 (1996). 

credit language as section 3(m)(2)(A), 

but made no substantive changes to that 

language. As a result, this rule does not 

alter the Department’s existing 

regulations and guidance regarding 

section 3(m)(2)(A) for employers that 

claim a tip credit. Those regulations are 

addressed only as necessary to clarify 

how they relate to the CAA’s 

amendments to the FLSA. In this rule, 

the Department makes the following 

three substantive changes to regulations 

concerning tips. First, the rule 

incorporates the new statutory language, 

section 3(m)(2)(B)—which applies 

whether or not the employer takes a tip 

credit—into the Department’s 

regulations and incorporates a new 

recordkeeping requirement to help it 

administer the new statutory language. 

Second, this rule, consistent with the 

CAA’s amendments, removes the 

portions of the Department’s regulations 

that prohibited certain employers— 

those that pay their tipped employees a 

direct cash wage of at least the full 

Federal minimum wage and do not take 

a tip credit against their minimum wage 

obligations—from including employees 

who do not customarily and regularly 

receive tips, such as cooks and 

dishwashers, in mandatory tip pooling 

arrangements. Third, this rule amends 

the Department’s regulations to reflect 

recent guidance explaining that an 

employer may 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. These amended 

regulations also address which nontipped duties are related to a tipproducing occupation. 

Additionally, the Department 

incorporates the CAA’s new language 

regarding CMPs into its regulations. The 

Department also takes this opportunity 

to revise portions of its CMP regulations 

on willful violations (specifically, 29 

CFR 578.3 and 579.2). It does so to make 

the regulatory language consistent with 

the way the Department actually 

litigates willfulness issues and to 

address the appellate courts that have, 

for example, ‘‘urge[d]’’ it to reconsider 

those regulations to ensure their 

consistency with the Supreme Court’s 

interpretation of the meaning of 

‘‘willful’’ in the FLSA. 

Finally, the Department amends the 

portions of its regulations that address 

the payment of tipped employees under 

Executive Order 13658, Establishing a 

Minimum Wage for Contractors, to 

reflect rescissions in the FLSA 

regulations for tipped employees, 

incorporate the Department’s 

explanation of when an employee 

performing non-tipped work is a tipped 

employee, and otherwise align those 

regulations with the Executive order. 

The Department estimates this final 

rule could result in a potential transfer 

of $109 million, as tip pools are 

expanded from front-of-the-house 

employees alone to include back-of-thehouse employees. A directly observable 

transfer would occur only among 

employees because section 3(m)(2)(B) 

prohibits employers from participating 

in these tip pools or otherwise keeping 

employees’ tips. However, assuming the 

shared tips are large enough to maintain 

wage levels for all workers in the tip 

pool, the Department acknowledges that 

some employers could potentially offset 

some of the increase in total 

compensation received by back-of-thehouse workers by reducing the direct 

wage that they pay those workers (as 

long as they do not reduce their wage 

below the applicable minimum wage), 

and such an outcome is what is 

modeled to produce the $109 million 

estimate of transfers from employees to 

employers. The rule may also result in 

transfers to workers as employers who 

adopt tip pools containing back-of-thehouse workers may not take a tip credit 

for their front-of-the-house staff. The 

Department also acknowledges the 

possibility that some transfers could 

occur as a result of the changes to the 

regulations involving when an employer 

may take a tip credit, but the 

Department is unable to estimate the 

likelihood or magnitude of these 

transfers. The Department estimates that 

regulatory familiarization costs 

associated with this final rule would be 

$3.86 million in the first year. 

This rule is considered an E.O. 13771 

deregulatory action. Details on the 

estimated cost savings of this rule can 

be found in the rule’s economic 

analysis. The Office of Information and 

Regulatory Affairs designated this rule 

as a ‘major rule,’ as defined by 5 U.S.C. 

804(2), under the Congressional Review 

Act (5 U.S.C. 801 et seq.). 

II. Background 

A. Section 3(m) 

Section 6(a) of the FLSA requires 

covered employers to pay their 

nonexempt employees a minimum wage 

of at least $7.25 per hour. 29 U.S.C. 

206(a). Section 3(m)(2)(A) allows an 

employer to satisfy a portion of its 

minimum wage obligation to any 

‘‘tipped employee’’ by taking a partial 

credit toward the minimum wage based 

on tips an employee receives. Id. 

203(m)(2)(A). Section 3(t) defines 

‘‘tipped employee’’ as ‘‘any employee 

engaged in an occupation in which he 

customarily and regularly receives more 

than $30 a month in tips.’’ Id. 203(t). An 

employer that elects to take a tip credit 

must pay the tipped employee a direct 

cash wage of at least $2.13 per hour. The 

employer may then take a credit against 

its wage obligation for the difference— 

up to $5.12 per hour—in tips received 

by the employee if the cash wage plus 

the employee’s tips equal at least the 

minimum wage. If the employee does 

not earn sufficient tips to bring his or 

her hourly earnings to the minimum 

wage, the employer must pay any 

additional wages required to make up 

the difference. If the employee’s cash 

wage plus tips exceeds the minimum 

wage, the employer must still pay a cash 

wage of at least $2.13 per hour. An 

employer may take a tip credit only if, 

among other things, the tipped 

employees retain all the tips they 

receive. An employer taking a tip credit 

is also allowed to implement a 

mandatory tip pool in which tips are 

shared only among employees who 

‘‘customarily and regularly receive 

tips.’’ 

Under section 3(m)(2)(B) of the FLSA, 

added by the CAA, ‘‘an employer may 

not keep tips received by its employees 

for any purposes, including allowing 

managers or supervisors to keep any 

portion of employees’ tips.’’ See Div. S., 

Tit. XII, sec.1201. Section 3(m)(2)(B) 

applies regardless of whether an 

employer takes a tip credit. 

B. Statutory and Regulatory History 

i. 1966 and 1974 Amendments to the 

FLSA 2

Congress created the FLSA’s tip credit 

in 1966 by amending the definition of 

‘‘wage’’ in section 3(m). See Public Law 

89–601, sec. 101(a), 80 Stat. 830 (1966). 

The Department promulgated its initial 

tip regulations the following year. See 

32 FR 13575 (Sep. 28, 1967). In 1974, 

Congress amended section 3(m) to 

prohibit an employer from taking a tip 

credit unless, among other things, ‘‘all 

tips received by [an] employee have 

been retained by the employee, except 

that this subsection shall not be 

construed to prohibit the pooling of tips 

among employees who customarily and 

regularly receive tips.’’ Public Law 93– 

259, sec. 13(e), 88 Stat. 55 (1974). As a 

result, an employer that takes a tip 

86758 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

credit may require a tipped employee to 

share tips with other employees engaged 

in occupations that customarily and 

regularly receive tips, but it cannot use 

employees’ tips for any other purpose or 

require tipped employees to share them 

with employees who do not customarily 

and regularly receive tips. By setting 

conditions under which an employer 

may take a tip credit, the statute makes 

plain that Congress intended these 

conditions to apply only to employers 

who take such a credit. Section 

3(m)(2)(A) contains no indication that 

Congress intended for these restrictions 

to apply to employers that do not take 

a tip credit and that use tip pools for 

other purposes, such as by sharing tips 

with ‘‘back-of-the-house’’ employees 

like cooks and dishwashers. 

The Ninth Circuit reached this same 

conclusion in 2010, observing that 

‘‘nothing in the text of the FLSA 

purports to restrict employee tippooling arrangements when no tip 

credit is taken.’’ Cumbie v. Woody Woo, 

Inc., 596 F.3d 577, 583 (9th Cir. 2010). 

It reasoned that section 3(m)’s ‘‘plain 

text’’ merely ‘‘imposes conditions on 

taking a tip credit and does not state 

freestanding requirements pertaining to 

all tipped employees.’’ Id. at 580–81. 

The contrary position, the court 

concluded, would render section 3(m)’s 

‘‘reference to the tip credit, as well as its 

conditional language and structure, 

superfluous.’’ Id. at 581. It accordingly 

held that the employer, which did not 

take a tip credit, did not violate section 

3(m) by requiring its tipped employees 

to contribute to a tip pool that included 

employees who were not customarily 

and regularly tipped. See id. 

ii. 2011 Regulations 

The Department did not promulgate 

regulations addressing the 1974 

amendments to the FLSA’s tip credit 

language until 37 years later. See 76 FR 

18832, 18854–56 (Apr. 5, 2011). Though 

issued after the Cumbie decision, the 

2011 regulations prohibited employers 

from, among other things, establishing 

mandatory tip pools that include 

employees who are not customarily and 

regularly tipped—whether the 

employers took a tip credit or not. See 

29 CFR 531.52 (2011) (‘‘The employer is 

prohibited from using an employee’s 

tips, whether or not it has taken a tip 

credit, for any reason other than that 

which is statutorily permitted in section 

3(m): As a credit against its minimum 

wage obligations to the employee, or in 

furtherance of a valid tip pool.’’). See 

also 29 CFR 531.54 (‘‘an employer . . . 

may not retain any of the employees’ 

tips’’); 531.59 (‘‘With the exception of 

tips contributed to a valid tip pool as 

described in § 531.54, the tip credit 

provisions of section 3(m) also require 

employers to permit employees to retain 

all tips received by the employee.’’). The 

Department acknowledged that section 

3(m) did not expressly address the use 

of an employee’s tips when an employer 

does not take a tip credit and pays a 

direct cash wage equal to or greater than 

the minimum wage, but stated that the 

regulation would fill a ‘‘gap’’ that the 

Department then believed to exist in the 

statutory scheme. 76 FR 18841–42. 

Multiple lawsuits challenged the 

Department’s authority under section 

3(m) to regulate employers that pay a 

direct cash wage of at least the Federal 

minimum wage. The parties challenging 

the validity of the 2011 regulations 

argued, and several courts ruling in 

favor of those parties recognized, that 

section 3(m)’s text reflected Congress’ 

intent to impose conditions only on 

employers that take a tip credit. See, 

e.g., Malivuk v. Ameripark, LLC, No. 15– 

2570, 2016 WL 3999878, at *4 (N.D. Ga. 

July 26, 2016) (agreeing that ‘‘Section 

203(m) only imposed a condition on 

employers who take a tip credit, rather 

than a blanket requirement on all 

employers regardless of whether they 

take a tip credit.’’); Trinidad v. Pret A 

Manger (USA) Ltd., 962 F. Supp. 2d 545, 

562 (S.D.N.Y. 2013) (‘‘Although the 

Court need not resolve this issue 

definitively . . . [it] finds Pret’s 

argument more persuasive: The DOL 

regulations are contrary to the plain 

language of § 203(m).’’). 

In 2016, a divided Ninth Circuit panel 

upheld the validity of the 2011 

regulations. See Oregon Rest. & Lodging 

Ass’n (ORLA) v. Perez, 816 F.3d 1080, 

1090 (9th Cir. 2016). Although the Ninth 

Circuit declined en banc review of the 

decision, ten judges dissented on the 

ground that the FLSA authorized the 

Department to address tip pooling and 

tip retention only when an employer 

takes a tip credit. 843 F.3d 355, 356 (9th 

Cir. 2016) (O’Scannlain, J., dissenting 

from denial of reh’g en banc). The 

dissent noted that the Ninth Circuit 

itself had decided in Cumbie that the 

FLSA ‘‘clearly and unambiguously 

permits employers who forgo a tip 

credit to arrange their tip-pooling affairs 

however they see fit.’’ Id. at 358 (citing 

Cumbie, 596 F.3d at 579 n.6, 581–83). 

The dissent therefore concluded that 

‘‘because the Department [had] not been 

delegated authority to ban tip pooling 

by employers who forgo the tip credit, 

the Department’s assertion of regulatory 

jurisdiction [was] manifestly contrary to 

the statute and exceed[ed] its statutory 

authority.’’ Id. at 363 (internal quotation 

marks omitted). The National Restaurant 

Association, on behalf of itself and other 

ORLA plaintiffs, sought U.S. Supreme 

Court review. See Pet. for Writ of Cert., 

Nat’l Rest. Ass’n v. U.S. Dep’t of Labor, 

No. 16–920, 2017 WL 360483, (U.S. Jan. 

19, 2017). 

While the National Restaurant 

Association’s petition was pending, the 

Tenth Circuit issued a conflicting 

decision, ruling that the 2011 tip 

regulations were invalid to the extent 

they barred an employer from using or 

sharing tips with employees who do not 

customarily and regularly receive tips 

when the employer pays a direct cash 

wage of at least the Federal minimum 

wage and does not take a section 3(m) 

tip credit. See Marlow v. New Food Guy, 

Inc., 861 F.3d 1157, 1159 (10th Cir. 

2017). The Tenth Circuit held that the 

text of the FLSA limits an employer’s 

use of tips only when the employer 

takes a tip credit, ‘‘leaving [the 

Department] without authority to 

regulate to the contrary.’’ See Marlow, 

861 F.3d at 1163–64. 

In light of the conflicting decisions 

from the Federal courts of appeals, the 

Department adopted a nationwide 

‘‘nonenforcement policy’’ under which 

it would ‘‘not enforce’’ the 2011 

regulations in any context in which an 

employer pays its employees a direct 

cash wage of at least the Federal 

minimum wage. See 82 FR 57395, 57399 

(Dec. 5, 2017). 

In its 2018 response to the petition for 

a writ of certiorari in the ORLA case, the 

Government explained that the 

Department had reconsidered its 

defense of the 2011 regulations in light 

of the Ninth Circuit’s ten-judge dissent 

from denial of rehearing in ORLA and 

the Tenth Circuit’s decision in Marlow. 

That reconsideration had led the 

Department to conclude that it had 

exceeded its statutory authority in 

promulgating those regulations to the 

extent they apply to employers that do 

not take a tip credit against their Federal 

minimum wage obligations: ‘‘[U]ntil the 

2018 [congressional] amendments, 

Section 203(m) placed limits only on 

employers that took a tip credit,’’ and 

‘‘[n]either Section 203(m) nor any other 

provision of the FLSA prevents an 

employer that pays at least the 

minimum wage from instituting a 

nontraditional tip pool [that includes 

back-of-the-house employees like cooks 

and janitors] for employees’ tips.’’ Br. 

for Resps. at 26–27, Nat’l Rest. Ass’n. 

(May 22, 2018). The government also 

noted that the Department had 

published in December 2017 an NPRM 

that proposed to rescind the challenged 

portions of the regulations. Id. at 10. 

Shortly thereafter, the Supreme Court 

denied the petition. 138 S. Ct. 2697 

(2018). 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86759 

3A recording of the testimony is available at 

https://www.congress.gov/committees/video/houseappropriations/hsap00/6Weo1vfNM1k. 

4The Federal Civil Penalties Inflation Adjustment 

Act of 1990 (Pub. L. 101–410), as amended by the 

Debt Collection Improvement Act of 1996 (Pub. L. 

104–134, sec. 31001(s)) and the Federal Civil 

Penalties Inflation Adjustment Act Improvements 

Act of 2015 (Pub. L. 114–74, sec. 701), requires that 

inflationary adjustments be made annually in these 

civil money penalties according to a specified 

formula. 

5As explained further below, there are a number 

of duties that may contribute to the tipped worker’s 

tips, but which are performed by other employees 

who do not directly receive tips for their work (e.g., 

the cook at a restaurant makes the food which the 

server delivers to a table, but only the server 

receives a tip for that work). 

iii. 2017 Notice of Proposed Rulemaking 

On December 5, 2017, the Department 

published an NPRM proposing to 

rescind the portions of its 2011 tip 

regulations that imposed restrictions on 

employers that pay a direct cash wage 

of at least the full Federal minimum 

wage and do not take a tip credit against 

their minimum wage obligations. See 82 

FR 57395 (Dec. 5, 2017). It did so in part 

because of its concerns at the time, in 

light of Marlow and the dissent from the 

denial of rehearing in ORLA, that it had 

misconstrued the statute when it 

promulgated the 2011 regulations. See 

82 FR 57399. The Department stated 

that where ‘‘an employer has paid a 

direct cash wage of at least the full 

federal minimum wage and does not 

take the employee tips directly, a strong 

argument exists that the statutory 

protections of section 3(m) do not 

apply.’’ 82 FR 57402. The Department 

also proposed allowing these employers 

to establish tip pools that include 

employees who contribute to the 

customers’ experience but do not 

customarily and regularly receive tips, 

such as dishwashers or cooks. See, e.g., 

82 FR 57399. 

A number of commenters on the 2017 

NPRM supported allowing employers to 

establish these tip pools. Several 

commenters pointed out that these 

workers contribute to each customer’s 

overall service, which directly affects 

the size of the customer’s tip. Many 

commenters, however, expressed 

concern that employers would take tips 

received by employees for its own 

purposes. 

During a hearing on March 6, 2018, 

before the Subcommittee on Labor, 

Health and Human Services, and 

Education of the U.S. House of 

Representatives Committee on 

Appropriations, Secretary of Labor R. 

Alexander Acosta was asked about the 

proposed rulemaking. The Secretary 

explained that the Tenth Circuit had 

made clear in Marlow, in reasoning the 

Secretary found persuasive, that the 

Department lacked statutory authority 

for its 2011 regulations at issue. He 

noted that Congress had the authority to 

implement a solution, and he suggested 

that Congress enact legislation stating 

that establishments, whether or not they 

take a tip credit, may not keep any 

portion of employees’ tips.3

C. The CAA’s Amendments to the FLSA 

Later that month, Congress enacted 

the CAA, amending the FLSA to address 

employers’ practices with respect to 

their employees’ tips. Public Law 115– 

141, Div. S., Tit. XII, sec. 1201. Shortly 

thereafter, the Department issued a FAB 

concerning the Wage and Hour 

Division’s (WHD) enforcement of the 

CAA amendments. See FAB No. 2018– 

3 (Apr. 6, 2018). 

i. Amendments to Section 3(m) of the 

FLSA 

The CAA left unchanged section 

3(m)’s then-existing text, renumbered as 

section 3(m)(2)(A), preserving the 

longstanding requirements that apply to 

employers that take a tip credit. It also 

added a new section 3(m)(2)(B) to the 

FLSA, which states that ‘‘[a]n employer 

may not keep tips received by its 

employees for any purposes, including 

allowing managers or supervisors to 

keep any portion of employees’ tips, 

regardless of whether or not the 

employer takes a tip credit.’’ CAA, Div. 

S, Tit. XII, sec. 1201(a) (codified at 29 

U.S.C. 203(m)(2)(B)); see FAB No. 2018– 

3 (Apr. 6, 2018). 

ii. Effect on Regulations 

Section 1201(c) of the CAA expressly 

addressed the portions of the 

Department’s 2011 regulations that 

restricted tip pooling when employers 

pay tipped employees a direct cash 

wage of at least the full FLSA minimum 

wage and do not take a tip credit. CAA, 

Div. S, Tit. XII, sec. 1201(c). Under that 

section, the portions of the regulations 

at 29 CFR 531.52, 531.54, and 531.59 

that were ‘‘not addressed by section 

3(m) . . . (as such section was in effect 

on April 5, 2011), shall have no further 

force or effect until any future action 

taken by [the Department of Labor].’’ 

The Department explained in FAB No. 

2018–3 that this language effectively 

suspended the Department’s existing 

regulations prohibiting employers that 

pay tipped employees the full Federal 

minimum wage from including back-ofthe-house workers, such as cooks and 

dishwashers, in a tip pool. 

iii. Amendments to Section 16 of the 

FLSA 

Section 16(b) of the FLSA allows 

employees to sue for unpaid minimum 

wages or overtime compensation. The 

CAA amended that section to add that 

‘‘[a]ny employer who violates section 

3(m)(2)(B) shall be liable to the 

employee or employees affected in the 

amount of the sum of any tip credit 

taken by the employer and all such tips 

unlawfully kept by the employer, and in 

an additional equal amount as 

liquidated damages.’’ CAA, Div. S, Tit. 

XII, sec. 1201(b)(1). 

Section 16(c) of the FLSA authorizes 

the Department to enforce the payment 

of unpaid minimum wages and unpaid 

overtime compensation. The CAA 

amended that section to add to the 

Department’s enforcement authority: 

‘‘The authority and requirements 

described in this subsection shall apply 

with respect to a violation of section 

3(m)(2)(B), as appropriate, and the 

employer shall be liable for the amount 

of the sum of any tip credit taken by the 

employer and all such tips unlawfully 

kept by the employer, and an additional 

equal amount as liquidated damages.’’ 

CAA, Div. S, Tit. XII, sec. 1201(b)(2). 

Under section 16(e)(2), repeated or 

willful violators of the FLSA’s 

minimum wage and overtime 

requirements are subject to a CMP not 

to exceed $1,100 for each such 

violation.4 The CAA amended this 

section to add a CMP for violations of 

section 3(m)(2)(B): ‘‘Any person who 

violates section 3(m)(2)(B) shall be 

subject to a civil penalty not to exceed 

$1,100 for each such violation, as the 

Secretary determines appropriate, in 

addition to being liable to the employee 

or employees affected for all tips 

unlawfully kept, and an additional 

equal amount as liquidated damages[.]’’ 

D. The Dual Jobs Regulation 

The CAA’s changes to the FLSA, in 

conjunction with subregulatory 

guidance the Department issued in 

2018, have illuminated the need to 

harmonize and update the Department’s 

‘‘dual jobs’’ regulation, codified at 29 

CFR 531.56(e). The dual jobs regulation 

addresses when an employer can take a 

tip credit for time that an employee in 

a tipped occupation spends performing 

duties that do not directly result in tips 

for that employee.5

The dual jobs regulation, § 531.56(e), 

was introduced in 1967 as part of the 

Department’s first final rule addressing 

tipped employment. 32 FR 13575; see 

29 CFR 531.50 through 531.60. The 

‘‘dual jobs’’ regulation was not 

contemplated in the notice proposing 

that rule, see 32 FR 222–227 (Jan. 10, 

1967), but was added as part of the final 

rule. Under the regulation, an employee 

who works for the same employer in 

86760 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

6The letter cited legislative history to support its 

conclusion that chefs were among the ‘‘employees 

who have not customarily and regularly 

participated in tip pools.’’ Id. (citing S. Rep. 93–690 

(1974) at 43). 

7 Field Operations Handbook, U.S. Dep’t of Labor 

(last accessed Aug. 18, 2020), available at https:// 

www.dol.gov/agencies/whd/field-operationshandbook. 

both a tipped occupation and a nontipped occupation is a ‘‘tipped 

employee’’ for purposes of section 3(t) 

of the FLSA only while employed in the 

tipped occupation. Therefore, an 

employer may take a tip credit against 

its minimum wage obligations only for 

the hours the employee spends in the 

tipped occupation. It may not take a tip 

credit for the time spent in a non-tipped 

occupation. 

Section 531.56(e) also distinguishes 

between employees who have dual jobs 

and tipped employees who perform 

‘‘related duties’’ that are not themselves 

directed toward producing tips. It uses 

the example of a server who ‘‘spends 

part of her time’’ performing non-tipped 

duties, such as ‘‘cleaning and setting 

tables, toasting bread, making coffee, 

and occasionally washing dishes or 

glasses.’’ In that example, the employee 

is still engaged in the tipped occupation 

of a server, for which the employer may 

take a tip credit, rather than working 

part of the time in a non-tipped 

occupation. 29 CFR 531.56(e). But that 

is as far as the regulation goes. It does 

not set forth or explain criteria for 

determining whether particular nontipped duties are related to a tipped 

occupation. It does not set forth or 

explain criteria for determining when an 

employee is performing duties unrelated 

to his or her tipped occupation and 

therefore engaged in a dual job. Nor 

does it explain whether or when an 

employee who performs related nontipped duties more than ‘‘part of the 

time’’ or ‘‘occasionally’’ might cease 

being employed in a tipped occupation 

and instead be engaged in a non-tipped 

occupation. Nor does it even give 

examples illustrating activities that 

would be considered (or not considered) 

related duties for workers other than 

those in restaurants. 

Section 531.56(e) did not define 

‘‘related duties,’’ ‘‘part of the time,’’ or 

‘‘occasionally,’’ and this lack of 

precision creates a need for clarification. 

WHD over the years attempted to clarify 

this rule through subregulatory 

guidance, but this piecemeal approach 

was insufficient. Cf. Perez v. Mortg. 

Bankers Ass’n, 575 U.S. 92, 112–13 

(2015) (Scalia, J., concurring) (‘‘There 

are weighty reasons to deny a lawgiver 

the power to write ambiguous laws and 

then be the judge of what the ambiguity 

means.’’). For example, following the 

1974 statutory amendments to section 

3(m) of the FLSA, WHD issued three 

opinion letters that address this issue. In 

1977, WHD addressed whether workers 

employed as ‘‘salad preparation 

persons’’ could participate in a tip 

pooling arrangement. WHD concluded 

that salad-preparation personnel could 

not participate in a tip pool as they ‘‘are 

essentially chefs’’ who ‘‘prepare food in 

the kitchen as any chef ordinarily 

would[,]’’ and rather than serving food 

to customers, ‘‘their basic duty outside 

the kitchen is to keep the buffet tables 

clean and replenish food as needed.’’ 

WHD Opinion Letter FLSA–623 (June 3, 

1977).6

In 1979, WHD addressed servers who 

‘‘report to work two hours before the 

doors are opened to the public to 

prepare the vegetables for the salad 

bar.’’ WHD Opinion Letter FLSA–895 

(Aug. 8, 1979). WHD opined that the 

employer could not claim a tip credit for 

those two hours because ‘‘salad 

preparation activities are essentially 

. . . [those] performed by chefs.’’ Id. 

(citing WHD Opinion Letter FLSA–623 

(June 3, 1977)). 

In 1980, WHD addressed whether the 

tip credit applied to servers in a 

restaurant who, as part of their closing 

duties, cleaned the salad bar, placed 

condiment crocks in the cooler, cleaned 

and stocked the server station, cleaned 

and reset the tables (including filling 

cheese, salt, and pepper shakers), and 

vacuumed the dining room carpet. See 

WHD Opinion Letter (Mar. 28, 1980). 

WHD opined that the employees would 

be considered tipped employees for this 

period because they were not engaged in 

a dual occupation. WHD noted that the 

after-hours cleanup duties were 

‘‘assigned generally to the [server] staff’’ 

at the establishment. Id. WHD did not 

explain why it concluded that tearing 

down and cleaning the salad bar was a 

tipped server’s duty but preparing 

vegetables for that same salad bar was 

a non-tipped chef’s duty. The letter 

suggested that if ‘‘specific employees 

were routinely assigned, for example, 

maintenance-type work such as floor 

vacuuming,’’ the employer would have 

been precluded from claiming a tip 

credit for the time the specific 

employees spent performing those 

maintenance activities. Id. 

Finally, in 1985, WHD addressed 

whether a server who, during a 5-hour 

shift, performed 1.5 to 2 hours of 

preparatory work before the restaurant 

opened, could be paid the tip-credit rate 

for the time spent performing those 

preparatory activities. WHD Opinion 

Letter (Dec. 20, 1985). The preparatory 

work included a variety of tasks such as 

setting tables, preparing coffee, and 

salad preparation. WHD repeated, but 

did not elaborate upon or explain, its 

earlier statements that ‘‘salad 

preparation activities are essentially the 

activities performed by chefs’’ for which 

the employer could not take a tip credit. 

WHD then concluded that because only 

one employee was assigned to the nonsalad preparatory work, the employee 

was responsible for preparing the entire 

restaurant, not just his or her area. The 

employee spent 30 percent to 40 percent 

of the entire shift on those duties. Such 

a ‘‘substantial portion’’ of the workday 

spent ‘‘performing general preparation 

or maintenance’’ work was too extensive 

to be considered part of the same 

occupation, and the employer could not 

take a tip credit for the hours spent on 

those tasks. Id. This was the first time 

WHD employed a proportion-of-time 

analysis to the ‘‘dual jobs’’ regulation. 

In 1988, WHD amended its Field 

Operations Handbook (FOH) to include 

section 30d00(e), regarding time spent 

in duties related to a tipped occupation. 

WHD FOH Revision 563 (Dec. 12, 1988). 

According to the handbook entry, 

§ 531.56(e) ‘‘permits the taking of the tip 

credit for time spent in duties related to 

the tipped occupation, even though 

those duties are not by themselves 

directed toward producing tips (i.e., 

maintenance and preparatory or closing 

activities),’’ if those duties are 

‘‘incidental’’ and ‘‘generally assigned’’ 

to tipped employees. To illustrate the 

types of related, non-tip producing 

duties for which employers could take 

a tip credit, the FOH listed ‘‘a waiter/ 

waitress . . . who spends some time 

cleaning and setting tables, making 

coffee, and occasionally washing dishes 

or glasses,’’ the same examples included 

in § 531.56(e). But ‘‘where the facts 

indicate that specific employees are 

routinely assigned to maintenance, or 

that tipped employees spend a 

substantial amount of time performing 

general preparation work or 

maintenance, no tip credit may be taken 

for the time spent in such duties.’’ For 

the first time, the FOH noted a 

‘‘substantial’’ amount of time spent 

performing general preparation or 

maintenance work as being in excess of 

20 percent. 

The FOH does not establish a binding 

legal standard on the public and is not 

a device for establishing interpretive 

policy.7 Rather, the FOH is an 

‘‘operations manual’’ that makes 

available to WHD investigators and staff 

policies already ‘‘established through 

changes in legislations, regulations, 

significant court decisions, and the 

decisions and opinions of the WHD 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86761 

8The Department extended the end of the 

comment period from December 9 to December 11, 

2019, due to an outage that temporarily caused most 

web browsers to refuse access to Regulations.gov. 

Administrator.’’ Id.; see also WHD 

Opinion Letter FLSA2020–12 (Aug. 31, 

2020); Probert v. Family Centered Servs. 

of Alaska, Inc., 651 F.3d 1007, 1012 (9th 

Cir. 2011). But, by furnishing these 

instructions to WHD investigators and 

staff in the field, the FOH in practice 

prohibited an employer from claiming a 

tip credit for ‘‘related-duties’’ time if 

that time exceeded 20 percent of the 

employee’s workweek. The handbook 

entry stated no rationale for a hard 

percentage cap in general or the 20 

percent figure in particular, and the 

Department did not issue any guidance 

rationalizing a hard cap. The standard 

in the FOH became known as the ‘‘80/ 

20 rule,’’ even though it was not 

promulgated as a regulation. 

In 2009, WHD issued an opinion letter 

expressly rescinding the 80/20 approach 

prescribed in the FOH, concluding that 

20 years of experience had shown it to 

be confusing and unworkable. WHD 

Opinion Letter FLSA2009–23 (Jan. 16, 

2009). WHD explained that, consistent 

with the text of the FLSA and its 

regulations, so long as the duties 

performed by the employees are part of 

their tipped occupation, those 

employees are not engaged in ‘‘dual 

jobs.’’ Thus, the Department would 

interpret the dual jobs regulation such 

that ‘‘no limitation shall be placed on 

the amount of these [related] duties that 

may be performed, whether or not they 

involve direct customer service, as long 

as they are performed 

contemporaneously with the duties 

involving direct service to customers or 

for a reasonable time immediately 

before or after performing such directservice duties.’’ Id. Following a change 

in the administration, however, in 2009 

WHD withdrew that opinion letter ‘‘for 

further consideration’’ and stated it 

would ‘‘provide a further response in 

the near future.’’ 

In 2012, WHD revised FOH 30d00(e), 

replacing it with language currently 

located at section 30d00(f). The prior 

1988 language had stated that tipped 

employees could spend up to 20 percent 

of their working time engaged in 

‘‘maintenance and preparatory or 

closing activities’’ such as cleaning and 

setting tables, making coffee, and 

occasionally washing dishes or glasses.’’ 

The 2012 revision, on the other hand, 

stated categorically that ‘‘maintenance 

work,’’ such as ‘‘cleaning bathrooms and 

washing windows,’’ is not related to the 

occupation of a server. Rather, ‘‘such 

jobs are non-tipped occupations’’ 

subject to the full minimum wage, 

regardless of the time spent. As with the 

1988 entry, this language was not 

promulgated as a rule and was not 

supported by guidance from WHD or the 

Department. As the Department 

explained in the 2019 NPRM, this dual 

jobs policy set forth in the FOH has 

proven difficult to enforce and resulted 

in widespread compliance issues; it has 

also generated extensive, costly 

litigation. See 84 FR 53972. 

Due in large part to those concerns, 

the Department in November 2018 

reinstated the January 16, 2009, opinion 

letter and later released an 

accompanying FAB. See WHD Opinion 

Letter FLSA 2018–27; see also FAB No. 

2019–2 (Feb. 15, 2019). In these 

documents, the Department explained 

that it would no longer prohibit an 

employer from taking a tip credit for the 

time an employee performed related, 

non-tipped duties as long as those 

duties were performed 

contemporaneously with, or for a 

reasonable time immediately before or 

after, tipped duties. See id. The 

Department also explained that, in 

addition to the examples listed in 

§ 531.56(e), it would use the 

Occupational Information Network 

(O*NET), a comprehensive database of 

worker attributes and job characteristics, 

to determine whether a tipped 

employee’s non-tipped duties were 

related to his or her tipped occupation. 

The 2019 NPRM proposed to revise 

§ 531.56(e) to reflect this 2018 guidance. 

E. The Department’s Proposal 

On October 8, 2019, the Department 

issued a new NPRM, proposing to 

amend its tip regulations under the 

FLSA to address the CAA’s amendments 

to the statute and to codify policy on 

how the tip credit applies to employees 

who perform both tipped and nontipped duties. The Department proposed 

to incorporate the new statutory 

prohibition against keeping employee 

tips—section 3(m)(2)(B), which applies 

whether or not the employer takes a tip 

credit—into its existing regulations and 

to enact new recordkeeping 

requirements to assist it in 

administering the new language. The 

Department proposed, consistent with 

the CAA’s depriving of further force or 

effect those portions of the Department’s 

2011 regulations that restricted tip 

pooling by employers that do not take 

a tip credit, to remove the portions of its 

regulations that prohibited those 

employers from including in mandatory 

tip-pooling arrangements those 

employees who do not customarily and 

regularly receive tips. Since the CAA 

merely renumbered the FLSA’s existing 

tip credit language, now section 

3(m)(2)(A), the Department did not 

propose revising the existing tip 

retention, tip pooling, and notice 

regulations. 

The Department proposed to 

incorporate into its CMP regulations the 

new statutory language giving it 

authority to seek CMPs for violations of 

section 3(m)(2)(B). To harmonize the 

regulations with Supreme Court 

authority and the manner in which the 

Department actually litigates 

willfulness, it also proposed to revise 

portions of its CMP regulations 

(specifically, 29 CFR 578.3 and 579.2) 

that address how the Department 

determines whether an FLSA violation 

is willful. Additionally, the Department 

proposed to amend its tip regulations to 

reflect recent guidance stating that an 

employer may take a tip credit for time 

that an employee in a tipped occupation 

performs related, non-tipped duties 

contemporaneously with or for a 

reasonable time immediately before or 

after performing the tipped duties. 

Finally, the Department proposed to 

amend its regulations that address the 

payment of tipped employees under 

Executive Order 13658 (Establishing a 

Minimum Wage for Contractors) to 

reflect the rescissions proposed in the 

FLSA regulations for tipped employees, 

to incorporate the Department’s 

guidance on when an employee 

performing non-tipped work is a tipped 

employee and to otherwise align those 

regulations with the Executive order. 

The Department received 466 timely 

comments on the NPRM during the 64- 

day comment period that ended on 

December 11, 2019.8 The comments 

were from a broad array of 

constituencies, including small business 

owners, restaurant companies, employer 

and industry associations, worker 

advocacy groups, trade unions, nonprofit organizations, social scientists, 

law firms, Members of Congress, state 

attorneys general, a state department of 

labor, and other interested members of 

the public. All timely received 

comments may be viewed on the 

regulations.gov website, docket ID 

WHD–2019–0004. Some of the 

comments the Department received 

were general statements of support or 

opposition, and the Department also 

received approximately 340 identical or 

nearly identical ‘‘campaign’’ comments 

sent in response to an organized 

initiative. Commenters expressed a wide 

variety of views on the merits of 

particular aspects of the Department’s 

proposal; however, most commenters 

favored some, if not all, of the changes 

proposed in the NPRM. Some 

commenters, including numerous 

86762 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

worker advocacy groups that submitted 

comments with substantially similar 

language, requested that the Department 

reject proposed revisions to its 

regulations that reflected recent 

guidance addressing the extent to which 

an employer can take a tip credit for the 

time a tipped employee spends 

performing related, non-tipped duties. 

The Department has considered the 

timely submitted comments addressing 

the proposed changes. 

The Department also received a small 

number of comments that are beyond 

the scope of this rulemaking. These 

include, for example, requests that the 

Department reconsider its regulation on 

compulsory service charges, § 531.55, 

and a request that the Department 

reconsider the notice requirements in 

§ 531.59. The Department does not 

address those issues in this final rule. 

Significant issues raised in the 

comments are discussed below, along 

with the Department’s responses to 

those comments. 

III. Final Regulatory Revisions 

The Department finalizes its 

proposals to amend its tip regulations to 

implement the CAA amendments and 

address other issues. The sections below 

address these regulatory revisions as 

adopted in the final rule. 

The sections of this rule are separate 

and severable and operate 

independently from one another. If any 

section is held to be invalid or 

unenforceable by its terms, or as applied 

to any person or circumstance, or stayed 

pending further agency action, the 

Department intends that the remaining 

sections continue in effect. 

A. General Restrictions on an 

Employer’s Use of Its Employees’ Tips— 

Section 531.52 

i. An Employer May Not Keep Tips, 

Regardless of Whether It Takes a Tip 

Credit 

Section 3(m)(2)(B) of the FLSA 

prohibits an employer from ‘‘keeping’’ 

tips received by its employees ‘‘for any 

purposes.’’ The prohibition on 

employers keeping tips applies 

regardless of whether the employer 

takes a tip credit. The Department 

proposed to amend § 531.52 to include 

the new statutory language prohibiting 

an employer from keeping employees’ 

tips and to clarify the extent to which 

an employer may exert control over 

employees’ tips without ‘‘keep[ing]’’ 

them in violation of 3(m)(2)(B). The 

Department proposed that an employer 

may exert control over tips only to (1) 

promptly distribute tips to the employee 

or employees who received them; (2) 

require employees to share tips with 

other eligible employees; or (3) where 

the employer facilitates tip pooling by 

collecting and redistributing employees’ 

tips, promptly distribute tips to eligible 

employees in a tip pool. In these 

circumstances, the Department 

explained, employees, not the employer, 

‘‘keep’’ the tips. 

Commenters—representing both 

employers and employees—supported 

the Department’s proposal to implement 

section 3(m)(2)(B)’s prohibition on 

employers’ keeping tips. See, e.g., 

Center for Workplace Compliance; 

National Employment Lawyers 

Association (NELA); National 

Restaurant Association; Oxfam. The 

Center for Workplace Compliance, for 

example, commented that the proposal 

aligns with the language of the 

amendment. The Department agrees, 

and adopts the changes to § 531.52 as 

proposed. 

In addition to comments on the 

Department’s proposal, several 

commenters requested that the 

Department address whether, under the 

new section 3(m)(2)(B), employers may 

deduct a portion of the transactional fee 

charged by the credit card company 

from employees’ credit card tips. 

Historically, the Department has 

consistently taken the position that, 

when a tip is charged to a credit card, 

an employer may reduce the amount of 

tips paid to the employee by the 

percentage charged by the credit card 

company as a transactional fee. For 

example, where a credit card company 

charges an employer 3 percent on all 

sales charged to its credit service, the 

employer may pay the employee 97 

percent of the charged tips without 

violating FLSA. The Department has 

long permitted employers to do so, 

finding this consistent with the 

statutory requirement that employees 

retain their tips. See WHD Opinion 

Letter FLSA–214 (Mar. 28, 1977); WHD 

Opinion Letter FLSA 2006–1 (Jan. 13, 

2006); 29 U.S.C. 203(m)(1) (1974); 32 FR 

13580 (adopting 29 CFR 531.52 (1967)). 

The NPRM did not specifically address 

this issue; however, as the Department 

explained shortly after Congress passed 

the CAA amendments, the Department 

has continued to apply its previous 

guidance concerning tips charged on 

credit cards. See FAB No. 2018–3 (Apr. 

6, 2018). In response to the NPRM, some 

commenters urged the Department to 

clarify that employers cannot reduce the 

amount of tips by the amount of credit 

card transactional fees. These 

commenters stated that it is the 

employer’s choice to incur the costs 

associated with taking credit cards, and 

section 3(m)(2)(B) should be interpreted 

to prohibit them from using a portion of 

employee tips to subsidize those costs. 

See NELP, NWLC, and the Pennsylvania 

Department of Labor and Industry. In 

contrast, another commenter requested 

that the Department affirm that an 

employer may continue to deduct those 

fees under whatever final rule is 

implemented based on the NPRM. See 

Littler Mendelson. The commenter 

noted the Department’s longstanding 

position allowing employers to do this 

and that courts have allowed the 

practice. See, e.g., Myers v. Copper 

Cellar, 192 F.3d 546, 554 (6th Cir. 1999) 

(employer may deduct the cost of 

‘‘converting the credited tip to cash’’). 

After considering these comments, the 

Department affirms its longstanding 

guidance authorizing employers to 

deduct the actual cost of credit card 

processing charges from employees’ 

tips. By deducting transactional fees, the 

employer exerts only the amount of 

control necessary to liquidate the tips to 

cash and distribute them to employees. 

This is consistent with the Department’s 

proposal, adopted in this final rule, that 

an employer may exert control over 

employees’ tips without ‘‘keep[ing]’’ 

them in violation of 3(m)(2)(B) only to 

distribute them to employees or to 

facilitate tip pooling. Credit-card 

processing fees are not an imposition by 

the employer on the employee; they are 

the price of converting credit obligations 

to cash. The same fees would be 

imposed upon servers themselves if 

they collected their tips through credit 

payments separate from the customer’s 

payment to the establishment. The 

Department reiterates that an employer 

may not deduct more than the actual 

transactional fee charged by the credit 

card company attributable to liquidating 

the credit card tip, nor may the 

employer reduce the amount of tips 

paid to the employee to cover other 

costs incurred by the employer related 

to credit card use, such as the cost of 

installing a Point of Sale system. See 

WHD Opinion Letter FLSA2006–1 (Jan. 

13, 2006). An employer that uses tips to 

cover those operating expenses would 

violate section 3(m)(2)(B). 

ii. Managers and Supervisors May Not 

Keep Tips 

a. Summary of the Final Rule 

Section 3(m)(2)(B) prohibits 

employers, regardless of whether they 

take a tip credit, from keeping tips, 

‘‘including allowing managers or 

supervisors to keep any portion of 

employees’ tips.’’ 29 U.S.C. 

203(m)(2)(B). The prohibition applies to 

managers or supervisors obtaining 

employees’ tips directly or indirectly, 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86763 

9An employee is an executive exempt from the 

FLSA’s minimum wage and overtime requirements 

if the employee performs certain duties, is paid on 

a salary basis, and is paid a minimum salary level. 

29 U.S.C. 213(a)(1), 29 CFR 541.100(a)(2)–(4). 

such as via a tip pool. To clarify which 

employees qualify as managers or 

supervisors for purposes of section 

3(m)(2)(B), the 2019 NPRM proposed 

§ 531.52(b)(2), which would codify the 

Department’s current enforcement 

policy under FAB No. 2018–3 (Apr. 6, 

2018). 

The Department is finalizing the 

language as proposed. Specifically, the 

final rule uses the duties test, but not 

the salary tests, from the FLSA’s 

executive employee exemption to 

determine which individuals are 

managers or supervisors who may not 

keep tips under section 3(m)(2)(B).9 As 

the 2019 NPRM explained, this 

exclusion ensures that the terms 

‘‘manager’’ and ‘‘supervisor’’ encompass 

more individuals than the term 

‘‘executive’’ as used in section 13(a)(1) 

of the FLSA. 

In effect, the final rule defines a 

manager or supervisor for purposes of 

section 3(m)(2)(B) as any employee (1) 

whose primary duty is managing the 

enterprise or a customarily recognized 

department or subdivision of the 

enterprise; (2) who customarily and 

regularly directs the work of at least two 

or more other full-time employees or 

their equivalent; and (3) who has the 

authority to hire or fire other employees, 

or whose suggestions and 

recommendations as to the hiring or 

firing are given particular weight. The 

definition also includes as managers or 

supervisors any individuals who own at 

least a bona fide 20 percent equity 

interest in the enterprise in which they 

are employed and who are actively 

engaged in its management. 

The final rule also revises § 531.52 to 

state that FLSA section 3(m)(2)(B) 

‘‘prohibits employers from requiring 

employees to share tips with managers 

and supervisors,’’ and revises § 531.54 

to state that employers who do not take 

a tip credit ‘‘may not include 

supervisors and managers’’ in a tip pool. 

b. Comments Regarding the Definition 

of Managers and Supervisors 

The Department received several 

comments addressing the issue of who 

should be included as managers or 

supervisors under section 3(m)(2)(B). 

The majority of commenters expressed 

general support for the proposal and one 

commenter noted that the proposed 

approach would be familiar and 

therefore less likely to have unintended 

consequences. Many commenters 

recommended modifications to the 

Department’s proposal. 

The Pennsylvania Department of 

Labor & Industry supported using the 

executive exemption duties test, but 

recommended that every employee who 

satisfies any of the three elements of the 

duties test be deemed a ‘‘manager’’ or 

‘‘supervisor’’ under section 3(m)(2)(B). 

For example, an employee who 

customarily and regularly directs the 

work of two or more other employees, 

but does not have the authority to hire 

or fire other employees, would be 

counted as a ‘‘manager’’ or ‘‘supervisor’’ 

under this definition, and prohibited 

from sharing employee’s tips. 

Other commenters, including Littler 

Mendelson and Fisher Phillips, 

recommended that the Department 

adopt the entire executive exemption, 

including the salary basis and salary 

level tests, rather than incorporating 

only the duties test. Littler asserted that 

this would state ‘‘an easy, bright-line 

rule’’ and would save ‘‘time and effort 

necessary to determine whether lowerpaid employees qualify for the 

exemption.’’ 

Other commenters, including the 

National Employment Law Project 

(NELP), Restaurant Opportunities 

Center United (ROC), and A Better 

Balance recommended incorporating a 

salary level into the definition, such as 

the median wage for supervisors of food 

preparation and serving workers based 

on the National Occupational 

Employment and Wage Estimates from 

the Bureau of Labor Statistics’ 

Occupational Employment Statistics 

(OES). They proposed in the alternative 

that the definition include the executive 

exemption’s salary level test, 29 CFR 

541.100(a)(1), but allow an hourly 

equivalent. This, they urged, would 

allow more low-level managerial 

employees to participate in tip pools. 

Finally, Senator Patty Murray and 

Representative Rosa DeLauro stated that 

the executive exemption duties test ‘‘is 

not appropriate for accurately 

identifying all employees who are 

managers and supervisors.’’ Senator 

Murray and Representative DeLauro 

asserted that the Department’s proposal 

allows employees who engage in some 

managerial work to participate in tip 

pools, while section 3(m)(2)(B) prohibits 

that group from keeping employees’ 

tips. They instead recommended 

importing the definition of ‘‘supervisor’’ 

from section 2(11) of the National Labor 

Relations Act or using ‘‘as a starting 

point’’ the definition of ‘‘management’’ 

from 29 CFR 541.102. 

After considering all comments, the 

Department finalizes this portion of 

§ 531.52 as proposed. Using the duties 

test disjunctively or using the definition 

of ‘‘management’’ set forth in 29 CFR 

541.102 would prevent employees who 

perform some lower-level managerial 

responsibilities from participating in tip 

pools, even if they are not bona fide 

managers or supervisors of the 

employer. On the other hand, adopting 

the full executive exemption test 

(including the salary basis and salary 

threshold tests) would, as Senator 

Murray and Representative DeLauro 

noted, conflict with Congress’s use of 

the terms ‘‘managers’’ and 

‘‘supervisors’’—terms not used 

elsewhere in the FLSA—rather than 

‘‘executives’’ or a reference to section 

13(a)(1). This counsels against fully 

adopting the test used for the executive 

exemption. 

Relatedly, Senator Murray and 

Representative DeLauro asserted that 

the Department’s proposed definition of 

‘‘managers’’ and ‘‘supervisors’’ as used 

in section 3(m)(2)(B) violates Congress’s 

intent because that section does not 

refer to the executive exemption. 

However, the section 13(a)(1) executive 

exemption requires each of the three 

tests—salary basis, salary threshold, and 

duties—to be met. The proposed 

definition of ‘‘manager’’ and 

‘‘supervisor’’ uses just one of those 

criteria—the duties test. As the NPRM 

noted, this definition therefore 

encompasses a different, broader group 

of employees than the term ‘‘executive’’ 

as used in section 13(a)(1). 

As for other commenters’ suggestion 

to establish two different salary levels, 

one for the executive exemption and 

one for managers and supervisors 

excluded from tip pools, the Department 

concludes that this would likely cause 

undue confusion in the regulated 

community. Additionally, setting a 

separate compensation level, as 

suggested by some commenters, could 

require periodic updates to § 531.52 to 

reflect inflation. Finally, there is no 

basis for applying a salary level based 

on the restaurant industry to tipped 

employees in all industries. For 

instance, the Department has not 

studied or received comments on an 

appropriate salary level at which to 

exclude managers and supervisors from 

tip pools in the cosmetology, casino, or 

cleaning-service industries and 

therefore cannot reasonably predict the 

effects imposing such a requirement 

would have in those industries. The 

Department therefore declines to adopt 

these proposals and finalizes this 

portion of § 531.52 as proposed. 

In sum, the Department concludes 

that the criteria in § 531.52 effectively 

identify the managers and supervisors 

whom Congress sought to prevent from 

86764 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

keeping other employees’ tips. The 

Department believes that employers can 

readily use these criteria to determine 

whether an employee is a manager or 

supervisor because employers are 

generally familiar with the longstanding 

regulations from which those criteria are 

drawn. 

c. Comments Regarding Managerial 

Participation in Tip Pools 

The Department also received several 

comments supporting the language in 

§ 531.52 prohibiting employers ‘‘from 

requiring employees to share tips with 

managers and supervisors’’ and the 

language in § 531.54 specifying that 

employers that do not take a section 

3(m)(2)(A) tip credit ‘‘may not include 

supervisors and managers’’ in a tip pool. 

Some commenters raised concerns, 

however, that the Department’s 

proposed regulations neither expressly 

prohibit nor expressly allow managers 

or supervisors to retain tips they receive 

directly from customers. For example, 

the National Restaurant Association and 

the Bowling Proprietors’ Association of 

America suggested that the regulations 

clarify that the law does not prohibit 

supervisors or managers from retaining 

tips they themselves receive directly 

from customers. These commenters also 

requested that the Department allow 

managers or supervisors who receive 

tips directly from customers to share or 

pool tips with other managers or other 

nontipped employees. The National 

Restaurant Association proposed that 

the prohibition against managers and 

supervisors participating in a tip pool 

‘‘extend only to those individuals 

receiving money from the pool or share, 

but not to individuals who only 

contribute money into the pool or 

share.’’ 

The Department agrees that section 

3(m)(2)(B) permits a manager or 

supervisor to keep a tip that he or she 

receives directly from a customer for the 

service only he or she provides. The 

statute states only that an ‘‘employer 

may not keep tips received by its 

employees for any purposes, including 

allowing managers or supervisors to 

keep any portion of employees’ tips’’ 

and is implicitly stating that managers 

and supervisors may not keep tips 

received by employees other than 

themselves. A salon manager, for 

example, may keep tips left by 

customers whose hair she personally 

styles. In response to commenters’ 

suggestions, the Department added 

language in finalized § 531.52(b)(2) to 

make this clear: ‘‘A manager or 

supervisor may keep tips that he or she 

receives directly from customers based 

on the service that he or she directly 

provides.’’ 

With regard to tip pools, the 

Department notes that the requirements 

of § 531.54 only apply to those tip pools 

mandated by employers. When a 

manager or supervisor who receives tips 

directly from customers wishes to 

voluntarily ‘‘tip out’’ a portion of his or 

her tips to other employees, that is not 

considered to be participation in a tip 

pool and is not prohibited by the FLSA 

or the proposed regulations. Voluntarily 

‘‘tipping out’’ is different from an 

employer-mandated tip pool. The 

Department believes that allowing 

managers and supervisors to participate 

in tip pools for one purpose 

(contributing tips) and not for another 

(receiving tips) would create confusion 

among employers and employees. 

Furthermore, such a proposal could lead 

to situations where it is difficult for 

employers to demonstrate compliance 

with the prohibition on employees 

sharing tips with managers and 

supervisors. Therefore, the Department 

declines to make such changes in the 

final rule. 

Finally, upon review, the Department 

realizes that it may have unintentionally 

created confusion by not including 

language expressly forbidding manager 

and supervisor participation in tip pools 

in proposed § 531.54(c), which applies 

to employers that take a section 3(m)(2) 

tip credit. As the statutory text and 

proposed § 531.52(b) make clear, no 

employer may require employees to 

share tips with managers and 

supervisors—there is no distinction 

between employers who do or do not 

take a tip credit. Therefore, the 

Department will add a new 

§ 531.54(c)(3) that mirrors the language 

in proposed § 531.54(d): ‘‘An employer 

may not participate in such a tip pool 

and may not include managers and 

supervisors in the pool.’’ The 

Department otherwise finalizes as 

proposed the language in §§ 531.52(b) 

and 531.54(d). 

B. Tip Pooling—Section 531.54 

The Department proposed to amend 

§ 531.54, which generally addresses tip 

pooling, to reflect the CAA 

amendments. The Department proposed 

to incorporate section 3(m)(2)(B)’s 

prohibition on employers keeping tips, 

which applies regardless of whether the 

employer takes a tip credit, into 

§ 531.54. The Department also proposed 

to amend § 531.54 to include the 

specific requirements that apply to 

employers that establish mandatory tip 

pools, depending on whether the 

employer does or does not take a tip 

credit, and depending on whether the 

mandatory tip pool is a traditional pool 

limited to customarily and regularly 

tipped employees or a nontraditional tip 

pool, which may include employees 

who do not customarily and regularly 

receive tips. 

i. Requirements When an Employer 

Collects and Redistributes Tips— 

Section 531.54(b) 

In its proposed rule, the Department 

took the position that section 3(m)(2)(B) 

does not prohibit an employer from 

collecting tips received by employees to 

facilitate a mandatory tip pool if the 

employer fully redistributes the tips it 

collects no less often than when it pays 

wages. In those circumstances, the 

employees’ tips are only temporarily 

within the employer’s possession, and 

the employer does not ‘‘keep’’ the tips 

within the meaning of section 

3(m)(2)(B). However, the Department 

proposed that employers ‘‘keep’’ tips in 

violation of section 3(m)(2)(B) when 

they collect tips but do not redistribute 

them within this time period. 

As proposed, § 531.54(b)(1) covered 

employers that collect tips to administer 

a tip pool and required those employers 

to fully distribute any collected tips at 

the regular payday for the workweek, or, 

for pay periods of more than one 

workweek, at the regular payday for the 

period in which the particular 

workweek ends. Proposed § 531.54(b) 

also required that, to the extent an 

employer could not ascertain the 

amount of tips received or how tips 

should be distributed before processing 

payroll, those tips be distributed to 

employees as soon as practicable after 

the regular payday. As the Department 

observed in the 2019 NPRM, these 

requirements align with current 

guidance on how soon an employer 

must distribute to tipped employees tips 

that were charged on credit cards. See 

WHD Opinion Letter FLSA2006–1 (Jan. 

13, 2006). Because proposed 

§ 531.54(b)(1) defined ‘‘keep’’ within the 

confines of section 3(m)(2)(B), the 

requirement that an employer fully and 

promptly distribute any tips it collects 

would have applied regardless of 

whether the employer took a tip credit 

and regardless of the type of tip pool the 

employer administered. 

The Pennsylvania Department of 

Labor and Industry expressed support 

for proposed § 531.54(b)(1). Restaurant 

owners who submitted comments as 

part of a comment campaign also 

expressed general support for ‘‘the 

proposed changes regarding tip 

pooling,’’ noting that they ‘‘closely track 

the new statutory language.’’ 

Accordingly, the Department adopts 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86765 

§ 531.54(b)(1) as proposed, but separates 

it into two paragraphs, (b)(1) and (2). 

ii. Additional Requirements for 

Mandatory Tip Pools When an 

Employer Takes a Tip Credit—Section 

531.54(c) 

Proposed § 531.54(c) sets forth the tip 

pooling requirements for employers that 

take a tip credit. As explained in the 

2019 NPRM, the Department’s approach 

to those employers remains unchanged 

because the CAA did not amend the 

substance of what is now section 

3(m)(2)(A), which applies to those 

employers. Accordingly, proposed 

§ 531.54(c) would retain the 

Department’s existing requirements in 

§ 531.54 but would clarify that these 

requirements apply only to employers 

that take a tip credit. Those existing 

requirements state that those employers 

that take a tip credit can require tipped 

employees to contribute tips to a tip 

pool only if the pool’s membership is 

limited to employees who customarily 

and regularly receive tips. 

Proposed § 531.54(c)’s requirements 

are drawn directly from section 

3(m)(2)(A) of the FLSA—formerly 

numbered section 3(m)—which has 

imposed the same tip pooling, notice, 

and tip retention requirements on 

employers that take a tip credit since 

1974. The Department thus adopts 

§ 531.54(c) as proposed. 

iii. Nontraditional Tip Pools When an 

Employer Does Not Take a Tip Credit— 

Sections 531.52, 531.54, and 531.59 

In 2011, the Department revised its tip 

regulations to require that tipped 

employees retain the tips that they 

receive, except those distributed 

through a tip pool comprising solely 

employees who customarily and 

regularly receive tips. The Department 

applied this interpretation to all 

employers of tipped employees, 

regardless of whether they took a tip 

credit. See 29 CFR 531.52, 531.54, and 

531.59 (2011). 

Through the CAA, Congress 

suspended portions of §§ 531.52, 

531.54, and 531.59 that restricted 

employers that do not take a tip credit 

from instituting nontraditional tip 

pools. See CAA, Div. S, Tit. XII, sec. 

1201(c). As a result, since the CAA’s 

effective date, employers that do not 

claim a tip credit have been permitted 

to implement mandatory nontraditional 

tip pools that include both tipped and 

nontipped employees. See FAB No. 

2018–3 (Apr. 6. 2018). 

Consistent with these amendments, 

the Department proposed to revise its 

regulations to remove certain 

restrictions on employers that do not 

claim a tip credit (and therefore pay 

workers a direct cash wage of at least 

the minimum wage), including those 

prohibiting them from instituting 

mandatory nontraditional tip pools. 

These restrictions were based on what is 

now section 3(m)(2)(A) of the FLSA, 

which the Department previously 

concluded neither limits employers that 

do not take a tip credit nor grants 

authority to the Department to do so. 

See Resps.’ Br. at 13, Nat’l Rest. Ass’n 

v. Dept. of Labor, No. 16–920 (U.S.), 

cert. denied, 138 S. Ct. 2697 (2018); see 

also 82 FR 57399. In particular, the 

Department proposed to rescind the 

congressionally-suspended language in 

§ 531.52 that bars employers from 

establishing mandatory nontraditional 

tip pools, ‘‘whether or not it takes a tip 

credit,’’ and to make additional 

clarifying edits; to revise § 531.54 to 

clarify that the restrictions and notice 

requirements for tip pools apply only to 

employers that take a tip credit; and to 

revise § 531.59 to state that the bar on 

mandatory nontraditional tip pools 

applies only to employers that take a tip 

credit. See 84 FR 53976–77. The 

Department also proposed to make 

explicit in § 531.54 that an employer 

that pays its tipped employees the full 

minimum wage and does not take a tip 

credit may impose a mandatory tip 

pooling arrangement that includes 

dishwashers, cooks, or other employees 

who are not employed in an occupation 

in which employees customarily and 

regularly receive tips, as long as that 

arrangement does not include any 

employer, supervisor, or manager. See 

84 FR 53976. 

A number of commenters addressed 

the Department’s proposal to allow 

employers that do not take a tip credit 

to mandate nontraditional tip pools. 

Commenters including the NFIB, 

Bloomin’ Brands, Littler, and several 

individuals, supported the proposal, 

noting that it reflects the realities of 

tipped workplaces and is fairer to 

nontipped employees. As Bloomin’ 

Brands stated, ‘‘it takes an entire team,’’ 

including employees in occupations 

that do not customarily and regularly 

receive tips, to give customers ‘‘the total 

quality experience necessary to earn a 

tip.’’ Littler stated that nontraditional 

tip pools are especially helpful where 

state law precludes employers from 

taking a tip credit, and tipped 

employees who continue to earn tips on 

top of their wages would otherwise 

‘‘earn far more than their nontipped 

coworkers.’’ 

In contrast, Texas RioGrande Legal 

Aid and some individual commenters 

opposed allowing employers that do not 

take a tip credit to institute mandatory 

nontraditional tip pools, arguing that 

this arrangement is contrary to what 

customers intend when they leave a tip 

and unfair to tipped employees. At least 

one of these commenters, however, 

appears to have misunderstood that the 

Department’s proposal requires an 

employer to pay a tipped employee the 

full Federal minimum wage before the 

employer can require the employee to 

participate in a mandatory tip pool or 

other similar arrangement that includes 

one or more nontipped employees. 

Texas RioGrande Legal Aid also 

opposed the removal of language in 

§ 531.52 stating that the customer ‘‘has 

the right to determine who shall be the 

recipient’’ of a tip. 

Other commenters, including those 

who did not oppose mandatory 

nontraditional tip pools as a general 

matter, expressed concern that an 

employer that institutes a mandatory 

nontraditional tip pool could 

conceivably reduce the cash wages it 

pays to nontipped employees, such as 

cooks and dishwashers, who receive 

tips from the pool. See, e.g., ROC, NELP, 

and Policy Integrity. The Department 

had acknowledged this possibility in the 

economic analysis accompanying the 

NPRM. See 84 FR 53968. NELP and 

other commenters asked the Department 

to prohibit employers from taking 

advantage of nontraditional tip pools to 

pay lower cash wages to nontipped 

employees, asserting that those actions 

would be inconsistent with 3(m)(2)(B)’s 

prohibition on employers’ keeping tips. 

Policy Integrity acknowledged, 

however, that it would be ‘‘difficult to 

design a rule’’ to accomplish this end. 

Finally, Senator Murray and 

Representative DeLauro recommended 

that the Department require employers 

to institute a ‘‘democratic process’’ to 

obtain the consent of tipped employees 

before instituting nontraditional tip 

pools. They asserted that such a 

safeguard would ensure that employers 

are not keeping employees’ tips. 

After considering the comments, the 

Department adopts without 

modification the changes it proposed to 

§§ 531.52, 531.54, and 531.59, which 

allow employers that do not take a tip 

credit to implement mandatory 

nontraditional tip pools, as long as those 

tip pools do not include employers, 

managers, or supervisors. These changes 

are consistent with the 2018 

amendments to the FLSA and the text 

of section 3(m)(2) as a whole. Section 

3(m)(2)(A) expressly prohibits 

employers that take a tip credit from 

including employees that do not 

customarily and regularly receive tips in 

mandatory tip pools together with 

employees that do, but it does not place 

86766 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

10 Given this flexibility afforded to employers to 

reward nontipped employees, the Department need 

not resolve disagreement between commenters as to 

whether customers tip based only on the specific 

performance of one or more tipped employees or, 

instead, on an assessment of the customer’s broader 

experience. The intention(s) behind individual 

customers’ tipping likely varies depending on 

context, customer, and circumstances. 

this prohibition on employers that do 

not take a tip credit. In addition, as 

commenters noted, the revised 

regulations will afford employers 

flexibility to reward nontipped 

employees who contribute to the 

customers’ experience and incentivize 

tipped and nontipped employees alike 

to improve that experience.10 As 

finalized, §§ 531.52, 531.54, and 531.59 

expressly allow employers that do not 

claim a tip credit to implement a 

mandatory tip pool that includes both 

employees who receive tips and 

employees who do not ’’customarily and 

regularly’’ receive tips. However, that 

tip pool may not include any employer, 

manager, or supervisor. 

The Department declines to require 

that employers institute a process to 

obtain consent from tipped employees 

before including them in a mandatory 

nontraditional tip pool. Nothing in 

section 3(m)(2) predicates the 

imposition of a tip pool on employee 

consent, and there is no textual basis for 

creating such a requirement with 

respect to only a nontraditional tip pool. 

Not only is there no textual basis for 

such a requirement, a bill introduced to 

impose such a requirement was neither 

passed, nor its substance incorporated 

into the CAA. See H.R. 5180, 115th 

Cong. (2d Sess. 2018). Additionally, this 

recommendation is outside of the 

proposed changes, and the public has 

not had the opportunity to comment on 

its merits or feasibility. 

The Department also declines to 

modify its proposal in response to 

commenters’ concern that an employer 

could reduce the cash wages paid to a 

nontipped employee who participates in 

a nontraditional tip pool. What matters 

is not nontipped employees’ cash 

wages, but rather their overall 

compensation, which includes both 

cash wages and tips that they may now 

receive under this final rule. Employers 

can already reduce nontipped 

employees’ overall compensation by 

lowering cash wages, but this requires 

tradeoffs: Morale and productivity 

would fall, and it would become more 

difficult to recruit and retain qualified 

workers. Allowing nontraditional tip 

pools does not alter these tradeoffs and 

thus would not make employers more 

able or willing to reduce nontipped 

employees’ overall compensation. While 

employers that share tips with 

nontipped employees under this rule 

could reduce cash wages paid to those 

same employees, economic reality 

makes it unlikely that they would do so 

in a way that reduces overall 

compensation unless the employer was 

already able and willing to reduce the 

employees’ overall compensation for 

reasons unrelated to this rule. 

On the other hand, the nontraditional 

tip pools allowed under this rule give 

employers a new way to increase 

nontipped employees’ overall 

compensation and thereby improve 

morale, productivity, recruitment, and 

retention. Some employers will do so by 

keeping nontipped employees’ cash 

wages the same while allowing them to 

share in tips. Others may reduce cash 

wages but share tips that, on average, 

more than offset the reduction in cash 

wages so that the net effect on overall 

compensation will be positive. 

Regardless of the approach, a nontipped 

employee’s overall compensation will 

increase. 

Additionally, it would be difficult, if 

not impossible, to develop and enforce 

a prohibition on employers’ adjusting a 

nontipped employee’s cash wage when 

the employer complies with the FLSA’s 

minimum wage and overtime 

requirements. Given the fungible nature 

of money and the innumerable lawful 

reasons why an employer might set, 

raise, reduce, or maintain an employee’s 

compensation, it would be difficult to 

distinguish between lawful reductions 

to compensation and unlawful 

‘‘keeping’’ of ‘‘tips received by its 

employees.’’ And although 

nontraditional tip pooling arrangements 

may affect pay decisions for nontipped 

workers who participate in a 

nontraditional pool—including by 

allowing employers to pay a lower cash 

wage to retain or hire an employee in 

the non-tipped position—the 

Department disagrees with commenters’ 

claims that any benefit an employer 

receives from a mandatory tip pool 

constitutes ‘‘keeping’’ tips in violation 

of 3(m)(2)(B). Indeed, for decades in 

what is currently section 3(m)(2)(A), 

Congress has expressly authorized 

mandatory traditional tip pools that 

afford employers similar indirect 

benefits. Congress also implicitly 

authorized these nontraditional tip 

pools when it suspended the 

Department’s regulations prohibiting 

them, undercutting any claim that such 

tip pools were actually prohibited by 

the CAA. 

Ultimately, the Department believes 

that employers will rarely reduce the 

cash wages of nontipped employees 

who participate in a nontraditional tip 

pool. Economic realities limit 

employers’ practical ability to reduce 

compensation significantly and 

simultaneously retain employees. 

Further, employers are constrained by 

wage and hour laws. Because back-ofthe-house and other employees who 

receive tips through a nontraditional tip 

pool are not employed in an occupation 

in which they customarily and regularly 

receive tips, an employer may not take 

a tip credit for these workers, and must 

pay them at least the full Federal 

minimum wage. See 29 U.S.C. 

203(m)(2), 206(a); see also S. Rep. No. 

93–690, at 43 (1974); WHD Opinion 

Letter FLSA2008–18 (Dec. 19, 2008). 

And, in many workplaces, state and 

local laws require employers to pay 

nontipped workers a minimum wage 

that exceeds the Federal minimum 

wage. 

Further, though employers could 

theoretically do so, an ability under the 

rule to decrease nontipped employees’ 

wages is unlikely, by itself, to motivate 

an employer to adopt a nontraditional 

tip pool. An employer that currently 

takes a tip credit that institutes a 

nontraditional tip pool would lose the 

tip credit and be required to pay tipped 

workers at least the full minimum wage. 

Accordingly, the wage obligations 

required under a nontraditional tip pool 

could result in an increased transfer 

from employers to employees. 

Finally, the Department declines to 

restore to § 531.52 the statement that a 

customer ‘‘has the right to determine 

who shall be the recipient’’ of a tip. This 

language is confusing in the context of 

section 3(m)(2) and the Department’s tip 

regulations, which expressly permit 

employers to require employees to pool 

tips with each other regardless of which 

employee or employees the customer 

intended to receive the tip. 

For these reasons, the Department 

finalizes the relevant changes to 

§§ 531.52, 531.54, and 531.59 as 

proposed. An employer may implement 

a nontraditional tip pool that includes 

tipped and nontipped employees, 

provided the pool does not include any 

employers, managers, or supervisors, 

and so long as the employer does not 

take a tip credit and pays the full 

minimum wage to both the tipped 

employees who contribute to the pool 

and the nontipped employees who 

receive tips from the pool. 

C. Recordkeeping Requirements for 

Employers That Have Employees Who 

Receive Tips—Section 516.28 

Section 516.28 imposes certain 

recordkeeping requirements on only 

those employers that take a tip credit. 

Among other things, § 516.28(a) requires 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86767 

11For information regarding IRS Form 4070, see 

https://www.irs.gov/businesses/small-businessesself-employed/tip-recordkeeping-and-reporting. 

12The Department maintains a proportion-of-time 

standard in other contexts. That standard is not 

appropriate in the dual jobs context because of the 

fluid nature of the work required in many tipped 

occupations. 

that the employer identify each 

employee for whom the employer takes 

a tip credit (see § 516.28(a)(1)) and 

maintain records regarding the weekly 

or monthly amount of tips received, as 

reported by the employee to the 

employer (see § 516.28(a)(2)). The 

employer may use information on IRS 

Form 4070 (Employee’s Report of Tips 

to Employer) to satisfy the requirements 

under § 516.28(a)(2).11

The Department proposed revisions to 

the recordkeeping requirements in 

§ 516.28 to improve consistent and 

effective administration of section 

3(m)(2)(B). The revisions would require 

similar recordkeeping requirements for 

employers that do not take a tip credit 

but still collect employees’ tips to 

operate a mandatory tip pool. Proposed 

§ 516.28(b)(1) would require these 

employers to identify on their payroll 

records each employee who receives 

tips. Proposed § 516.28(b)(2) would also 

require those employers to keep records 

of the weekly or monthly amount of tips 

received by each employee, as reported 

by the employee to the employer (this 

may consist of reports from the 

employees to the employer on IRS Form 

4070). 

The Department received only two 

comments concerning the proposed 

recordkeeping requirements for 

employers that do not take a tip credit 

but still collect employees’ tips to 

operate a mandatory tip pool. One 

commenter recommended that the 

Department require additional 

recordkeeping beyond the proposed 

requirements, while the other argued 

that the proposed recordkeeping was 

not required. The proposed 

recordkeeping requirements would help 

the Department determine whether 

employers are complying with their tip 

pooling obligations. Accordingly, the 

Department adopts the addition of 

§§ 516.29(b)(1) and 516.28(b)(2) as 

proposed. 

D. Dual Jobs—Section 531.56(e) 

i. Summary of the Final Rule 

Section 531.56(e) addresses instances 

in which an employer employs an 

employee in both a tipped occupation, 

for which the employer may take a tip 

credit, and a non-tipped occupation, for 

which the employer may not take a tip 

credit. The Department proposed to 

amend § 531.56(e) to codify its recent 

subregulatory guidance regarding when 

an employer can take a tip credit for 

hours that a tipped employee performs 

non-tipped duties related to his or her 

tipped occupation. See WHD Opinion 

Letter FLSA2018–27 (Nov. 8, 2018); 

FAB No. 2019–2 (Feb. 15, 2019). Before 

it was amended to reflect this recent 

guidance, the FOH had stated that an 

employer may not take a tip credit for 

non-tipped duties related to an 

employee’s tipped occupation if the 

time spent on those duties exceeds 20 

percent of the employee’s workweek. As 

described above, stakeholders and 

courts sometimes referred to this 

guidance as the ‘‘80/20 rule,’’ although 

it was not, in fact, a regulation. 

However, as the Department observed in 

the NPRM, this policy was difficult for 

employers to administer and led to 

confusion, in part because the guidance 

did not explain how employers could 

determine whether a particular nontipped duty is ‘‘related’’ to the tipproducing occupation and in part 

because the monitoring surrounding the 

80/20 approach on individual duties 

was onerous for employers. 

The final rule, which (with the 

exception of two changes) adopts the 

changes to § 531.56(e) as proposed and 

clarifies, consistent with the 

Department’s current guidance, that an 

employer may take a tip credit for all 

non-tipped duties an employee 

performs that meet two requirements. 

First, the duties must be related to the 

employee’s tipped occupation; second, 

the employee must perform the related 

duties contemporaneously with the tipproducing activities or within a 

reasonable time immediately before or 

after the tipped activities. This updated 

approach to the related-duties standard 

is consistent with the plain text of the 

FLSA, which permits employers to take 

a tip credit based on whether an 

employee is engaged in a tipped 

‘‘occupation,’’ not on whether the 

employee is performing certain kinds of 

duties within the tipped occupation. 

To facilitate the administration of this 

approach, the final rule also 

complements the examples already in 

§ 531.56(e) by adopting the 

Occupational Information Network 

(O*NET) as a source of guidance for 

determining when a tipped employee’s 

non-tipped duties are related to his or 

her tipped occupation. As explained in 

more detail below, the final rule states 

that a non-tipped duty is presumed to 

be related to a tip-producing occupation 

if it is listed as a task of the tipproducing occupation in O*NET. As the 

Department explained in the NPRM, 

O*NET is a comprehensive database of 

worker attributes and job characteristics, 

and is available to the public at 

www.onetonline.org. O*NET includes 

information on work activities for more 

than 900 occupations based on the 

Standard Occupational Classification 

system, a statistical standard used by 

Federal agencies to classify workers into 

occupational categories for the purpose 

of collecting, calculating, or 

disseminating data. 

ii. Comments Regarding the Updated 

Related Duties Approach 

The Department received many 

comments expressing support for the 

proposed changes to § 531.56(e). Those 

commenters suggested that the updated 

related duties approach is a substantial 

improvement over the 80/20 approach 

because it is more consistent with the 

FLSA’s text, structure, and purpose; and 

it is a more practical and administrable 

approach. See, e.g., Inspire Brands; the 

Center for Workplace Compliance; 

Littler Mendelson. 

On the first point, several commenters 

observed that the Department’s proposal 

aligns the tip credit regulations with the 

plain language of the FLSA. For 

example, Littler stated that ‘‘the FLSA 

says nothing about slicing an 

employee’s duties into creditable and 

non-creditable categories, nor does it 

say anything about capping an 

employee’s related duties at 20%.’’ 

Instead, the statutory language ‘‘suggests 

that all work within the tipped 

occupation is eligible for a credit—not 

just some arbitrary percentage of the 

work.’’ Inspire Brands stated that the 

Department’s proposal parallels other 

FLSA regulations. In particular, ‘‘in the 

context of the FLSA’s white collar 

exemptions, the Department long ago 

abandoned any notion that employees 

must spend a specific amount of time 

performing exempt work to qualify for 

an exemption.’’ See 29 CFR 541.700(b) 

(‘‘The amount of time spent performing 

exempt work can be a useful guide 

. . . , [but] time alone . . . is not the 

sole test’’).12 Inspire Brands also stated 

that the Department’s proposal best 

approximates ‘‘what Congress intended 

to achieve when it first amended the 

FLSA to include tip credit rules. 

Specifically, when Congress amended 

sections 203(m) and 203(t) in 1966, it 

did so to permit ‘the continuance of 

existing practices with respect to tips’ in 

the hotel and restaurant industries[,] S. 

Rep. No. 89–1487 (1966),’’ and there 

was no evidence that employers in 1966 

had an ‘‘existing practice’’ of paying 

servers or bartenders full minimum 

wages whenever related non-tipped 

duties exceeded a specific time limit. 

86768 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

On the second point, a number of 

commenters observed that the 

Department’s proposal is easier to 

administer than the 80/20 approach. 

Employers noted they will no longer 

feel that they have to try to track their 

employees minute by minute or task by 

task. Nor will they have to wrestle with 

which duties are related to their 

employees’ tipped work. Instead, they 

can refer to the list of tasks for that 

occupation in O*NET. An employer that 

does so may take a tip credit for the 

employee’s entire shift (as long as any 

non-tipped duties are performed 

contemporaneously with or for a 

reasonable time immediately before or 

after tipped work). This approach 

increases compliance, reduces employer 

costs, and avoids litigation. See, e.g., 

Littler; Center for Workplace 

Compliance; Inspire Brands; Bloomin’ 

Brands; cf. Pellon v. Bus. Representation 

Int’l, Inc., 528 F. Supp. 2d 1306, 1314 

(S.D. Fla. 2007), aff’d, 291 F. App’x 310 

(11th Cir. 2008) (describing the practical 

difficulties of administering the contrary 

80/20 approach). Inspire Brands stated 

that under the proposed rule, employers 

will no longer need to devote significant 

time to monitoring duties performed by 

tipped employees or tracking 

employees’ time spent on various 

specific duties, and ‘‘in the place of 

such activities,’’ supervisors will be able 

to spend ‘‘more time tending to 

customers’’ and helping servers and 

bartenders with non-tipped work, such 

as cleaning tables and stocking stations. 

Since a tipped employee ‘‘would have 

otherwise performed such tasks,’’ 

Inspire Brands also stated that tipped 

employees will be able to ‘‘use that time 

savings to interact with customers and 

generate more in tips.’’ Bloomin’ Brands 

noted that the proposal remedied a 

‘‘particularly unrealistic unintended 

consequence’’ of the existing regulation, 

which required employers to 

‘‘evaluate[ ] a tipped employee’s 

entitlement to the tip credit on a taskby-task basis.’’ Littler commended the 

Department’s proposal for ‘‘solv[ing] 

. . . in one stroke’’ the monitoring 

problems associated with the 80/20 

approach. The Center for Workplace 

Compliance stated that by ‘‘not focusing 

on the specific amount of time spent on 

various tasks,’’ the proposal ‘‘will be 

easier to understand and will make 

compliance simpler.’’ 

The Department also received several 

comments skeptical of or opposed to its 

proposal or recommending that the 

Department adopt a different approach. 

The National Restaurant Association, for 

example, suggested that the Department 

loosen the proposed limitations on nontipped work and ‘‘specify in the Final 

Rule that so long as [non-tipped] work 

occurs during the same shift or workday 

in which the employee engages in the 

main duties of a tipped occupation, the 

tip credit is available for the entire shift 

or workday.’’ In contrast, several 

commenters, including those 

representing employees, 19 State 

Attorneys General, and Democratic 

Members of Congress, expressed 

concern that the updated related duties 

approach was not sufficiently stringent 

and would allow an employer to take a 

tip credit even when a tipped employee 

spends a substantial amount of time 

performing non-tipped work. These 

commenters urged the Department to 

return to the 80/20 approach (or adopt 

a more protective standard), and stated 

that a return to the 80/20 approach 

would be more workable than the 

proposed approach. They also argued 

that the Department has not sufficiently 

explained why the new standard would 

be more easily administrable than the 

80/20 approach. 

In addition, Senator Murray and 

Representative DeLauro asserted that 

the Department’s proposal violates 

newly added section 3(m)(2)(B), which 

prohibits employers from keeping any 

portion of employees’ tips for any 

purposes. They contended that to read 

section 3(m)(2)(B) as permitting a tip 

credit for any time an employee spends 

on non-tipped duties (whether related 

or unrelated) would produce an ‘‘absurd 

result’’; that is, it would allow 

employers to reassign non-tipped 

workers’ duties to tipped workers and 

use tips to fulfill their minimum wage 

obligations for that work. 

After considering the comments, the 

Department finalizes § 531.56(e)(2) as 

proposed (with the exception of one 

word that was changed for consistency). 

The Department disagrees that the 

updated related duties test allows an 

employer to take a tip credit when a 

tipped employee performs a substantial 

amount of non-tipped work and agrees 

with other commenters that a return to 

the 80/20 approach would be unwise for 

several reasons. 

First, the updated related duties test 

does not permit employers to take a tip 

credit when tipped employees are, in 

fact, engaged in a non-tipped 

occupation. Instead, an employer may 

take a tip credit for non-tipped related 

duties only when those duties are 

performed ‘‘contemporaneously with or 

for a reasonable time immediately 

before or after’’ tipped work. As a result, 

when a tipped employee engages in a 

substantial amount of separate, nontipped related duties, such that he or 

she has effectively ceased to be engaged 

in a tipped occupation, the tip credit is 

no longer available. Thus, an employer 

could not take a tip credit for the entire 

shift when a tipped employee spends 

‘‘five hours, or more’’ of a 6-hour shift 

doing non-tipped work, see NELA, nor 

could it claim the tip credit for all hours 

worked by a dishwasher who picks up 

a few serving shifts per week, see 

Patriotic Millionaires. In these 

examples, the employee would not be 

performing the non-tipped related 

duties contemporaneously with or for a 

reasonable time immediately before or 

after performing tipped work. By 

contrast, an employer of an employee 

who has significant non-tipped related 

duties which are inextricably 

intertwined with their tipped duties 

should not be forced to account for the 

time that employee spends doing those 

intertwined duties. Rather, such duties 

are generally properly considered a part 

of the employee’s tipped occupation, as 

is consistent with the statute. 

Second, the Department disagrees that 

the proposed rule’s language is not 

specific enough to furnish useful 

guidance. The requirement that related 

duties be performed contemporaneously 

with tipped duties is not difficult to 

administer in practice. For example, a 

barber who cleans the combs she is 

using as she is cutting a customer’s hair 

is performing that duty during the same 

time as—contemporaneously with—the 

tip-producing work. The regulatory term 

‘‘contemporaneously’’ does not 

necessarily mean that the employee 

must perform tipped and non-tipped 

duties at the exact same moment in 

time. 

Moreover, the allowance for related 

duties performed ‘‘for a reasonable time 

immediately before or after’’ a tipped 

duty creates a sufficiently intelligible 

distinction between employees engaged 

in tipped occupations and non-tipped 

occupations. It is true that this limit 

does not create as bright a line as a firm 

cap on the amount of time an employee 

may spend on particular duties 

(although the 80/20 approach creates 

significantly greater uncertainty in other 

ways as discussed below). But the 

concept of reasonableness is a 

cornerstone of modern common law and 

is familiar to employers in a variety of 

contexts. See, e.g., Anderson v. Mt. 

Clemens Pottery Co., 328 U.S. 680, 687– 

88 (1946) (factfinder may base FLSA 

back wages award on reasonable 

estimates); 29 CFR 825.302(a) (requiring 

employee to furnish notice of need for 

FMLA leave ‘‘as soon as practicable’’); 

42 U.S.C. 12112(a), (b)(5)(A) (requiring 

reasonable accommodations for disabled 

employees); 29 U.S.C. 1108(b)(2), (c)(2) 

(ERISA fiduciaries are entitled to 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86769 

receive reasonable compensation from a 

plan for services provided); 29 CFR 

1604.11(a) (conduct is sexual 

harassment if it unreasonably interferes 

with an individual’s work performance); 

Burlington N. & S.F. Ry. Co. v. White, 

548 U.S. 53, 67–68 (2006) (Title VII 

prohibits employers from taking actions 

that a reasonable employee would find 

to be materially adverse); Burlington 

Indus., Inc. v. Ellerth, 524 U.S. 742, 765 

(1998) (employer is vicariously liable 

under Title VII unless it took reasonable 

steps to prevent and correct harassing 

behavior); Green v. Brennan, 136 S. Ct. 

1769, 1776–78 (2016) (constructive 

discharge occurs when a reasonable 

employee would feel compelled to 

resign). Reasonableness balances a 

flexible accounting of circumstances 

with a sufficiently definite limit on 

acceptable conduct in those contexts. 

This flexible approach is appropriate to 

apply to the question of whether 

particular duties are a part of an 

employee’s tipped occupation. 

For example, consider the following 

scenario: A hotel bellhop continuously 

performs tipped duties such as carrying 

luggage to guests’ rooms during a busy 

8-hour shift and then works for an 

additional 2 hours performing related 

non-tipped duties such as cleaning, 

organizing, and maintaining bag carts in 

storage. The 2 hours of related nontipped duties would not be ‘‘for a 

reasonable time’’ after the performance 

of tipped duties. Accordingly, the 

bellhop was engaged in a tipped 

occupation (bellhop) for 8 hours and a 

non-tipped occupation (cleaner) for 2 

hours. 

On the other hand, consider a second 

scenario in which this hotel employee 

works a 10-hour shift that is less busy. 

Because there are fewer hotel guests to 

assist, there are times during the 

bellhop’s shift when he is not 

transporting bags for customers. Rather, 

every hour, he transports bags for 

customers for approximately 48 minutes 

and in between transporting bags, 

spends approximately 12 minutes 

performing related non-tipped duties, 

such as sweeping and mopping the 

entrance and cleaning bag carts. At the 

end of the shift, the employee in this 

scenario would have spent a total of 8 

hours on tipped duties and 2 hours on 

non-tipped related duties—the same 

amounts as in the first scenario. But 

unlike in the first scenario, each period 

of related non-tipped duties would have 

been performed ‘‘for a reasonable time 

immediately before or after’’ the 

performance of tipped duties. As such, 

the employee would have been engaged 

in a tipped occupation (bellhop) for the 

entire 10-hour shift. 

Even though the two above scenarios 

are different, the previous 80/20 

approach drew no distinction between 

them because it focused solely on the 

precise ratio of time spent on tipped 

versus related non-tipped duties. But 

that focus obscures the relevant 

question of whether an employee is 

functionally engaged in one occupation 

or two. To answer this question, it is 

necessary to examine the context in 

which time is spent on tipped versus 

related non-tipped duties. If tipped and 

related non-tipped duties were 

performed at distinct times that never 

overlap, the employee would be 

engaged in two distinct occupations, 

even if the tipped-to-related-non-tipped 

ratio were more than 80/20. Conversely, 

if tipped and related non-tipped duties 

were performed alongside each other, 

the employee would be engaged in a 

single occupation, even if the tipped-torelated-non-tipped ratio were less than 

80/20. The final rule’s ‘‘reasonable 

time’’ standard considers the critical 

context in which tipped and related 

non-tipped duties are performed and 

focuses on the key issue of whether nontipped duties form a substantial, 

segregable part of an employee’s work. 

The 80/20 approach does not adequately 

address this issue. 

Third, the guidance establishing the 

80/20 approach did not adequately 

consider the practical difficulties in 

complying with a hard quantitative cap. 

To do so, employers attempted to track 

the amount of time employees spend 

performing duties that are not tipproducing but are related to each 

employee’s tipped occupation. See 

Littler. But as several commenters 

explained, this proved extremely 

difficult, if not impossible. Inspire 

Brands, for example, stated that it 

implemented policies within its 

timekeeping system intended to allow 

employees to switch between different 

job codes when engaging in different 

duties, but found that doing so 

‘‘required substantial managerial 

resources’’ and that it was impossible to 

‘‘keep track of tipped versus non-tipped 

duties at such a micro level.’’ Another 

commenter representing employers 

stated, ‘‘[t]imekeeping systems are not 

designed to deal with that level of 

granularity,’’ nor ‘‘do tipped employees’ 

jobs allow them sufficient time to 

constantly clock in under a different 

code when finishing one task but before 

starting another.’’ This is especially true 

‘‘when the tasks are often measured in 

seconds and are frequently part of a 

‘multi-tasking’ approach.’’ See Johnson 

Jackson. The practical difficulties of 

complying with the 80/20 approach are 

also evident in case law. For example, 

as the District Court for the Southern 

District of Florida observed in a 

decision affirmed by the Eleventh 

Circuit, the non-tipped duties 

performed by the employees at issue 

were so ‘‘intertwined with indirect tipproducing tasks throughout the day’’ 

that determining precisely how much 

time was spent on non-tipped related 

duties was indeed ‘‘infeasible.’’ Pellon, 

528 F. Supp. 2d at 1314. 

The updated related duties test, in 

contrast, does not require employers to 

attempt a minute-by-minute accounting 

of tipped employees’ work to ensure 

that non-tipped related work does not 

exceed a quantitative cap. Each 

employee can instead perform the 

related, non-tipped work of his or her 

tipped occupation as needed in 

conjunction with his or her tipped 

work—either contemporaneously with 

or for a reasonable time immediately 

before or after the tipped work—and 

employers may confidently take a tip 

credit without precisely tracking the 

time spent by the employee as he or she 

moves between duties. 

Fourth, the 80/20 approach was 

difficult to administer because it 

required employers to distinguish with 

precision between non-tipped duties 

(which were subject to the 20 percent 

cap) and tipped duties (which were 

not). In general, determining whether a 

duty is tip-producing is straightforward; 

WHD and courts ask whether the task 

involves direct interaction with 

customers. See WHD Opinion Letter 

FLSA2018–27 (referring to tipped duties 

as those ‘‘involv[ing] direct customer 

service’’); Barnhart v. Chesapeake Bay 

Seafood House Assocs., L.L.C., No. CV 

JFM–16–01277, 2017 WL 1196580, at *6 

(D. Md. Mar. 31, 2017) (‘‘tasks that 

involve direct customer interaction 

would fall squarely into the tipproducing category, and tasks that are 

not customer-facing would not’’); Belt v. 

P.F. Chang’s China Bistro, Inc., 401 F. 

Supp. 3d 512, 519–20 (E.D. Pa. 2019) 

(considering tasks that ‘‘did not involve 

interacting with, nor serving food and 

beverages to customers’’ to be untipped 

work). But the 80/20 approach requires 

precision, not generality, and, as 

commenters noted, the precise minute 

when an employee ceases to perform a 

tip-producing duty and begins 

performing a non-tipped, related duty 

(and vice-versa) is not always clear. See, 

e.g., Inspire Brands. One court, for 

example, observed that applying the 80/ 

20 approach to the plaintiff skycaps, 

who ‘‘me[t] airline travelers at the curb 

and assist[ed] them with their luggage,’’ 

would require it to determine, ‘‘for 

instance, how far from the curb could 

86770 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

13The employee would also need to earn at least 

$30 per month in tips to meet the full criteria set 

forth in 29 U.S.C. 203(t). 

Plaintiffs even walk before they are too 

far to be considered tipped 

employees[.]’’ Pellon, 528 F. Supp. 2d at 

1315. 

The updated related duties approach 

adopted in this final rule continues to 

distinguish between tip producing and 

non-tip producing duties. But because 

the updated test eschews a numerical 

analysis, it no longer requires precise 

parsing of whether tasks performed in 

close conjunction with one another are 

tipped duties or are non-tipped related 

duties that must be aggregated against a 

20 percent cap. Instead, an employer 

may take a tip credit whether an 

employee is performing a tipped duty or 

is performing a related duty 

contemporaneously with or for a 

reasonable time immediately before or 

after tipped duties. In addition, as 

discussed further below, by using 

O*NET to identify duties related to the 

tipped occupation, courts will be able to 

better and more consistently apply the 

dual jobs regulation. 

Fifth, the Department disagrees that 

the 80/20 approach is more 

administrable than the proposed rule. 

An 80/20 approach may well be easy to 

administer once the precise amount of 

time an employee has spent on various 

tasks has been tabulated, but it is the 

categorizing of tasks and tracking of 

each employee’s time that makes the 80/ 

20 approach difficult to administer. 

Sixth, the updated related duties test 

better effectuates the text of section 3(m) 

than did the 80/20 approach. Section 

3(m) permits employers to take a tip 

credit based on whether an employee is 

engaged in a tipped ‘‘occupation,’’ not 

whether the employee is performing 

certain kinds of duties or tasks within 

the tipped occupation. See 29 U.S.C. 

203(m) and (t). Because the 80/20 

approach imposed a hard cap on related 

non-tipped work, regardless of the 

context, applying this policy sometimes 

precluded an employer from taking the 

tip credit, even for time when a tipped 

employee arguably continued to be 

engaged in his or her tipped 

‘‘occupation.’’ By permitting the tip 

credit for the time an employee spends 

performing non-tipped related duties 

contemporaneously with or for a 

reasonable time immediately before or 

after tipped work, the updated approach 

better approximates the point at which 

a tipped employee has ceased to be 

engaged in his or her tipped occupation 

and becomes engaged in a non-tipped 

occupation. 

The updated related duties test also 

draws this line more effectively than the 

alternative proposed by the National 

Restaurant Association, which would 

permit an employer to take a tip credit 

for a full shift when an employee 

performs any tipped work during the 

course of the shift. For example, under 

that approach an employer could take a 

tip credit for the entire shift of a cook 

or dishwasher whom it had directed to 

perform a token amount of tipped work 

during the shift.13 This is inconsistent 

with the commonsense understanding 

of the statutory term ‘‘occupation’’ in 

the FLSA, which permits an employer 

to take a tip credit only for the hours 

that an employee spends working in a 

tipped occupation, not for all hours 

worked by an employee who spends 

part of his or her time working in a 

tipped occupation. Removing the rigid 

20 percent limitation, but permitting an 

employer to take a tip credit for time 

spent on non-tipped work only when 

that work is related to the tipped 

occupation and performed in 

conjunction with tipped work, 

reasonably interprets the statutory text 

while striking a balance that is both 

protective of employees and manageable 

for employers. 

Seventh, it is not clear what time 

frame should be used to determine 

compliance with the 80/20 approach. As 

commenters noted, there was confusion 

with how the 80/20 approach would be 

determined on a workweek basis. Nor is 

it clear whether a workweek approach 

would, in the dual jobs context, produce 

results consistent with the FLSA’s 

language that allows an employer to 

take a tip credit based on hours worked, 

not a workweek. Consider a casino that 

requires its card dealers to make 

periodic security rounds at their pit in 

order to allow other employees to focus 

fully on the tip-producing work of 

dealing. Over the course of an 8-hour 

shift each week, a card dealer is 

required to make six half-hour rounds 

monitoring gaming tables to ensure the 

security of the game (for a total of 3 

hours over the course of her shift). The 

hours she spends monitoring gaming 

tables constitute more than 20 percent 

of her shift devoted to non-tipped 

related duties, but less than 20 percent 

of her workweek. If the workweek were 

applied as the standard of measurement, 

then the casino would be permitted to 

take a tip credit for the time spent on 

security rounds—even if that task 

consumed a substantial portion of the 

card dealer’s designated work day that 

she could have devoted to tip-producing 

work. If the 80/20 approach were 

applied on a shift basis, the employer 

would be denied the tip credit for all 

eight hours the employee worked even 

though she was working in her tipped 

occupation for the entire shift. This lack 

of clarity and potential for unintended 

outcomes counsels against continued 

use of the 80/20 approach and in favor 

of the updated related duties test. 

Eighth, the Department disagrees with 

some commenters’ argument that the 

updated related duties approach 

violates section 3(m)(2)(B) by allowing 

employers to use tips to meet their 

minimum wage obligations for nontipped work. Section 3 of the FLSA 

makes clear that an employer that takes 

a tip credit in compliance with section 

3(m)(2)(A) does not ‘‘keep’’ tips in 

violation of section 3(m)(2)(B). This is 

because the two sections must be read 

in harmony with each other to avoid 

internal contradiction. Section 

3(m)(2)(A) permits an employer to take 

a tip credit for ‘‘tipped employee[s],’’ 

defined under section 3(t) as those 

‘‘engaged in an occupation’’ in which 

they ‘‘customarily and regularly receive 

tips.’’ When a tipped employee 

performs non-tipped duties related to 

the employee’s tipped occupation either 

contemporaneously with or for a 

reasonable time immediately before or 

after the employee’s tipped duties, the 

employee continues to be ‘‘engaged’’ in 

the tipped occupation under section 

3(t). As a result, an employer that takes 

a tip credit for this time does so in 

compliance with section 3(m)(2)(A) and 

thus does not violate section 3(m)(2)(B). 

As long as an employee’s direct cash 

wage plus tips equals the minimum 

wage (and the employer has met the 

other criteria for taking a tip credit) 

section 6 of the FLSA is satisfied. If 

tipped employees do not receive 

sufficient tips to cover the minimum 

wage, the employer must supplement 

the cash wage payment. Compliance 

with the FLSA’s minimum wage 

requirement, therefore, requires 

sufficient tip-generating activity to 

satisfy that minimum wage obligation. It 

is consistent with the FLSA for an 

employer to use tips to cover an 

employee’s non-tipped work that is 

related to the tipped occupation, so long 

as that employee is engaged in a tipped 

occupation when performing the nontipped work and earns at least the 

minimum wage for all hours worked. 

This is the exact result envisioned by 

the FLSA’s scheme of satisfying the 

minimum wage with a mixture of a 

direct cash wage and tips. 

Ninth, the Department disagrees with 

commenters’ suggestions that a return to 

the 80/20 approach is appropriate given 

that some Federal courts have 

concluded the Department did not 

sufficiently explain its reasoning for the 

updated related duties test in its 2018 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86771 

14More detailed information about O*NET’s data 

collection can be found at https://

www.onetcenter.org/ombclearance.html. 

subregulatory guidance. See Williams v. 

Bob Evans Rests., LLC, No. 18–01353, 

2020 WL 4692504, at *9 (W.D. Pa. Aug. 

13, 2020); Reynolds v. Chesapeake & 

Del. Brewing Holdings, LLC, No. 19– 

2184, 2020 WL 2404904 (E.D. Pa. May 

12, 2020); Sicklesmith v. Hershey Entm’t 

& Resorts Co., No. 19–1675, 2020 WL 

902544 (M.D. Pa. Feb. 25, 2020); O’Neal 

v. Denn-Ohio, LLC, No. 19–280, 2020 

WL 210801 (N.D. Ohio Jan. 14, 2020); 

Belt, 401 F. Supp. 3d at 512; Spencer v. 

Macado’s, Inc., 399 F. Supp. 3d 545 

(W.D. Va. 2019); Cope v. Let’s Eat Out, 

Inc., 354 F. Supp. 3d 976 (W.D. Miss. 

2019); Esry v. P.F. Chang’s China Bistro, 

Inc., 373 F. Supp. 3d 1205 (E.D. Ark. 

2019); Berger v. Perry’s Steakhouse of 

Ill., LLC, No. 14–8543, 2019 WL 

7049925 (N.D. Ill. Dec. 23, 2019); Flores 

v. HMS Host Corp., No. 18–3312, 2019 

WL 5454647 (D. Md. Oct. 23, 2019). But 

see Shaffer v. Perry’s Rests., Ltd., No. 

16–1193, 2019 WL 2098116, at *1 (W.D. 

Tex. Apr. 24, 2019). The Department has 

now explained through this notice-andcomment rulemaking process its 

reasoning for replacing the 80/20 

approach with the updated related 

duties test. 

In sum, the Department adopts the 

changes to § 531.56(e) as proposed, with 

minor exceptions. First, to ensure that it 

is read consistently with § 531.59(b), 

which makes the tip credit available 

‘‘only for hours worked by the 

employee,’’ the Department replaces the 

phrase ‘‘amount of time’’ in the fourth 

sentence of proposed § 531.56(e)(2) with 

‘‘hours.’’ This correction for consistency 

does not change the meaning of the 

proposed language. Thus, the fourth 

sentence of § 531.56(e)(2) as adopted 

reads: ‘‘An employer may take a tip 

credit for any hours that an employee 

performs related, non-tipped duties 

contemporaneously with his or her 

tipped duties, or for a reasonable time 

immediately before or after performing 

the tipped duties.’’ Second, as discussed 

in more detail below, the Department 

does not use O*NET’s list of duties for 

an occupation to definitively limit the 

non-tipped duties that are related to that 

occupation. Rather, it refers to O*NET 

as the source of a list of non-tipped 

duties that are presumed to be related to 

a tipped occupation. 

iii. Comments Regarding the Use of 

O*NET 

The Department received several 

comments on proposed § 531.56(e)(3), 

which would use O*NET as a source for 

defining which non-tipped duties are 

related to a tipped occupation. Some 

commenters representing employers 

stated that using O*NET to define 

related duties would make the tip credit 

easier to administer. Littler, for 

example, stated that employers can 

‘‘simply check O*NET and assign the 

duties appearing on that list. Upon 

doing that, employers can take a tip 

credit for the employee’s entire shift.’’ 

The Center for Workplace Compliance 

also supported the proposed update to 

the regulations, stating that it would 

‘‘make compliance simpler.’’ 

The Department also received several 

comments expressing concerns about 

using O*NET to define related duties. 

Some commenters, including Littler, 

Fisher Phillips, and NELP, expressed 

concern about the fact that O*NET’s 

listings and identified job duties are 

subject to change and could ‘‘even 

disappear in the future.’’ Some 

commenters were concerned that the list 

of related duties could expand without 

limit or be manipulated, and some 

commenters recommended 

incorporating the O*NET definitions in 

place as of the date of this final rule. 

The National Restaurant Association 

and another commenter requested that 

the Department state that a task’s 

appearance on O*NET is sufficient but 

not necessary to demonstrate that it is 

related to the occupation. Some 

commenters advocated for the 

Department to state that a tipped 

worker’s related duties may encompass 

the duties of any tip-producing 

occupation within the same industry. 

Finally, State Attorneys General and 

some other commenters disputed 

whether further clarity regarding related 

duties was necessary, pointing to 

numerous court cases applying the 

Department’s prior guidance, which did 

not comprehensively define related 

duties. 

After considering the comments, the 

Department finalizes § 531.56(e)(3) 

largely as proposed but with an addition 

to account for concerns raised by 

commenters. Specifically, the 

Department adds the phrase ‘‘presumed 

to be’’ in two locations in § 531.56(e)(3), 

so that the section now states that a nontipped duty is presumptively related to 

a tip-producing occupation if it is listed 

as a task of the tip-producing 

occupation in O*NET. 

O*NET is the most current and 

comprehensive source of descriptive 

occupational information in the United 

States. O*NET has conducted extensive 

research and collects occupational data 

from multiple sources: Incumbent 

workers, occupational experts, 

employers, and trade and professional 

associations.14 This multiple-method 

approach ensures high quality data, 

which facilitates O*NET’s ability to 

identify new and emerging occupations 

in high-growth industries, and new and 

changing skills requirements in existing 

occupations. O*NET also uses a flexible, 

common language-based system to 

describe the world of work, making it 

accessible and understandable. In 

addition to serving job seekers and 

students, O*NET is used by state 

workforce agencies and the 

Department’s Employment and Training 

Administration. Therefore, the 

Department believes that O*NET is the 

best way to give employers and 

employees clear, comprehensible 

information on related duties that will 

remain current, even in a changing 

economy. As noted by commenters, 

employers may simply check O*NET 

and take the tip credit for time spent by 

their employees performing the related 

duties appearing on the list. 

Although some commenters 

expressed concern that O*NET will not 

be maintained in perpetuity, the 

Department has no intention of making 

O*NET unavailable at any time in the 

near future. O*NET has existed for more 

than 20 years and replaced a similar 

product, the Dictionary of Occupational 

Titles, which had existed since the 

1930s. Should O*NET be discontinued, 

the Department would revisit the 

regulation. The Department also 

declines to incorporate O*NET’s current 

list of tasks into the regulation because 

doing so would limit its usefulness with 

regard to both changing and emerging 

occupations. In addition, this would 

require the Department to expend 

substantial resources to identify which 

of the nearly 1,000 occupations in 

O*NET are tipped and which are not, 

without the benefit of stakeholder input 

in making these determinations. 

Moreover, some commenters 

suggested that adopting O*NET by 

reference is problematic because 

automatic updates to the database 

would not go through notice and 

comment. However, in response to those 

comments and others concerned with 

changes to O*NET, and in recognizing 

that O*NET is updated using 

occupational data from various sources 

and may not accurately capture all 

related non-tipped duties, the 

Department is not adopting the O*NET 

listings as binding requirements. Rather, 

the Department is adopting O*NET only 

to assist in determining when a tipped 

employee’s non-tipped duties are 

related to his or her tipped occupation. 

Specifically, the final rule explains that 

the Department will look to the tasks 

listed within the tip-producing 

occupation in O*NET as guidance on 

86772 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

15The CMP amounts in this rule are adjusted for 

inflation as required by the Federal Civil Penalties 

Inflation Adjustment Act of 1990 (Pub. L. 101–410), 

as amended by the Debt Collection Improvement 

Act of 1996 (Pub. L. 104–134, sec. 31001(s)) and the 

Federal Civil Penalties Inflation Adjustment Act 

Improvements Act of 2015 (Pub. L. 114–74, sec. 

701). 

whether a particular non-tipped duty is 

related to a tipped occupation. In other 

words, a non-tipped duty listed as a task 

of a tip-producing occupation in O*NET 

indicates that this duty can be treated as 

related to the tipped occupation. 

However, if industry-wide practices and 

trends demonstrate that a listed duty is 

not actually related to the tipped 

occupation, or that an unlisted duty is 

actually related to that occupation, then 

employers would not be able to rely on 

O*NET as a compliance assistance tool 

in that particular case. In sum, because 

any updates to O*NET will not result in 

additional legal requirements for 

affected parties, those changes are not 

subject to notice and comment. 

Adopting fluctuating databases and 

standards as guidance is a common 

regulatory practice. For example, the 

Department refers to the Dictionary of 

Occupational Titles, O*NET’s 

predecessor, when determining whether 

a public employee’s volunteer activity is 

in the ‘‘same type of services’’ that he 

is paid to perform. See 29 CFR 553.103; 

FLSA2008–16 at *3 (Dec. 18, 2008) 

(clarifying that referring to O*NET for 

this determination is also acceptable). 

Other Federal agencies also use this 

approach in a variety of contexts. Social 

Security Administration regulations, for 

instance, refer to the Department’s 

Dictionary of Occupational Titles, 

several Census publications, and the 

Occupational Outlook Handbook 

published by the Bureau of Labor 

Statistics to rule on benefits 

applications. See 20 CFR 416.966(d). 

Meanwhile, the Department of 

Education requires postsecondary 

schools to be accredited, but outsources 

those accrediting decisions to 

accrediting bodies, each of which makes 

its own accreditation rules. See 34 CFR 

part 602. 

Although some commenters 

expressed concerns about potential 

manipulation of O*NET, the 

Department is confident that O*NET, 

upon which numerous stakeholders and 

governmental entities depend, is 

reliable. O*NET’s data collection 

process ensures this reliability by 

incorporating, among other methods, 

surveying and random sampling, data 

cleaning, weighting, and the use of 

experts and occupational analysts. 

Several commenters asked the 

Department to allow employers to deem 

as ‘‘related’’ to a tipped occupation 

additional duties that are neither 

included in the O*NET duties list for 

the occupation nor as examples in the 

regulation. The Department does not 

believe that this explicit approach is 

necessary. Under § 531.56(e)(3) as 

proposed, O*NET’s list of non-tipped 

duties for an occupation was 

exhaustive; non-tipped duties were not 

related to the occupation unless they 

appeared in the O*NET list of duties. 

But under § 531.56(e)(3) as adopted, 

O*NET’s lists are no longer 

exhaustive—O*NET lists duties that are 

presumed to be related to the tipped 

occupation, but that list is no longer 

exhaustive. 

The Department disagrees with the 

commenters who dispute the need for 

further clarity regarding related duties. 

The extensive litigation over the 80/20 

approach attests to the difficulty in 

determining whether particular nontipped duties were related to an 

employee’s tipped occupation. In many 

of these cases, courts declined to 

dismiss at the pleading stage the 

plaintiffs’ claims that they performed 

unrelated duties for which they were 

improperly compensated because facts 

developed through discovery could 

ultimately show that those duties were 

related to the plaintiffs’ tipped 

occupations. See, e.g., Knox v. Jones 

Grp., 201 F. Supp. 3d 951, 959 (S.D. Ind. 

2016) (citing precedent in reasoning that 

‘‘the division between permissible, 

related duties and impermissible, 

unrelated duties is not categorical’’; the 

court would ultimately need to consider 

‘‘the qualitative and quantitative nature 

of the allegedly unrelated duties’’); 

Stokes v. Wings Inv., LLC, 213 F. Supp. 

3d 1097, 1102 (S.D. Ind. 2016) (‘‘After 

conducting discovery, Defendant might 

be able to show that all of the duties 

identified by Plaintiff are related to her 

tipped occupation[.]’’). Using O*NET to 

identify non-tipped duties that are 

presumed to be related to particular 

tipped occupations will make it simpler 

for employers, employees, and courts 

alike to distinguish related duties for 

which employers can take a tip credit 

from unrelated duties for which for 

which they cannot. Section 531.56(e)(3) 

as adopted may not furnish as much 

certainty as that section did as 

proposed, but it furnishes much more 

certainty than the regulatory text prior 

to this final rule, which identified few 

duties as related or unrelated. 

Additionally, the Department sought 

and received comment on the use of 

O*NET as a tool for identifying nontipped duties that would be related to a 

tipped occupation, and the majority of 

commenters agreed that using the 

database would be useful and would 

provide much-needed clarity. 

Finally, the Department declines 

commenters’ requests to expand the 

related duties for a particular 

occupation beyond the O*NET tasks 

associated with that occupation to 

include any tasks associated with any 

other tipped occupation in the same 

industry. One commenter, by way of 

example, noted an overlap in a number 

of tasks shared by bartenders and 

servers. That example itself 

demonstrates why adopting that sameindustry standard would be 

inappropriate. As reflected in O*NET, 

the North American Industrial 

Classification System (NAICS) places 

bartenders and servers within the 

Accommodation and Food Services 

industry—an industry that also includes 

occupations such as hotel maids and 

gaming dealers. It is not part of a hotel 

bartender’s tipped occupation to equip 

rooms with linens, nor is it part of a 

hotel maid’s tipped occupation to deal 

cards or collect wagers. 

In light of these considerations, the 

Department finalizes the regulation to 

include the O*NET database as a source 

of non-tipped duties that are presumed 

to be related to a tipped occupation. The 

Department will continue to evaluate 

and refine its approach with respect to 

O*NET to address concerns that may 

arise. 

E. Civil Money Penalties 

i. Civil Money Penalties for Violations 

of Section 3(m)(2)(B) 

Section 1201(b)(3) of the CAA 

amended FLSA section 16(e)(2) by 

adding new penalty language: ‘‘Any 

person who violates section 3(m)(2)(B) 

shall be subject to a civil penalty not to 

exceed $1,100 for each such violation, 

as the Secretary determines appropriate, 

in addition to being liable to the 

employee or employees affected for all 

tips unlawfully kept, and an additional 

equal amount as liquidated damages, as 

described in subsection (b).’’ The 

Department’s current enforcement 

policy states that the CAA amendments 

give the Department discretion to 

impose civil money penalties (CMPs) up 

to $1,100 15 when employers unlawfully 

keep employee tips (including when 

they allow managers or supervisors to 

keep any portion of employees’ tips). 

See FAB 2018–3. The Department 

currently follows its normal procedures 

for FLSA CMPs with regard to violations 

of section 3(m)(2)(B), ‘‘including by 

determining whether the violation is 

repeated or willful.’’ See id. 

The Department proposed to 

incorporate this current guidance into 

the regulations: To use the same 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86773 

guidelines and procedures that it 

follows for assessing CMPs for 

violations of the minimum wage 

(section 6) and overtime (section 7) 

requirements of the FLSA as it does for 

violations of section 3(m)(2)(B). That 

means the Department proposed to 

assess CMPs for violations of section 

3(m)(2)(B) only when it determines the 

violation is repeated or willful. 

Some commenters generally 

supported the proposal regarding CMPs. 

The National Federation of Independent 

Business (NFIB) noted that the 

Department ‘‘has taken into account the 

practical realities of labor compliance 

for small businesses’’ by proposing to 

exercise its discretion by assessing 

CMPs for ‘‘violations of section 

3(m)(2)(B) only if committed repeatedly 

or willfully.’’ Other commenters, such 

as the National Employment Lawyers 

Association, the National Women’s Law 

Center, and NELP, opposed the 

proposal, arguing that because 

‘‘Congress used the words ‘repeatedly or 

willfully’ for minimum wage and 

overtime violations [in section 16(e)(2)] 

but omitted such words with respect to 

section 3(m)(2)(B),’’ that ‘‘demonstrates 

Congress’ clear intent that civil 

penalties for this latter section do not 

require a repeated or willful violation.’’ 

Senator Murray and Representative 

DeLauro stated that the relevant 

language ‘‘clearly provides for a civil 

penalty . . . against ‘any person’ and for 

‘each’ violation of the tip-protection 

language’’ and argued that the 

Department’s proposal was ‘‘in direct 

contravention of this plain language.’’ 

The CAA amendments state that 

‘‘[a]ny person who violates section 

203(m)(2)(B) of this title shall be subject 

to a civil penalty not to exceed $1,100 

for each such violation, as the Secretary 

determines appropriate . . . .’’ 29 

U.S.C. 216(e)(2) (emphasis added). The 

plain meaning of this language is that 

the Department has the discretion to 

determine when civil penalties are 

appropriate. While Senator Murray and 

Representative DeLauro’s comment 

acknowledged that this language gives 

the Secretary discretion, they argued 

‘‘that discretion is to be used to 

determine the amount of the penalty up 

to $1,100 depending on the particular 

circumstances,’’ rather than whether to 

assess a CMP at all. The Department 

does not see any inconsistency with its 

approach here. Effectively, the 

Department is exercising its discretion 

‘‘to determine the amount of the penalty 

. . . depending on the particular 

circumstances’’; it has determined to 

assess a CMP of $0 for violations that 

are not repeated or willful. Section 

216(e) also authorizes the Department to 

assess CMPs ‘‘not to exceed’’ a specified 

amount in the context of child labor, 

minimum wage, and overtime 

violations, and the Department has long 

used such discretion to determine the 

amount of penalties assessed in those 

areas. Unlike the CAA, however, those 

authorizations do not include the 

language ‘‘as the Secretary determines 

appropriate.’’ Therefore, the CAA 

language granting the Secretary 

discretion to determine the 

appropriateness of CMPs for violations 

of section 3(m)(2)(B) must refer to the 

Secretary’s discretion to determine 

whether to assess CMPs at all. 

The Department in the 2019 NPRM 

proposed to explain in the regulations 

its intent to exercise its discretion by 

limiting the assessment of CMPs to 

repeated and willful violations of 

section 3(m)(2)(B). Assessing CMPs only 

when an employer has repeatedly or 

willfully violated section 3(m)(2)(B), as 

opposed to doing so for a first-time 

violation, is consistent with how the 

Department enforces other FLSA wage 

violations. The Department has been 

assessing CMPs for repeated or willful 

violations of the minimum wage and 

overtime requirements of the FLSA 

using the guidelines in part 578 and 

procedures in part 580 for nearly three 

decades. This consistency of approach 

creates familiarity with the 

Department’s requirements in both the 

public and in the Department’s staff, in 

turn engendering consistency of 

compliance among employers and 

consistency in enforcement by the 

Department’s staff, and ultimately 

improves public trust in the law and the 

Department’s enforcement of it. For 

these reasons, the Department finalizes 

the revisions to the regulations at 29 

CFR 578.1, 578.4, 579.1, 580.2, 580.3, 

580.12, and 580.18 as proposed. 

In addition to clarifying the 

circumstances under which it will seek 

CMPs, the Department proposed to 

revise 29 CFR 578.3 and 579.2 to clarify 

how it determines whether a violation is 

willful for purposes of assessing CMPs. 

See 84 FR 53964–65. As explained in 

the NPRM, the Department’s definition 

of a ‘‘willful’’ violation in §§ 578.3 and 

579.2 is based on McLaughlin v. 

Richland Shoe Co., 486 U.S. 128, 133 

(1988), which held that a violation is 

willful if the employer ‘‘knew or 

showed reckless disregard’’ for whether 

its conduct was prohibited by the FLSA. 

Sections 578.3(c)(1) and 579.2 

incorporate this holding and state that 

‘‘[a]ll of the facts and circumstances 

surrounding the violation shall be taken 

into account in determining whether a 

violation was willful.’’ The Department 

proposed no changes to this language. 

Previous §§ 578.3(c)(2) and (3) and 

579.2 stated that ‘‘an employer’s 

conduct shall be deemed knowing’’ if 

the employer received advice from 

WHD that its conduct is unlawful. 

These sections further stated that ‘‘an 

employer’s conduct shall be deemed to 

be in reckless disregard’’ of the FLSA’s 

requirements ‘‘if the employer should 

have inquired further’’ into whether its 

conduct complied with the FLSA ‘‘and 

failed to make adequate further 

inquiry.’’ In the NPRM, the Department 

discussed concerns with this language 

that two appellate courts had identified. 

See 84 FR 53964–65 (discussing Rhea 

Lana, Inc. v. Dep’t of Labor, 824 F.3d 

1023, 1030–32 (D.C. Cir. 2016), and 

Baystate Alt. Staffing, Inc. v. Herman, 

163 F.3d 668, 680–81 (1st Cir. 1998)). 

Those courts noted the inconsistency 

between the regulation’s language, on 

the one hand, that conduct ‘‘shall be 

deemed knowing’’ if the employer was 

previously advised by WHD that the 

conduct was unlawful, and its language, 

on the other hand, derived from 

Richland Shoe that WHD shall take into 

account ‘‘[a]ll of the facts and 

circumstances surrounding the 

violation’’ when determining 

willfulness. See id. The Department 

explained in the NPRM that it does 

evaluate all of the facts and 

circumstances surrounding a violation 

when litigating willfulness and that 

while an employer’s receipt of advice 

from WHD that its conduct was 

unlawful can be sufficient to prove 

willfulness, notwithstanding the 

regulatory language that appears to be to 

the contrary, it would not necessarily be 

so. See 84 FR 53965. In light of the 

appellate courts’ opinions and the 

Department’s acknowledgement of how 

it litigates willfulness, the NPRM 

proposed to revise §§ 578.3(c)(2)–(3) and 

579.2 to clarify that, in considering all 

of the facts and circumstances, an 

employer’s receipt of advice from WHD 

that its conduct is unlawful and its 

failure to inquire further regarding the 

legality of its conduct are each ‘‘a 

relevant fact and circumstance’’ in 

determining willfulness. See 84 FR 

53978. 

Some commenters supported the 

proposed revision. The Center for 

Workplace Compliance (CWC) 

explained that, under the proposal, 

‘‘advice from [WHD] about the 

lawfulness of conduct would be a 

relevant factor in determining 

willfulness, but would not 

automatically trigger the standard.’’ 

CWC stated that the proposed revision 

‘‘more closely aligns with federal court 

precedent’’ and is ‘‘a more practical 

86774 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

interpretation that recognizes that 

employers should not be automatically 

subject to civil money penalties where 

legitimate questions exist concerning 

coverage of the FLSA.’’ Fisher Phillips 

described the proposed revision as 

‘‘vague’’ but asserted that ‘‘there is 

[often] a legitimate dispute with the 

Department’s position’’—suggesting that 

an employer’s receipt of advice from 

WHD that its conduct was unlawful 

should not always mean that the 

violation was willful. 

Other commenters, such as Texas 

RioGrande Legal Aid and NELA, 

opposed the proposed revision. They 

described § 578.3(c) as stating 

‘‘longstanding, bright line rules’’ that 

‘‘promote consistency in application 

and certainty for employers.’’ They 

asserted that, ‘‘in redefining willfulness, 

the Department is using the need to 

implement new worker protections in 

the FLSA as a pretext to weaken worker 

protections—in this case, far beyond the 

context of tipped occupations.’’ They 

stated that the Department ‘‘is 

misguided at best . . . to apply a 

vaguer, weaker standard to the new 

statutory provision at hand, and it is 

beyond the pale to apply the same 

proposal to minimum wage, overtime, 

and child labor standards that are not at 

issue in this rulemaking.’’ They 

criticized the proposed revision as 

treating, in Texas RioGrande Legal Aid’s 

words, ‘‘an employer’s decision to 

ignore advice from the Department as a 

mere factor to be considered rather 

than’’ evidence that is ‘‘sufficient’’ to 

show that the violation was willful. 

Finally, NELA stated that the 

Department did not furnish adequate 

notice of its intent to change ‘‘nontip’’ 

portions of the regulations and that the 

NPRM’s statement that § 578.3(c) 

contradicts Supreme Court precedent 

was considered and rejected when it 

was promulgated in 1992. 

Having considered the comments, the 

Department adopts the proposed 

revisions with some modifications. The 

final rule revises § 578.3(c)(2) and 

corresponding language in § 579.2 to 

state that, in considering all of the facts 

and circumstances, an employer’s 

receipt of advice from WHD that its 

conduct was unlawful can be sufficient 

to show that the violation is willful but 

is not automatically dispositive. This 

revision addresses concerns raised by 

commenters that one fact should not 

automatically result in a violation being 

willful but that the fact identified in 

§ 578.3(c)(2) can be ‘‘sufficient’’ for a 

violation to be willful. In addition, the 

final rule deletes § 578.3(c)(3) and 

corresponding language in § 579.2. 

Upon further consideration, 

§ 578.3(c)(3) does not just identify a fact 

and address how that fact impacts a 

willfulness finding (like § 578.3(c)(2) 

does). Instead, it addresses a scenario— 

should have inquired further but did not 

do so adequately—that is tantamount to 

reckless disregard. See Davila v. 

Menendez, 717 F.3d 1179, 1185 (11th 

Cir. 2013). Accordingly, revising 

§ 578.3(c)(3) in the same manner as 

§ 578.3(c)(2) did not seem helpful, and 

retaining § 578.3(c)(3) without 

modifying it would not resolve the 

concerns raised by the appellate 

decisions discussed above. 

These modified revisions, including 

deleting § 578.3(c)(3) and corresponding 

language in § 579.2, resolve the tensions 

identified within the Department’s 

regulations and with the Supreme 

Court’s decision and comport more 

precisely with how the Department 

litigates willfulness than did the 

original proposed revisions. An 

employer’s receipt of advice from WHD 

that its conduct is unlawful is a 

relevant, and may be a determining, 

factor regarding that employer’s 

willfulness—but the law also requires 

examining all facts and circumstances 

surrounding the violation. Among other 

situations, proof that an employer 

should have inquired further into 

whether its conduct was in compliance 

with the Act and failed to make 

adequate further inquiry is only one 

indicium of reckless disregard. Finally, 

the Department gave adequate notice of 

its intent to revise §§ 578.3(c)(2)–(3) and 

579.2, and the Rhea Lana and Baystate 

decisions give a sufficient basis for 

reconsidering its regulations on 

willfulness. 

F. Additional Proposed Regulatory 

Revisions 

In the NPRM, the Department 

proposed to revise § 531.50 to reflect the 

language that the CAA added to the 

FLSA. The Department also proposed to 

update §§ 531.50, 531.51, 531.52, 

531.55, 531.56, 531.59, and 531.60 to 

reflect the new statutory citation to the 

FLSA’s existing tip credit language, 

previously cited as section 3(m), as 

section 3(m)(2)(A). Additionally, the 

Department proposed to clarify 

references in §§ 531.56(d), 531.59(a) and 

(b), and 531.60 to the amount an 

employer can take as a tip credit under 

current section 3(m)(2)(A). The 

Department’s regulations currently state 

that an employer can take a tip credit for 

each employee equal to the difference 

between the minimum wage required by 

section 6(a)(1) of the FLSA (currently 

$7.25 an hour) and $2.13 an hour. To 

ensure that the Department’s regulations 

clearly state employers’ obligations 

under the FLSA, the Department 

proposed to revise §§ 531.56(d), 

531.59(a) and (b), and 531.60 to state, 

consistent with the text of the statute, 

that the tip credit permitted by section 

3(m)(2)(A) is equal to the difference 

between the Federal minimum wage 

and the cash wage paid by the 

employer. That cash wage must be at 

least $2.13 per hour, but the statute does 

not preclude an employer from paying 

more. 

The Department received little 

comment on these proposed regulatory 

revisions, which merely update the 

regulations to reflect the new statutory 

language and citations added by the 

CAA amendments and clarify other 

references consistent with the statutory 

text. Accordingly, the Department 

adopts as proposed the updates to 

§§ 531.50, 531.51, 531.52, 531.55, 

531.56, 531.59, and 531.60 to reflect the 

new statutory citation to the FLSA’s 

existing tip credit language, previously 

cited as section 3(m), as section 

3(m)(2)(A) and to revise § 531.50 to 

reflect the language that the CAA added 

to the FLSA. Additionally, the 

Department adopts as proposed the 

clarifying references in §§ 531.56(d), 

531.59(a) and (b), and 531.60 to the 

amount an employer can take as a tip 

credit under section 3(m)(2)(A). 

In the NPRM, the Department 

proposed to amend the tip language of 

its Executive Order 13658 regulations. 

Executive Order 13658 raised the hourly 

minimum wage paid by contractors to 

workers performing work on or in 

connection with covered Federal 

contracts. See E.O. 13658, 79 FR 9851 

(Feb. 12, 2014). The Executive order 

also established a tip credit for workers 

covered by the Order who are tipped 

employees pursuant to section 3(t) of 

the FLSA. Section 4(c) of the Executive 

Order encourages the Department, when 

promulgating regulations under that 

Order, to incorporate existing 

‘‘definitions, procedures, remedies, and 

enforcement processes’’ from a number 

of laws that the agency enforces, 

including the FLSA, and the 

Department’s current Executive Order 

13658 regulations are modeled after the 

Department’s current FLSA tip 

regulations. The Department proposed 

to amend § 10.28, consistent with its 

proposed rescissions to portions of the 

Department’s FLSA regulations, to 

remove restrictions on an employer’s 

use of nontraditional tip pools and to 

otherwise align those regulations with 

the authority in the Executive Order. 

The Department also proposed to amend 

§ 10.28, consistent with its proposed 

revisions to § 531.56(e), to reflect its 

current guidance on when an employee 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86775 

16The NPRM for this final rule cited 1235–0NEW 

as the OMB control number for revising information 

collection burdens previously approved under 

control number 1235–0018. A different control 

number was needed for this action because a 

revision of 1235–0018 was already under review for 

another of the Department’s rulemakings. The 

creation of a new control number allowed OMB to 

process this action. On December 10, 2019, OMB 

issued a notice of action assigning new control 

number 1235–0030. Upon conclusion of this action 

by OMB, the Department will submit a 

nonsubstantive change request to combine the 

control numbers 1235–0018 with 1235–0030. 

performing non-tipped work constitutes 

a tipped employee for the purposes of 

3(t). The Department received few 

comments on the proposal to amend 

§ 10.28. The Center for Workplace 

Compliance indicated that they 

‘‘support DOL’s corresponding revisions 

to the regulations implementing the 

federal contractor minimum wage.’’ The 

Department continues to believe that 

since many Federal contractors also are 

subject to the FLSA regulations 

proposed, it is important to align the 

corresponding regulations in part 10. 

Accordingly, in this final rule the 

Department adopts § 10.28 as proposed, 

with these exceptions: As with the 

fourth sentence in § 531.56(e)(2), the 

Department replaces the phrase 

‘‘amount of time’’ in the fourth sentence 

of § 10.28(b)(2)(ii) with ‘‘hours,’’ so that 

sentence as adopted reads: ‘‘An 

employer may take a tip credit for any 

hours that an employee performs 

related, non-tipped duties 

contemporaneously with his or her 

tipped duties, or for a reasonable time 

immediately before or after performing 

the tipped duties.’’ Additionally, as 

with the changes to § 531.56(e)(3), the 

Department adds the phrase ‘‘presumed 

to be’’ in two locations in 

§ 10.28(b)(2)(iii). 

The Department attempted to use 

gender-neutral phrasing in its proposed 

regulations. Texas RioGrande Legal Aid 

appreciated the Department’s efforts but 

noted some omissions. In response, the 

Department has made revisions to 

§§ 531.54(a) and 531.56(a), (c), and (e) to 

make these sections gender-neutral. 

Finally, in this final rule the 

Department corrects a typographical 

error in the NPRM, identified by the 

NFIB. In the authority section of the 

regulatory text, the Department corrects 

the authority to cite Title 5, not Title 4. 

The Department also corrects an 

additional typographical error in 

§ 10.28(b)(2)(iii) referencing examples 

described in paragraph (b)(2)(ii). 

IV. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA), 44 U.S.C. 3501 et seq., and its 

attendant regulations, 5 CFR part 1320, 

require the Department to consider the 

impact of paperwork and other 

information collection burdens imposed 

on the public. This final rule will revise 

the existing information collection 

burden estimates previously approved 

under OMB control number 1235–0018 

(Records to be Kept by Employers—Fair 

Labor Standards Act) because employers 

may choose to pay the full Federal 

minimum wage and not take a tip credit, 

and collect tips to operate an employerrequired, mandatory tip pooling 

arrangement, thereby triggering the new 

recordkeeping requirement in 

§ 516.28(b). 

In accordance with the PRA, the 

Department solicited comments on the 

FLSA information collections in the 

NPRM published October 8, 2019, see 

84 FR 53956, as the NPRM was expected 

to impact these collections. 44 U.S.C. 

3506(c)(2). The Department also 

submitted a contemporaneous request 

for OMB review of the proposed 

revisions to the FLSA information 

collections, in accordance with 44 

U.S.C. 3507(d). The Department opened 

OMB control number 1235–0NEW for 

this action and OMB assigned control 

number 1235–0030 for this action.16 As 

the PRA requires, the Department 

submitted the information collection 

revisions to OMB for review to reflect 

changes that would result from this final 

rule. The Department reports a slight 

burden increase for employers keeping 

records concerning employees who 

receive tips. OMB asked the Department 

to resubmit the information collection 

request upon promulgation of the final 

rule and after considering public 

comments on the proposed rule. 

Circumstances Necessitating 

Collection: FLSA section 11(c) requires 

covered employers to make, keep, and 

preserve records of employees and their 

wages, hours, and other conditions of 

employment, as prescribed by 

regulation. The Department’s 

regulations at 29 CFR part 516 establish 

the basic FLSA recordkeeping 

requirements. Section 516.28(a) 

currently requires employers to keep 

certain records concerning tipped 

employees for whom the employer takes 

a tip credit under the FLSA. Among 

other things, § 516.28(a) requires that 

the employer identify each employee for 

whom the employer takes a tip credit, 

identify the hourly tip credit for each 

such employee, and maintain records 

regarding the weekly or monthly 

amount of tips received (which may 

consist of IRS Form 4070) as reported by 

the employee to the employer. The new 

recordkeeping regulations found at 

§ 516.28(b)(1) and (2) require an 

employer that does not take a tip credit, 

but that collects employees’ tips to 

operate a mandatory tip pooling 

arrangement, to indicate on its pay 

records each employee who receives 

tips and to maintain records of the 

weekly or monthly amount of tips that 

each such employee receives (this may 

consist of reports that the employees 

make to the employer on IRS Form 

4070). The increase in the number of 

respondents and, accordingly, the 

burden hours associated with records to 

be kept under § 516.28(b)(1)–(2), is 

attributable to an expanding economy 

increasing the number of establishments 

employing individuals who receive tips 

since the last PRA revision of this 

recordkeeping requirement. 

Public Comments: The Department 

sought public comments regarding the 

burdens imposed by information 

collections contained in the NPRM. The 

Department received few comments 

relevant to the PRA. The Pennsylvania 

Department of Labor and Industry 

expressed support for the § 516.28 

requirement ‘‘that employers who take a 

tip credit must record which employees 

are tipped employees.’’ 

An agency may not conduct an 

information collection unless it has a 

currently valid OMB approval, and the 

Department submitted the identified 

information-collection contained in the 

NPRM to OMB for review under the 

PRA for control number 1235–0030. See 

44 U.S.C. 3507(d); 5 CFR 1320.11. The 

Department has resubmitted the revised 

FLSA information collections to OMB 

for approval, and intends to publish a 

notice announcing OMB’s decision 

regarding this information collection 

request. A copy of the information 

collection request can be obtained at 

http://www.reginfo.gov or by contacting 

the Wage and Hour Division as shown 

in the For Further Information Contact 

section of this preamble. 

Total annual burden estimates, which 

reflect both the existing and new 

responses for the recordkeeping 

information collection, are summarized 

as follows: 

Type of Review: Revision of a 

currently approved collection. 

Agency: Wage and Hour Division, 

Department of Labor. 

Title: Records to be Kept by 

Employers—Fair Labor Standards Act. 

OMB Control Number: 1235–0030. 

Affected Public: Private Sector: 

Businesses or other for-profits, farms, 

and not-for-profit institutions; State, 

local and tribal governments; and 

individuals or households. 

Estimated Number of Respondents: 

3,763,890 (29,296 from this rulemaking). 

86776 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

17 58 FR 51735 (Sept. 30, 1993). 

18 In the Current Population Survey, these 

occupations correspond to Bartenders (Census Code 

4040) and Waiters and Waitresses (Census Code 

4110). The industries correspond to Restaurants and 

Other Food Services (Census Code 8680) and 

Drinking Places, Alcoholic Beverages (Census Code 

8690). 

19 Discount rates are directed by OMB. See 

Circular A–4, OMB (Sept. 17, 2003). 

20BLS Current Population Survey, https://

data.bls.gov/timeseries/LNU04034262/ 

?amp%253bdata_tool=XGtable&output_

view=data&include_graphs=true. 

Estimated Number of Responses: 

43,709,493 (703,104 from this 

rulemaking). 

Estimated Burden Hours: 983,359 

hours (1,953 from this rulemaking). 

Estimated Time per Response: 

Various (unaffected by this rulemaking). 

Frequency: Various (unaffected by 

this rulemaking). 

Other Burden Cost: $0. 

V. Analysis Conducted in Accordance 

With Executive Order 12866, 

Regulatory Planning and Review and 

Executive Order 13563, Improved 

Regulation and Regulatory Review 

A. Introduction 

Under Executive Order 12866, OMB’s 

Office of Information and Regulatory 

Affairs determines whether a regulatory 

action is significant and, therefore, 

subject to the requirements of the 

Executive Order and OMB review.17

Section 3(f) of Executive Order 12866 

defines a ‘‘significant regulatory action’’ 

as an action that is likely to result in a 

rule that: (1) Has an annual effect on the 

economy of $100 million or more, or 

adversely affects in a material way a 

sector of the economy, productivity, 

competition, jobs, the environment, 

public health or safety, or state, local or 

tribal governments or communities (also 

referred to as economically significant); 

(2) creates serious inconsistency or 

otherwise interferes with an action 

taken or planned by another agency; (3) 

materially alters the budgetary impacts 

of entitlement grants, user fees, or loan 

programs, or the rights and obligations 

of recipients thereof; or (4) raises novel 

legal or policy issues arising out of legal 

mandates, the President’s priorities, or 

the principles set forth in the Executive 

order. Because the annual effect of this 

rule would be greater than $100 million, 

this rule is economically significant 

under section 3(f) of Executive Order 

12866. 

Executive Order 13563 directs 

agencies to propose or adopt a 

regulation only upon a reasoned 

determination that its benefits justify its 

costs; that it is tailored to impose the 

least burden on society, consistent with 

achieving the regulatory objectives; and 

that, in choosing among alternative 

regulatory approaches, the agency has 

selected the approaches that maximize 

net benefits. Executive Order 13563 

recognizes that some benefits are 

difficult to quantify and states 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. 

B. Economic Analysis 

i. Introduction 

In March 2018, Congress amended 

section 3(m) and sections 16(b), (c), and 

(e) of the FLSA to prohibit employers 

from keeping their employees’ tips, to 

permit recovery of tips that an employer 

unlawfully keeps, and to suspend the 

operations of the portions of the 2011 

final rule that restricted tip pooling 

when employers do not take a tip credit. 

This analysis examines the economic 

impact associated with the Department’s 

implementation of those amendments. 

Specifically, it examines the possible 

transfers resulting from employers who 

implement a new nontraditional tip 

pool that includes ‘‘back-of-the-house’’ 

employees (i.e., janitors, chefs, 

dishwashers, and food-preparation 

workers) who formerly either did not 

claim a tip credit and previously did not 

have a mandatory tip pool, or who only 

had a traditional tip pool limited to 

‘‘front-of-the-house’’ employees. The 

Department is also amending its ‘‘dual 

jobs’’ regulation to replace the 80/20 

approach with the updated related 

duties test. The Department 

qualitatively discusses potential 

economic impacts of this update but 

does not quantify them due to lack of 

data and the wide range of possible 

responses by market actors that cannot 

be predicted with specificity. 

Commentators provided neither needed 

data nor a reliable quantitative estimate 

of economic impacts that the 

Department could use. The Department 

quantified rule familiarization costs and 

qualitatively discusses additional costs, 

cost savings, and benefits. To perform 

the quantitative analysis, the 

Department compared the impact 

relative to a pre-statutory baseline (i.e., 

before Congress amended the FLSA in 

March 2018). If the Department were to 

look at economic impacts relative to a 

post-statutory baseline, there would 

likely be no impact of the tip pooling 

aspect of the final rule, aside from rule 

familiarization costs, as the transfers 

arise from the changes put forth in the 

statute. 

The economic analysis covers 

employees in two industries and in two 

occupations within those industries. 

The two industries are classified under 

the North American Industry 

Classification System (NAICS) as 

722410 (Drinking Places (Alcoholic 

Beverages)) and 722511 (Full-service 

Restaurants); referred to in this analysis 

as ‘‘restaurants and drinking places.’’ 

The two occupations are classified 

under Bureau of Labor Statistics (BLS) 

Standard Occupational Classification 

(SOC) codes SOC 35–3031 (Waiters and 

Waitresses) and SOC 35–3011 

(Bartenders).18 The Department 

understands that there are other 

occupations beyond servers and 

bartenders with tipped workers, such as 

SOC 35–9011 (Dining room and 

Cafeteria Attendants and Bartender 

Helpers), SOC 35–9031 (Hosts and 

Hostesses, Restaurant, Lounge, and 

Coffee Shop), and others, as well as 

other industries that employ workers 

who receive tips, such as NAICS 722515 

(snack and nonalcoholic beverage bars), 

NAICS 722513 (limited service 

restaurants), NAICS 721110 (hotels and 

motels), and NAICS 713210 (casinos). 

Nonetheless, the Department 

concentrates its analysis on the above 

two occupations because they constitute 

a large percentage of total tipped 

workers and more than half (56.5 

percent) of the workers in these 

occupations receive tips (see Table 1 for 

shares of workers in these occupations 

who report receiving tips). 

The analysis presents its estimates 

over a 10-year time horizon. When 

summarizing the costs and transfers of 

the rule, the Department presents the 

first year’s impact, as well as the 10-year 

annualized costs and transfers with 3 

percent and 7 percent discounting.19

Since the Department’s analysis relies 

on data collected before 2020, it reflects 

the state of the economy prior to the 

COVID–19 pandemic. The Department 

acknowledges that data on tipped 

workers will possibly look different 

following the economic effects of the 

pandemic, and discusses potential 

effects here. 

The COVID–19 pandemic has greatly 

affected the restaurant industry and 

tipped workers. The unemployment rate 

for the Food Services and Drinking 

Places industry jumped from 5.7 percent 

in February 2020 to 35.4 percent in 

April 2020. Although the rate has fallen 

by more than half of its peak, 16.4 

percent of these workers were still 

unemployed as of September 2020.20

Even as restaurants begin to reopen 

across the nation, and tipped workers 

return to their jobs, uncertainty exists 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86777 

21National Restaurant Association, Restaurant 

Employment Recovery is in Danger of Stalling, 

Sept. 4, 2020, https://restaurant.org/articles/news/ 

restaurant-employment-recovery-is-in-danger. 

regarding the long-term impacts. Even 

in areas with limited pandemic-related 

restrictions, business may be affected as 

some customers may remain reluctant to 

eat at restaurants due to the pandemic. 

As a result, employers may not be hiring 

or staffing at pre-pandemic levels, at 

least in the near term. In a survey of full 

service restaurant operators conducted 

by the National Restaurant Association 

from August 26 through September 1, 

2020, staffing plans were mixed—26 

percent of operators said they plan to 

add employees and 25 percent said they 

plan to lay off or furlough employees.21

During the short term, as the economic 

effects of the pandemic linger, the labor 

market for tipped workers will be less 

predictable, and aggregate tips may be 

reduced, though the amount of tips per 

employee may or may not be impacted. 

Because unemployment in tipped 

industries is still higher than it was at 

the beginning of the year, the transfer 

estimate for the first year of the RIA’s 

time horizon could be reduced. The 

Department lacks data to determine how 

much the transfer estimate will be 

reduced, and believes that this effect 

will be temporary. 

The Department acknowledges these 

changes in the industry but believes that 

the justifications for the Rule remain as 

strong as—if not more so than—before 

the pandemic. More flexibility in 

compensation and labor allocation will 

help businesses retain workers and 

maintain capacity. Further, the 

increased cooperation and efficiency 

that the final rule promotes will help 

businesses maintain quality of service— 

and therefore support tipped-employee 

compensation and provide increased 

certainty to tipped workers—at a time 

when the industry as a whole is 

struggling. 

ii. Estimated Transfers 

Under this regulation, transfers could 

arise when employers that already pay 

the full Federal minimum wage and 

previously did not have a mandatory tip 

pool or had only a traditional tip pool 

institute nontraditional tip pools in 

which tipped employees, such as 

servers and bartenders, are required to 

share tips with employees who do not 

customarily and regularly receive tips, 

such as cooks and dishwashers. The 

Department believes that including 

back-of-the-house workers in tip pools 

could help promote cooperation and 

collaboration among employees. This 

increased cooperation and flexibility 

could lead to Pareto improvement: 

Efficiencies that allow employers to 

engage in tip-pooling without 

decreasing wages for anyone while 

increasing wages for some. However, 

even in the event that tip-pooling 

requires a transfer from the front-of-thehouse, directly observable transfers will 

mainly occur among employees because 

the statute prohibits employers from 

keeping employee tips. 

It is possible that there will be 

subsequent transfers after the initial tip 

pooling and redistribution takes place. 

Because back-of-the-house workers 

could now be receiving tips, employers 

may offset this increase in total 

compensation by reducing the direct 

wage that they pay back-of-the-house 

workers (as long as employers do not 

reduce the employees’ direct wages 

below the applicable minimum wage), 

and such an outcome is what is 

modeled to produce the quantitative 

estimate of transfers. However, there are 

reasons to believe this may not be 

common in practice. Consider a pastry 

chef currently making $20 per hour. The 

Department assumes that, in practice, 

this established wage would restrict an 

employer’s ability to reduce the total 

compensation wage (i.e., wages plus 

pooled tips) below that rate. The chef, 

who last year was paid $20 per hour in 

Georgia, could in theory, with this rule, 

have her direct wage reduced to the 

Federal minimum wage of $7.25, with 

tip pooling adding to that wage and 

bringing the total take-home to near or 

above $20. However, even if the pooled 

tips amounted to $15 per hour, the 

minimum wage would prevent the 

employer from reducing her direct wage 

to $5. If pooled tips account for only $3 

per hour on average, it is unlikely the 

employer would be able to reduce her 

hourly wage rate below $17, more than 

twice as much as is allowed by law, 

because of the market effects impacting 

wages. 

A number of commenters raised the 

prospect that employers could use tip 

pooling to ultimately transfer tips to 

themselves by reducing the base wages 

of back-of-the-house workers since those 

workers would now be earning tips to 

offset the wage reduction. However, 

employers in states that permit tip 

credits—which is a majority of states— 

may already transfer to themselves up to 

the full amount of the tip credit (up to 

$5.12 per hour) directly from front-ofthe-house workers without first 

initiating a system of tip pooling for 

back-of-the-house workers by taking the 

credit and paying those front-of-thehouse workers the lower direct cash 

wage (at least $2.13 per hour). 

The analysis assumes that employers 

will institute nontraditional tip pools 

with employees who do not customarily 

and regularly receive tips only in 

situations that are beneficial to them. 

Accordingly, it assumes that employers 

will include back-of-the-house 

employees in their tip pools only if they 

believe that they can do so without 

losing their front-of-the-house staff and 

without reducing the overall quality of 

the customer experience. To attract and 

retain the tipped workers that they 

need, employers must pay these workers 

as much as their ‘‘outside option,’’ 

which is the hourly earnings that they 

could receive from another employer in 

a non-tipped job with a similar skill 

level requirement to their current 

position. For each tipped worker, the 

Department assumes a transfer could 

occur only if their total earnings, 

including tips, is greater than the 

predicted outside-option wage from a 

non-tipped job. While the Department 

identified serious methodological faults 

with a commenter’s outside option 

analyses, which are discussed later in 

this document, the approach comports 

in principle to expected market 

behavior, and therefore the Department 

built an outside option calculation into 

this analysis to frame the potential 

upper bound of total transfers. 

The transfer calculation herein 

excludes workers who are paid a direct 

cash wage below the full FLSA 

minimum wage of $7.25, because under 

the amended statute and the 

Department’s rule, employers who take 

a tip credit are still subject to section 

3(m)(2)(A)’s restrictions on tip pools. 

Some employers may begin paying their 

tipped workers a direct cash wage of at 

least the full FLSA minimum wage to 

institute a tip pool with back-of-thehouse workers. The potential transfer 

due to this scenario is not quantified 

due to uncertainty regarding how many 

employers would choose to no longer 

use the tip credit. Choosing to no longer 

take a tip credit would require a change 

to employers’ payroll systems and 

methods of compensation to which 

employers and employees are 

accustomed, and it would increase the 

employers’ out of pocket payroll 

expenses, both of which could 

discourage employers from making this 

change. 

The transfer calculation also excludes 

workers who are paid a direct cash wage 

by their employers, exclusive of any tips 

received, that exceeds the applicable 

minimum wage (either the Federal or 

applicable state minimum wage). The 

Department assumes that because these 

employers are already paying more than 

required under applicable law for these 

86778 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

22See, e.g., Minn. Stat. sec. 177.24, subd. 3 (‘‘No 

employer may require an employee to contribute or 

share a gratuity received by the employee with the 

employer or other employees or to contribute any 

or all of the gratuity to a fund or pool operated for 

the benefit of the employer or employees.’’); Mass. 

Gen. Laws ch. 149, sec. 152A(c) (‘‘No employer or 

person shall cause, require or permit any wait staff 

employee, service employee, or service bartender to 

participate in a tip pool through which such 

employee remits any wage, tip or service charge, or 

any portion thereof, for distribution to any person 

who is not a wait staff employee, service employee, 

or service bartender.’’) 

23Arkansas, California, Colorado, Delaware, 

Hawaii, Kansas, Kentucky, Massachusetts, 

Minnesota, New Hampshire, New Mexico, New 

York, North Carolina, North Dakota, Oklahoma, 

Utah, and Wyoming. 

24See Current Population Survey, U.S. Census 

Bureau, https://www.census.gov/surveys/cps.html 

(last visited Aug. 13, 2019); CPS Merged Outgoing 

Rotation Groups, NBER, http://www.nber.org//.html 

(last visited Aug. 13, 2019). 

25This question is asked only of hourly 

employees and nonhourly workers are consequently 

excluded from the transfer estimate. The 

Department did not quantify transfers from 

nonhourly workers because without knowing the 

prevalence of tipped income among nonhourly 

workers, the Department cannot accurately estimate 

potential transfers from these workers. However, 

the Department believes the transfer from 

nonhourly workers will be small because only 13 

percent of wait staff and bartenders in restaurants 

and drinking places are nonhourly workers, whom 

the Department believes may have a lower 

probability of receiving tips. 

26According to BLS Current Population Survey 

data, in 2017, workers in service occupations 

worked an average of 35 hours per week. See 

https://www.bls.gov/cps/aa2017/cpsaat23.htm. 

workers, any reduction in compensation 

would result in these workers leaving 

that employment. These employees 

would therefore not have their tips 

redistributed through a nontraditional 

tip pool. 

The Department does not attempt to 

definitively interpret individual states’ 

laws. However, some servers and 

bartenders work in states that either 

prohibit mandatory tip pooling or 

impose stricter limits on who can 

participate in a mandatory tip pool than 

are in this rule,22 or in states in the 

Tenth Circuit where, as a result of 

Marlow, 861 F.3d at 1159, employers 

that do not take a tip credit were already 

permitted to institute nontraditional tip 

pools at the time Congress amended the 

FLSA. The transfer estimate excludes 

tipped employees in these states whom 

the changes in this rule may not affect.23

The Department first determined total 

transfers for all servers and bartenders 

using the method described above. The 

Department then excluded workers 

whom the changes would not affect due 

to their respective state laws. Finally, 

the Department further reduced the total 

transfer amount to account for the 

uncertain number of employers who are 

expected to decline to change their tip 

pooling practices because it will require 

changes to practices to which employers 

and employees are accustomed, 

including payroll and recordkeeping 

changes. 

To compute potential tip transfers, the 

Department used individual-level 

microdata from the 2017 Current 

Population Survey (CPS), a monthly 

survey of about 60,000 households that 

is jointly sponsored by the U.S. Census 

Bureau and BLS. Households are 

surveyed for four months, excluded 

from the survey for eight months, 

surveyed for an additional four months, 

and then permanently dropped from the 

sample. During the last month of each 

rotation in the sample (month 4 and 

month 16), employed respondents 

complete a supplementary 

questionnaire in addition to the regular 

survey. These households and questions 

form the CPS Merged Outgoing Rotation 

Group (CPS–MORG) and give more 

detailed information about those 

surveyed.24 Because the CAA went into 

effect in March 2018, the Department 

used CPS data from 2017, the most 

recent full year of data that predates the 

CAA, to calculate the transfer. In this 

analysis, 2017 wage data are inflated to 

2019 dollars using the GDP deflator. For 

purposes of rule familiarization costs, 

the Department used the most recent 

year of data (2019) to reflect employers 

reading the rule after it is published. 

The CPS asks respondents whether 

they usually receive overtime pay, tips, 

and commissions (OTTC), which allows 

the Department to estimate the number 

of bartenders and wait staff in 

restaurants and drinking places who 

receive tips.25 CPS data are not available 

separately for overtime pay, tips, and 

commissions, but the Department 

assumes very few bartenders and wait 

staff at restaurants and drinking places 

receive commissions, and the number 

who receive overtime pay but not tips 

is also assumed to be minimal.26

Therefore, when bartenders and wait 

staff responded affirmatively to this 

question, the Department assumed that 

they receive tips. Based on CPS data, the 

Department identified 2,546 

observations (unique data points), 

which based on the survey’s 

methodology represent 2.2 million 

individuals, of respondents claiming to 

fall in the two categories of Waiters and 

Bartenders. The number of observations 

decreases as the analysis refines the 

universe of applicable employees. 

All data tables in this analysis include 

estimates for the year 2017 as the 

baseline. To identify the relevant 

population, the Department removed 

from the analysis workers who do not 

receive tips. Table 1 presents the 

estimates of the share of bartenders and 

wait staff in restaurants and drinking 

places who reported that they usually 

earned OTTC in 2017. Approximately 

64 percent of bartenders and 55 percent 

of wait staff reported usually earning 

OTTC in 2017. These numbers include 

workers in all states, including states 

where the changes in this rule are 

assumed not to affect. These numbers 

also include workers who are paid a 

direct cash wage below the full FLSA 

minimum wage of $7.25 (that is, 

employees whose employers are using a 

tip credit). Both these populations are 

excluded from the transfer calculation. 

Only 56.5 percent of workers in these 

occupations report earning tips, which 

may be low and could result in an 

underestimation of transfers. The 

Department did not adjust for this 

possibility because it lacked the data to 

do so and also estimates there is 

sufficient downward pressure on the 

total transfer estimate due to other 

factors that were not adjusted for. 

Discussions of these can be found in 

section V.B.ii (Estimated Transfers and 

Outside-Option Wage Calculation). 

TABLE 1—SHARE OF BARTENDERS AND WAITERS/WAITRESSES IN RESTAURANTS AND DRINKING PLACES WHO EARNED

OVERTIME PAY, TIPS, OR COMMISSIONS

Occupation Total workers 

(millions) 

Workers 

responding to 

question on 

OTTC 

(millions) 

Report earning OTTC 

Workers 

(millions) Percent 

Total ............................................................................................................. 2.21 1.92 1.08 56.5 

Bartenders ................................................................................................... 0.34 0.27 0.17 63.5 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86779 

27For workers who had missing values for one or 

more of these explanatory variables we imputed the 

missing value as the average value for tipped/nontipped workers. 

28For a full list of all occupations on O*NET, see 

https://www.onetcenter.org/taxonomy/2010/ 

updated.html. 

TABLE 1—SHARE OF BARTENDERS AND WAITERS/WAITRESSES IN RESTAURANTS AND DRINKING PLACES WHO EARNED

OVERTIME PAY, TIPS, OR COMMISSIONS—Continued 

Occupation Total workers 

(millions) 

Workers 

responding to 

question on 

OTTC 

(millions) 

Report earning OTTC 

Workers 

(millions) Percent 

Waiters/Waitresses ...................................................................................... 1.88 1.65 0.91 55.4 

Source: CEPR, 2017 CPS–MORG. 

Occupations: Bartenders (Census Code 4040) and Waiters and Waitresses (Census Code 4110). 

Industries: Restaurants and other food services (Census Code 8680) and Drinking places, alcoholic beverages (Census Code 8690). 

Of the 1.08 million bartenders and 

wait staff who receive OTTC, only 

688,000 reported the amount received in 

OTTC. Therefore, the Department 

imputed OTTC for those workers who 

did not report the amount received in 

OTTC. As shown in Table 2, 54 percent 

of bartenders’ earnings (an average of 

$281 per week) and 49 percent of 

waiters’ and waitresses’ earnings (an 

average of $238 per week) were from 

overtime pay, tips, and commissions in 

2017. For workers who reported 

receiving tips but did not report the 

amount, the ratio of OTTC to total 

earnings for the sample who reported 

their OTTC amounts (54 or 49 percent) 

was applied to their weekly total 

income to estimate weekly tips. 

Nonhourly workers, who are not asked 

the question on receipt of OTTC, are 

assumed to not be tipped employees. 

TABLE 2—PORTION OF INCOME FROM OVERTIME PAY, TIPS, AND COMMISSIONS FOR BARTENDERS AND WAITERS/ 

WAITRESSES IN RESTAURANTS AND DRINKING PLACES

Occupation 

Those who report the amount earned in OTTC 

Workers Average weekly 

earnings 

Average 

weekly 

OTTC 

Percent of 

earnings 

attributable 

to OTTC 

Total ........................................................................................................... 688,171 $486.95 $244.48 50 

Bartenders ................................................................................................. 105,787 521.51 280.61 54 

Waiters/Waitresses .................................................................................... 582,384 480.67 237.91 49 

Source: CEPR, 2017 CPS–MORG, inflated to $2019 using the GDP deflator. 

Occupations: Bartenders (Census Code 4040) and Waiters and Waitresses (Census Code 4110). 

Industries: Restaurants and other food services (Census Code 8680) and Drinking places, alcoholic beverages (Census Code 8690). 

1. Outside-Option Wage Calculation 

As discussed above, to determine 

potential transfers of tips, the 

Department assumes that employers 

will redistribute tips from tipped 

employees to employees who are not 

customarily and regularly tipped in a 

nontraditional tip pool only if the 

tipped employee’s total earnings, 

including the tips the employee retains, 

are greater than the ‘‘outside-option 

wage’’ that the tipped employee could 

earn in a non-tipped job. To model a 

worker’s outside-option wage, the 

Department used quantile regression 

analysis to attempt to predict the wage 

that these workers would earn in a nontipped job. Hourly wage was regressed 

on age, age squared, age cubed, 

education, gender, race, ethnicity, 

citizenship, marital status, veteran 

status, metro area status, and state for a 

sample of non-tipped workers.27 The 

Department restricted the regression 

sample to workers earning at least the 

Federal minimum wage of $7.25 per 

hour (inclusive of OTTC), and those 

who are employed. This analysis 

excludes states where the law prohibits 

non-tipped back-of-the-house 

employees from being included in the 

tip pool and states governed by the 

Marlow decision. 

In calculating the outside-option wage 

for tipped workers, the Department 

developed a model that defined the 

comparator sample for tipped workers 

in two different ways: (1) All non-tipped 

workers (i.e., workers who are either not 

waiters, waitresses, or bartenders, or do 

not work in restaurants or drinking 

places), and (2) Non-tipped workers in 

a set of occupations that are likely to 

represent outside options. The 

Department selected the list of relevant 

occupations by exploring the similarity 

between the knowledge, activities, 

skills, and abilities required by the 

occupation to that of servers and 

bartenders. The Department searched 

the Occupational Information Network 

(O*NET) system for occupations that 

share important similarities with 

waiters and waitresses and bartenders— 

the occupations had to require 

‘‘customer and personal service’’ 

knowledge and ‘‘service orientation’’ 

skills.28 The list was further reduced by 

eliminating occupations that are not 

comparable to the waitress and 

bartender occupations in terms of 

education and training, as waiter and 

waitress and bartender occupations do 

not require formal education or 

86780 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

29Approximately 14 percent of waiters and 

waitresses and 16 percent of bartenders have 

college degrees, even though a degree is not 

generally required to obtain such positions. 

According to research, the degree itself may carry 

an earnings premium for these workers. Therefore, 

excluding outside option occupations based on 

education attainment inflates the transfer estimates 

produced from this analysis because it compares 

these workers to artificially suppressed wage 

alternatives (e.g., only those positions for which at 

least this 14 percent of servers would be overqualified). However, since in most cases servers and 

bartenders are not required to have degrees, and it 

is unclear the degree to which including additional 

occupations in the outside option pool may skew 

the results, the Department opted to exclude these 

comparator occupations and simply highlight this 

fact here. BLS data on the share of workers with 

bachelor’s degrees working in jobs that only require 

a high school diploma are presented in a study by 

Vedder, R., Denhart, C., and Robe, J. (2013), 

available here: https://eric.ed.gov/?id=ED539373. 

30The Appendix and data tables are included in 

the rulemaking docket at www.regulations.gov. 

31Because of the uncertainty in the estimate of 

the percentile ranking of the worker’s current wage, 

the Department used the midpoint percentile for 

workers in each decile. For example, workers 

whose current wage was estimated to be in the zero 

to tenth percentile range were assigned the 

predicted fifth percentile outside-option wage, 

those with wages estimated to be in the eleventh to 

twentieth percentile were assigned the predicted 

fifteenth percentile outside-option wage, etc. 

32The 50th percentile method results in a higher 

transfer estimate ($176 million, compared to $109 

million). 

33All workers in tipped occupations/industries 

earning at least $7.25/hour when including tips 

were broken into deciles. This sample included 

about 1,500 observations (representing 

approximately 1.3 million workers) in the nonexcluded states. 

34The quantile regressions using non-tipped 

workers in comparable occupations included 

21,086 observations. 

35Based on the original CPS methodology, these 

observations were calculated to represent 205,170 

individuals. Due to the subsequent calculations 

conducted in this analysis, the Department remains 

confident in its findings but recognizes 

methodological constraints may impact the ability 

to extrapolate the findings across the originally 

representative universe with as much accuracy. 

36The same constraints apply to this 

extrapolation as described in the previous footnote, 

to an even greater degree. 

training.29 See Appendix Table 1 for a 

list of these occupations.30

The transfer estimates presented in 

this analysis use this sample of limited 

occupations to predict each tipped 

worker’s outside-option wage, that is, 

the wage that the tipped worker could 

earn in a non-tipped job. The 

Department also ran the regression to 

predict the outside-option wage using 

all non-tipped workers as the outsideoption sample, and found that transfers 

are approximately 30 percent lower in 

that specification. This implies that the 

resulting transfer estimate is likely a 

significant overestimate. 

The regression calculates a 

distribution of outside-option wages for 

each worker. The Department 

considered two methods: (1) Using the 

50th percentile and (2) using the same 

percentile for each worker as they 

currently earn in the distribution of 

wages for wait staff and bartenders in 

restaurants and drinking places in the 

state where they live.31 The second 

method accounts for the fact that two 

workers may have the exact same 

characteristics (age, race, education, 

etc.), but one worker may have a higher 

or lower outside-option wage because 

he or she is a more or less effective 

employee. This method assumes that a 

worker’s position in the wage 

distribution for wait staff and bartenders 

in restaurants and drinking places 

reflects his or her position in the wage 

distribution for the outside-option 

occupations. The Department believes 

this method is more appropriate than 

the 50th percentile method.32

To calculate the outside option wage, 

the Department first calculated the 

hourly wage decile (including tips) for 

each of the tipped workers identified 

above (i.e., in a tipped occupation/ 

industry and report earning OTTC), 

relative to other tipped workers.33

Second, the Department ran quantile 

regressions of the hourly wages of 

workers in non-tipped occupations that 

are similar to the tipped workers’ 

occupations (Appendix Table 1). The 

regressions controlled for state dummy 

variables, education level, sex, age, race, 

citizenship status, marital status, 

veteran status, and metropolitan area 

status. Workers reporting an hourly 

wage with overtime, tips, and 

commissions of less than $7.25 were 

excluded from this analysis.34 The 

regression results are included in 

Appendix A. Third, based on the 

regression estimates, the Department 

calculated a predicted wage in a nontipped occupation for each worker in a 

tipped occupation, for each of the ten 

deciles. The Department then used the 

predicted wage from the decile 

regression applicable to each tipped 

worker (i.e., based on his or her wage 

percentile) as his or her outside wage. 

Lastly, for the workers in tipped 

occupations, the Department removed 

some that did not have applicable data, 

including workers as follows: 

• Without wage data, 

• with negative or zero tips (after 

removing overtime pay), 

• with hourly wages including tips 

less than or equal to than their outside 

option wage, and 

• with hourly wages including tips 

less than the state minimum wage. 

After making these exclusions, the 

analysis includes 237 observations.35

Upon adjusting the universe of 

observations for employees who report 

earning tips, residing in states that may 

be impacted by this rule, individuals 

reporting wages lower than the 

applicable minimum wage, and those 

reporting wages higher than the 

minimum wage, only 37 observations 

remain, representing 24,743 workers.36

The Department does not know the 

degree to which the reduced sample size 

may impact the findings of its analysis. 

Nonetheless, the Department remains 

confident that the outside option 

calculation is of sufficient merit to 

retain it in the analysis, insofar as it is 

instructive in setting an approximate 

upper bound for the potential total 

transfers due to tip pooling. 

The Institute for Policy Integrity (IPI), 

in their comment, asserted that the 

assumptions used to calculate the 

Department’s outside option were 

flawed because they do not account for 

the search and travel costs that an 

employee would incur when deciding to 

change jobs. According to IPI, this 

caused the Department to overestimate 

the value of the outside-option wage for 

affected workers, leading to an 

underestimate in the overall size of the 

transfer. The Department acknowledges 

that search and travel costs are part of 

an employee’s decision to leave his or 

her current job, but believes these costs 

to be relatively minimal (due to being 

time-limited) and highly variable from 

employee to employee and location to 

location. The Department does not have 

data to estimate these and other highly 

individualized costs employees might 

face in considering their outside option 

nor does the commenter provide or 

address them. Instead, the Department’s 

outside option regression controls for 

location and other factors that may 

relate to differences in these costs. 

2. Per Worker Transfer Calculation 

After determining each tipped 

worker’s outside-option wage, the 

Department calculated the potential 

transferrable tips as the lesser of the 

following four numbers: 

A. The positive differential between a 

worker’s current earnings (wage plus 

tips) and his or her predicted outsideoption wage, 

B. The positive differential between a 

worker’s current earnings and the state 

minimum wage, 

C. The total tips earned by the worker, 

or 

D. Zero if the worker currently earns 

a direct cash wage above the full 

applicable minimum wage. 

The second number is included for 

cases where the outside-option wage 

predicted by the analysis is below the 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86781 

37Predicted overtime pay is calculated as (1.5 × 

base wage) × weekly hours worked over 40. 

38On average, from the dataset employed for the 

regression analysis, the tipped workers included in 

the outside option calculation usually work 14 

percent fewer hours per week than the non-tipped 

workers included in the regression (30 hours versus 

35 hours). 

39An additional source of uncertainty with regard 

to the magnitude of the estimated transfers is due 

to sampling error, the use of sample data to make 

inferences about the population. The estimated 

standard error on the point estimate of total 

potential tip transfers per year is large. The 95 

percent confidence interval around this estimate is 

$128.6 million to $305.3 million, a 41 percent 

swing either higher or lower than the provided 

estimate. Additionally, this confidence interval 

itself is too narrow due to the inability to take into 

account the stratified sampling design of the CPS, 

which means the spread is likely larger. 

state minimum wage, because the 

worker will not earn less than his or her 

applicable state minimum wage. The 

third number is included because the 

maximum potential tips that can be 

transferred from an employee cannot be 

greater than his or her total tips. Total 

tips for each worker were calculated 

from the OTTC variable in the CPS data. 

For hourly-paid workers, the 

Department subtracted predicted 

overtime pay to better estimate total 

tips.37 For workers who reported 

receiving overtime, tips, and 

commissions, but did not report the 

amount they earned, the Department 

applied the ratio of tipped earnings to 

total earnings for all waiters and 

waitresses and bartenders in their state 

(see Table 2). 

The Department set the transfer to 

zero if the worker currently earns a 

direct cash wage above the full 

applicable minimum wage. If the 

employer is paying a tipped employee a 

direct cash wage above the required full 

minimum wage, this indicates the wage 

is set at the market clearing wage and 

any reduction in the wage (e.g., by 

requiring tips to be transferred to backof-the-house workers) would cause the 

employee to quit and look for other 

work commensurate with the value they 

provide. Therefore, where an employer 

is paying a tipped employee above the 

full applicable minimum wage, the 

Department assumes the employer 

would generally not require the 

employee to contribute tips to a 

nontraditional tip pool. 

The Department includes an example 

to demonstrate how the outside option 

and the hourly transfers are calculated. 

Suppose a worker, with tips, earns 

$16.82 per hour. She earns a direct cash 

wage of $8.33 per hour, which is the 

relevant state minimum wage (both 

values adjusted to 2019 dollars using 

the GDP deflator), and $8.49 per hour in 

tips. The outside option wage for her 

wage decile is $15.44. We then calculate 

the following values: 

• Hourly wage ($16.82) minus state 

minimum wage ($8.33): $8.49 

• hourly wage ($16.82) minus outside 

option wage ($15.44): $1.38 

• hourly tips ($16.82 minus $8.33): 

$8.49 

The lesser of these three numbers is 

$1.38 per hour; therefore, hourly 

transfers are determined to be $1.38. 

One notable constraint to this 

methodology is that it does not account 

for variations in total number of hours 

worked or the number of weeks worked 

per year, which have a direct impact on 

compensation.38 If the averages of usual 

hours differ between a restaurant service 

job and an outside option, not adjusting 

the resultant figures accordingly could 

present a transfer estimate above or 

below reality. For example, a bartender 

working 4 hours per night and 5 days 

per week might make $30 per hour, but 

work only 20 hours per week (earning 

$600 per week). Comparing that wage to 

her outside option wage, set at $20 per 

hour but with 40 hours per week, would 

result in a $10 per hour loss, totaling 

$200 per week. Yet in reality she would 

earn more in the outside option role 

than in the original restaurant service 

role ($800 total, or $200 more), and the 

transfer calculation could be drastically 

overestimated. Conversely, the outside 

option transfer calculation would be 

underestimated if the same bartender 

works five 12-hour shifts at the same 

wage rate. The Department recognizes 

this as a constraint to its approach. It 

nonetheless maintains that the resultant 

transfer estimate is instructive. 

3. Total Annual Transfer 

Next, the Department estimates total 

weekly transfers. Estimated per worker 

hourly transfers were multiplied by 

usual hours to estimate weekly transfers 

per worker (on average $192.40 per 

week). Estimated weekly transfers were 

then aggregated over the relevant 

population (24,743 workers, based on 

the 37 CPS observations in the refined 

employee universe). 

To determine the potential annual 

total tip transfer, the Department first 

multiplied the estimated weighted sum 

of weekly tip transfers for all wait staff 

and bartenders who work at full-service 

restaurants and bars in the United States 

by 45.2 weeks—the average weeks 

worked in a year for waiters and 

waitresses and bartenders in the 2017 

CPS Annual Social and Economic 

Supplement. Using this methodology, 

the maximum possible transfer from 

front-of-the-house employees is 

estimated not to exceed $217.2 million 

(24,743 workers × $194.20 per week × 

45.2 weeks).39 This represents the total 

transfers that the Department estimates 

would occur in the extremely unlikely 

situation where every employer that 

does not take a tip credit institutes tip 

pools that include back-of-the-house 

workers and where none of the front-ofthe-house workers see an increase in 

total tips. In reality, even when it is 

seemingly economically beneficial 

when considering the wage dimension, 

many employers may not change their 

tip pooling practices because it would 

require changes to current practices to 

which they and their employees are 

accustomed, including their payroll and 

recordkeeping systems. 

The Department was unable to 

determine what proportion of the total 

tips estimated to be potentially 

transferred from these workers will 

realistically be transferred. For a range 

of reasons presented in this analysis, the 

Department expects that the potential 

transfers fall significantly below the 

above-calculated $217.2 million, and 

therefore considered the midpoint 

between this amount and zero to be a 

reasonable estimate of the potential 

transfers. The Department accordingly 

estimates that transfers of tips from 

front-of-the-house workers will be $109 

million in the first year that this rule is 

effective. Assuming these transfers 

occur annually, and there is no real 

wage growth, this results in 10-year 

annualized transfers of $109 million at 

both the 3 percent and 7 percent 

discount rates. These transfers, in and of 

themselves, could have benefits which 

are discussed further below. 

The $217 million transfer amount 

could also be an overestimation because 

employers do not have perfect 

information about employees’ outside 

option wages. Employers could decide 

not to implement a nontraditional tip 

pool in order to ensure that they do not 

lose any of their front-of-the-house 

workers. 

The earnings reduction for front-ofhouse workers could also be reduced if 

instituting a nontraditional tip pool 

leads to increased cooperation and 

productivity among workers, which the 

Department expects will occur. This, in 

turn, could lead to better service for 

customers, and higher tip amounts. 

Such effects would be categorized as 

benefits of the rule, rather than 

transfers, so please see section V.B.iii.3. 

for further discussion of these potential 

benefits. 

As noted above, the Department 

acknowledges that it is possible some 

employers might choose to respond to 

86782 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

40The Department further notes, however, that 

even a worker who receives minimum wage and 

also participates in the tip pool will in every 

conceivable scenario make more than a worker 

whose sole compensation is the minimum wage. 

41An establishment is commonly understood as 

a single economic unit, such as a farm, a mine, a 

factory, or a store, that produces goods or services. 

Establishments are typically at one physical 

location and engaged in one, or predominantly one, 

type of economic activity for which a single 

industrial classification may be applied. An 

establishment is in contrast to a firm, or a company, 

which is a business and may consist of one or more 

establishments, where each establishment may 

participate in a different predominant economic 

activity. See BLS, ‘‘Quarterly Census of 

Employment and Wages: Concepts,’’ https://

www.bls.gov/opub/hom/cew/concepts.htm. 

the rule by decreasing back-of-the-house 

workers’ wages, as the rule will allow 

these employees’ wages to be 

supplemented with tips, and such an 

outcome is what is modeled to produce 

the $109 million estimate of transfers 

from front-of-house employees to 

employers. (The Department notes that, 

because employers cannot take a tip 

credit for employees in nontraditional 

tip pools, an employer who institutes 

such a program would be precluded 

from taking a tip credit for their frontof-the-house workers and would have to 

pay those workers at least the full 

minimum wage.) 

Furthermore, although some 

employers may consider implementing 

a tip pooling system that substitutes 

back-of-the-house workers’ hourly 

wages for tips, tips fluctuate at any 

given time. Thus, employers’ ability to 

do so would be limited by market 

forces, such as, potentially, workers’ 

aversion to risk and the endowment 

effect (workers potentially valuing their 

set wages more than tips of the same 

average amount). Furthermore, the 

minimum wage limits an employer’s 

ability to decrease back-of-the-house 

wages. In the NPRM, the Department 

stated that it lacked data to quantify the 

extent to which this will occur, and this 

remains true. The Department requested 

information during the comment period 

on this point and received no applicable 

data. 

In its comment, IPI asserted that the 

Department’s transfer calculation 

wrongly assumes the restaurant industry 

is perfectly competitive. According to 

IPI’s comment, the assumption of 

perfect competition underestimates the 

degree to which employers will be able 

to transfer wages from employees and 

understates the total volume of 

transfers. The Department acknowledges 

that, the less competitive the labor 

market, the greater the ability of 

employers to reduce worker wages to an 

amount near the minimum wage.40

However, the Department does not have 

sufficient information to estimate the 

magnitude of this effect beyond the 

controls it already applied in its 

outside-options regression, and 

maintains that existing data on average 

wages indicate that employers face 

constraints consistent with market 

competition. 

Some commenters asserted that the 

Department failed to provide a 

quantitative analysis of the potential 

transfer between employees and 

employers. For example, IPI suggested 

that, ‘‘DOL could, using its already 

stated assumptions, isolate the subset of 

employers that would be able to capture 

the transfer. The Department could then 

construct a range of values for that 

subset using the same data sources and 

methods used to construct the overall 

transfer estimate.’’ The Department 

acknowledges that employers could 

ultimately capture some transfers, as 

stated above. Employers would be more 

able to lower the base wages of back-ofthe-house employees, and therefore 

capture the transfer, over a longer time 

horizon. It is unlikely that they could 

immediately lower wages of existing 

employees. Importantly, by instituting a 

nontraditional tip pool, employers 

would disqualify themselves from 

taking a tip credit for front-of-the-house 

workers, which is already permitted by 

law. Moreover, it is probably less 

complex and more direct for employers 

to continue such established 

arrangements than it is to set up a new 

nontraditional tip pool to reduce overall 

employee wages, if that is their 

objective. 

Finally, even if employers are able to 

lower the base wages of back-of-thehouse employees, it is possible that they 

would reinvest these wage savings back 

into the business, or use it to generate 

additional efficiencies. This, in turn, 

could lead to improvements in the 

overall customer experience, which 

could lead to customers leaving higher 

tips. This increase in tips would 

ultimately benefit all employees in the 

tip pool. 

Employers face a strong incentive to 

take action that will boost productivity 

and maximize long-term profits. The 

Department did not attempt to account 

for this point in the outside option 

analysis, but nonetheless holds that 

employers face real incentives. All of 

the employers in the population sample 

used for the regression analysis are 

eligible to take a tip credit, and therefore 

already have means by which to transfer 

tips to themselves via reduced wait staff 

wages if that were their goal. Thus, the 

employers who decide to implement tip 

pooling will likely do so because they 

believe it will boost productivity and 

profits. If employees have the incentive 

for greater cooperation because they all 

share in the tip pool, it is quite possible 

the quality of service will increase and 

result in a higher absolute value of tips 

in the pool. Consider a cook who, 

motivated by his participation in a tip 

pool, walks past a table and decides to 

stop and chat for a minute to ask about 

how the patrons are enjoying the food— 

this would likely be well received and 

may very well result in higher tips in 

the pool, in which the cook would now 

be eligible to partake. Conceivably, such 

quality and efficiency improvements 

could result in back-of-the-house and 

front-of-the-house workers all receiving 

higher tipped wages. 

One commenter, IPI, said that the 

Department should consider social costs 

and transfers when promulgating this 

rule, such as an increase in reliance on 

public benefits and adverse health 

consequences. If total compensation 

were reduced and if that reduction 

caused individual workers to rely on 

public benefits, then the transfers 

described as being borne by front-ofhouse workers would instead be 

partially borne by the Federal, state, or 

local government funding the benefits 

program. However, such an outcome is 

uncertain, and an attempted analysis of 

it would be characterized by lack of 

data. The Department notes that these 

same or newly hired workers may 

receive more compensation due to the 

rule and thus there could be a reduction 

in any reliance they presently have on 

social welfare benefits. 

iii. Estimated Costs, Cost Savings, and 

Benefits 

In this subsection, the Department 

addresses costs attributable to the rule, 

by quantifying regulatory familiarization 

costs and qualitatively discussing 

additional recordkeeping costs. The 

Department qualitatively discusses 

benefits and cost savings associated 

with the rule. Lastly, the Department 

qualitatively discusses the potential 

costs, transfers, and benefits associated 

with the revisions to § 531.56(e). 

1. Regulatory Familiarization Costs 

Regulatory familiarization costs 

represent direct costs to businesses 

associated with reviewing the new 

regulation. It is not clear whether 

regulatory familiarization costs are a 

function of the number of 

establishments or the number of firms.41

Presumably, the headquarters of a firm 

will conduct the regulatory review for 

businesses with multiple restaurants, 

and may also require chain restaurants 

to familiarize themselves with the 

regulation at the establishment level. To 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86783 

42This includes establishments in states excluded 

from the transfer calculation. 

43A Compensation/Benefits Specialist ensures 

company compliance with Federal and state laws, 

including reporting requirements; evaluates job 

positions, determining classification, exempt or 

non-exempt status, and salary; plans, develops, 

evaluates, improves, and communicates methods 

and techniques for selecting, promoting, 

compensating, evaluating, and training workers. See 

BLS, ‘‘13–1141 Compensation, Benefits, and Job 

Analysis Specialists,’’ https://www.bls.gov/oescurrent-oes131141.htm (last visited July 27, 2020). 

reduce the chance of underestimating 

costs, the Department used the number 

of establishments in its cost estimate— 

which is larger than the number of 

firms—and assumes that regulatory 

familiarization occurs at both the 

headquarters and establishment levels. 

The Department assumes that all 

establishments will incur some 

regulatory familiarization costs 

regardless of whether the employer 

decides to change its tip pooling 

practices as a result of the rule.42 There 

may be differences in familiarization 

cost by the size of establishments; 

however, our analysis does not compute 

different costs for establishments of 

different sizes. To estimate the total 

regulatory familiarization costs, the 

Department used (1) the number of 

establishments in the two industries, 

Drinking Places (Alcoholic Beverages) 

and Full-Service Restaurants; (2) the 

wage rate for the employees reviewing 

the rule; and (3) the number of hours 

that it estimates employers will spend 

reviewing the rule. Table 3 shows the 

number of establishments in the two 

industries. To estimate the number of 

potentially affected establishments, the 

Department used data from BLS’s 

Quarterly Census of Employment and 

Wages (QCEW) for 2019. 

TABLE 3—NUMBER OF ESTABLISHMENTS WITH TIPPED WORKERS

Industry Establishments 

NAICS 722410 (Drinking Places (Alcoholic Beverages)) ................................................................................................................ 42,912 

NAICS 722511 (Full-service Restaurants) ...................................................................................................................................... 250,056 

Total .......................................................................................................................................................................................... 292,968 

Source: QCEW, 2019. 

The Department assumes that a 

Compensation, Benefits, and Job 

Analysis Specialist (SOC 13–1141) (or a 

staff member in a similar position) with 

a mean wage of $33.58 per hour in 2019 

will review the rule.43 Given the change 

in this rule, the Department assumes 

that it will take on average about 15 

minutes to review the final rule. The 

Department has selected a small time 

estimate because it is an average for 

both establishments making changes to 

their compensation structure and those 

who are not (and consequently will 

have negligible or no regulatory 

familiarization costs). Further, the 

change effected by this regulation is 

unlikely to cause major burdens or 

costs. Assuming benefits are paid at a 

rate of 46 percent of the base wage, and 

overhead costs are 17 percent of the 

base wage, the reviewer’s effective 

hourly rate is $54.74; thus, the average 

cost per establishment is $13.68 for 15 

minutes of review time. The number of 

establishments in the selected industries 

was 292,968 in 2019. Therefore, 

regulatory familiarization costs in Year 

1 are estimated to be $4.01 million 

($13.68 × 292,968 establishments), 

which amounts to a 10-year annualized 

cost of $469,902 at a discount rate of 3 

percent or $570,700 at a discount rate of 

7 percent. Regulatory familiarization 

costs in future years are assumed to be 

de minimis. 

2. Other Costs 

The Department also assumes that 

there will be a minimal increase in 

recordkeeping costs associated with this 

rule. Under the Department’s previous 

regulations, employers were only 

required to keep records of which 

employees receive tips, the hours those 

employees worked, and how much each 

employee receives if the employer takes 

a tip credit. Some employers also kept 

records of the time employees spent on 

tipped duties and non-tipped duties to 

demonstrate compliance with the 

Department’s 80/20 approach to 

enforcing the dual-jobs regulation. 

Under this rule, employers that do not 

take a tip credit but collect tips to 

institute a mandatory tip pool must 

keep records showing which employees 

are included in the tip pool, and the 

amount of tips they receive, as reported 

by employees to the employer. As those 

records are already required under IRS 

Form 4070, there will be minimal 

additional recordkeeping costs for 

employers that pay the full Federal 

minimum wage in direct cash wages 

and choose to institute a nontraditional 

tip pool. 

Employers may incur some training 

costs associated with familiarizing first 

line managers and staff with the rule; 

however, the Department believes these 

costs will be de minimis. 

3. Benefits 

In their comment, IPI stated that the 

Department should better support its 

assertions regarding the proposed rule’s 

benefits. In response, the Department 

has further elaborated on the benefits 

discussed in this section. 

Section 3(m)’s tip credit language 

allows an employer to meet a portion of 

its Federal minimum wage obligation 

from the tips customers give employees. 

If an employer takes a tip credit, section 

3(m)(2)(A) applies, along with its 

requirement that only employees who 

customarily and regularly receive tips 

be included in any mandatory tip pool. 

When an employer does not take a tip 

credit, however, the rule would allow 

the employer to act in a manner 

currently prohibited by regulation—that 

is, by distributing tips to employees 

who are employed in occupations in 

which they do not customarily and 

regularly receive tips (e.g., cooks or 

dishwashers) through a tip pool. The 

rule, therefore, gives employers greater 

flexibility in determining their pay 

policies for tipped and non-tipped 

workers. Allowing employers and 

employees to structure tip pools in a 

manner that fits the needs of their 

business will improve efficiency and 

enhance cooperation amongst 

employees. By creating an atmosphere 

of cooperation, diminishing incentives 

for employees to unduly compete 

amongst themselves, and allowing 

workers at all levels to profit directly 

from quality service, employers with 

nontraditional tip pools may realize 

efficiencies and take on more business 

and more tips. This could cause an 

overall increase in business, 

employment, tips, and wages for all 

workers, not to mention increased job 

security and job satisfaction. 

The Department conducted a 

literature review of relevant academic 

studies that address the nexus of service 

quality and remuneration. One analysis 

86784 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

44Samuel Estreicher & Jonathan R. Nash, The 

Case for Tipping and Unrestricted Tip-Pooling: 

Promoting Intrafirm Cooperation, 59 B.C.L. Rev. 1 

(2018), http://lawdigitalcommons.bc.edu/bclr/ 

vol59/iss1/2. 

45Ofer H. Azar, The Implications of Tipping for 

Economics and Management, 30 (10) Int’l J. Soc. 

Econ., 1084–94 (2003), http:// 

individual.utoronto.ca/diep/c/azar2003.pdf. 

46Samuel Estreicher & Jonathan R. Nash, The 

Case for Tipping and Unrestricted Tip-Pooling: 

Promoting Intrafirm Cooperation, 59 B.C.L. Rev. 1 

(2018), http://lawdigitalcommons.bc.edu/bclr/ 

vol59/iss1/2. 

47Conlin, M., Lynn, M., and O’Donoghue, T. 

(2003). The Norm of Restaurant Tipping. Retrieved 

October 16, 2020 from Cornell University, School 

of Hospitality Administration site: http://

scholarship.sha.cornell.edu/articles/133. 

48Lynn, M. (2003). Tip Levels and Service: An 

Update, Extension, and Reconciliation. Cornell 

Hotel and Restaurant Administration Quarterly. 

October–December. 

49Bodvarsson, B. and Gibson, W.A. (1997). 

Economics and Restaurant Gratuities: Determining 

Tip Rates. The American Journal of Economics and 

Sociology, 56(2): 187–203, https://

onlinelibrary.wiley.com/doi/abs/10.1111/j.1536- 

7150.1997.tb03460.x. 

50Whaley, J., Kim, S., and Kim, Y. (2019). Drivers 

and Impact of Restaurant Tipping Behavior, Journal 

of Foodservice Business Research, 22:2, 117–131, 

https://www.tandfonline.com/doi/abs/10.1080/ 

15378020.2019.1570773. 

has suggested that tip pooling promotes 

and rewards cooperation among 

employees as serving customers is often 

a cooperative endeavor among frontand back-of-the-house employees; this 

study further suggests that tip pooling 

leads to uniformly better service, which 

in turn, leads to increased patronage 

and increased tipping.44 Another study 

indicates that tip pooling may foster 

customer-focused service, promote 

employee camaraderie, and increase 

productivity.45 Additionally, under the 

changes in this rule and per the transfer 

analysis discussed above, the employer 

will be able to distribute customer tips 

to back-of-the-house employees like 

cooks and dishwashers, possibly 

resulting in increased earnings for those 

employees. This would allow employers 

to hire more or higher quality workers 

for those roles. Finally, the Department 

believes that allowing employers to 

expand tip pools beyond customarily 

and regularly tipped workers like 

servers and bartenders could help 

incentivize back-of-the-house workers to 

perform better, which may improve the 

customer’s experience. 

As noted above, Estreicher and Nash 

(2018) assert that tip pooling leads to 

uniformly better service, which in turn, 

leads to increased tipping.46 The 

potential for increased tipping deserves 

some additional consideration. 

Theoretically, if the tip pool amount 

increases due to improved service, then 

the possible reduction in earnings noted 

in the transfer analysis for front-of-thehouse workers could be overestimated. 

The Department conducted a literature 

review of both (1) the direct relationship 

between tip pooling and tips and (2) the 

indirect relationship between dining 

experience and tips received. The 

Department did not identify studies that 

show a direct empirical relationship 

between tip pooling and tip levels, 

although studies such as Estreicher and 

Nash (2018) present related findings. 

There is some literature on the 

relationship between dining quality 

(e.g., service quality, food quality) and 

tip amounts. However, much of this 

literature is based on relatively small, 

locality-specific, non-representative 

samples. That does not mean their 

findings are inaccurate, but tempers the 

Department’s interest in extrapolating 

the findings across the U.S. economy. 

Several particularly applicable papers 

are briefly described here. The key 

takeaway is the relationship between 

dining quality and tip amount varies, so, 

despite having relative confidence in 

the direction of the impact (i.e., 

improved quality leads to higher tips), 

the amount non-traditional tip pooling 

may impact tips is unknown. 

The literature generally found a 

positive but small to moderate impact of 

quality of service on tips. The following 

are examples: 

• Conlin, Lynn, and O’Donoghue 

(2003) find that a one-point increase in 

service quality (on scale from 1 to 5) 

increases tip percent by either 1.43 or 

1.464 percentage points (depending on 

the model, both statistically 

significant).47 The average tip percent is 

17.56 percent so this is approximately 

an 8 percent increase. A one-point 

increase in food quality (which may 

improve after implementation of a nontraditional tip pool) increased the tip 

percent by either 0.585 or 1.481 

percentage points (depending on the 

model; only the latter is statistically 

significant). 

• Lynn (2003) finds that service 

ratings explained an average of less than 

two percent of the variation in a 

restaurant’s tip percentages.48 Although 

the paper cites empirical findings of 

increases in tips for servers who take 

certain actions (e.g., smiling, writing 

‘‘thank you’’ on check, drawing a 

picture such as a smiley face on check), 

actions taken by back-of-the-house 

workers may also increase tips. 

• Bodvarsson and Gibson (1997) 

estimated that within the seven central 

Minnesota restaurants in their survey, a 

one unit increase in service quality (on 

a scale of 1–5) was associated with 

slightly higher tips (0.44 to 0.54 percent 

of the bill or $0.14 on average).49

• Whaley, Kim, and Kim (2019) find 

that tipping size is positively related to 

server quality, food quality, and 

ambiance (although indirectly and occur 

through an intermediary variable of 

customer value).50 However, the 

magnitudes of these impacts on tips are 

relatively small. 

4. Cost Savings 

The cost savings associated with this 

rule would result in part from the 

increased earnings for back-of-the-house 

employees. Higher earnings for these 

employees could result in reduced 

turnover, which reduces hiring and 

training costs for employers. This rule 

will also give employers greater 

flexibility for tip pooling, and could 

reduce effort spent ensuring that the tip 

pool is limited to only customarily and 

regularly tipped employees. The 

Department believes that the cost 

savings would outweigh any increased 

rule-familiarization and recordkeeping 

costs. 

This rule may also reduce deadweight 

loss. Deadweight loss is the loss of 

economic efficiency that occurs when 

the perfectly competitive equilibrium in 

a market for a good or service is not 

achieved. Minimum wages may prevent 

the market from reaching equilibrium 

and thus result in fewer hours worked 

than would otherwise be efficient. 

Allowing nontraditional tip pools may 

cause a shift in the labor demand or 

supply curves for wait staff and 

bartenders. This could result in the 

market moving closer to the competitive 

market equilibrium. Although 

deadweight loss reductions are most 

commonly thought about in quantitative 

terms, such as new hiring or expanded 

hours for existing workers, quality could 

be how it manifests itself; in this case, 

deadweight loss reduction would be 

another term for some of the same 

benefits discussed elsewhere in this 

regulatory impact analysis. 

The Department did not quantify the 

potential reduction in deadweight loss 

because of uncertainty (e.g., what the 

appropriate demand and supply 

elasticities may be). 

5. Costs, Benefits, and Potential 

Transfers Associated With Revision to 

Dual Jobs Regulation 

The Department is amending its dual 

jobs regulation to reflect its recent 

guidance replacing the 80/20 approach 

with the updated related duties test. 

In the NPRM, the Department stated 

the removal of the arbitrary 20 percent 

cap on tasks that are not directly tied to 

receipt of a tip may result in tipped 

workers such as wait staff and 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86785 

51For example, if cleaning and setting tables 

helps a restaurant turn over tables more quickly and 

the server is able to wait on one additional party 

at each table during a shift, the ‘‘non-tipped’’ work 

may, in fact, result in an increase in the total tip 

and total compensation that the employee receives 

for a shift. 

52Note that the Department quantified a potential 

transfer in the tip pooling portion of this analysis, 

unlike the impacts due to the related duties test, 

because the Department has greater confidence in 

the ability to model a simpler system (i.e., interplay 

between the minimum wages with and without a 

tip credit, for front-of-the-house workers) than the 

complexities of the related duties system (e.g., 

ambiguous baseline, competing incentives of 

market actors, uncertain magnitudes of changes, 

etc.). It is consistent for the Department to not 

attempt to quantify impacts for a portion of the 

regulation for which it has less confidence in 

accurately estimating the input variables for a more 

dynamic interplay of factors. The Department 

requested comments and data to inform these 

approaches, and while it received a number of 

comments, none of them provided data or sufficient 

methodological parameters to increase the 

Department’s confidence in a quantitative analysis. 

53The Department notes that the comment itself 

lacks any specificity to replicate the estimates it 

purports to support the conclusions. To better 

understand the basis for these assertions, the 

Department reviewed the blog post at one point in 

time (and is unaware whether the post was 

modified at any time during the notice and 

comment period or thereafter) which itself lacks 

certain data and calculations necessary to 

reproduce it and evaluate its rigor. Further, because 

the comment itself merely concludes without the 

blog’s analysis that transfers would occur, the 

Department treats those conclusions as 

unsupported assertions. However, because the 

comment pointed to the blog post and the blog post 

itself contains a number of errors, which color the 

conclusions cited in the comment, the Department 

evaluates the blog post here. 

bartenders performing more non-tipped 

related duties such as ‘‘cleaning and 

setting tables, toasting bread, making 

coffee, and occasionally washing dishes 

or glasses.’’ Consequently, employment 

of workers currently performing these 

duties, such as dishwashers and cooks, 

may fall on the margin. In addition, the 

Department acknowledged that one 

possibility from taking on related, nontipped duties would be that tipped 

workers might lose tipped income by 

spending more of their time performing 

duties where they are not earning tips, 

while still receiving cash wages of less 

than minimum wage (total 

compensation would nonetheless 

remain at or above the minimum wage). 

However, the Department did not 

suggest that this was the only possible 

outcome; another distinct possibility, 

for instance, is that these ‘‘non-tipped’’ 

activities could result in greater overall 

tips for the worker.51

The Department stated that it lacked 

the data to quantify any potential 

reduction in tips or employment, 

because data does not exist on the 

amount of time that tipped employees 

currently spend on tipped duties or 

related, non-tipped duties.52 Several 

commenters criticized the Department’s 

lack of a quantitative analysis, but did 

not themselves provide data on the 

amount of time that tipped employees 

currently spend on tipped or related, 

tipped duties. See, e.g., NELP, NELA; 

State Attorneys General; National 

Women’s Law Center; Leadership 

Conference on Civil and Human Rights. 

The Economic Policy Institute (EPI), in 

particular, asserted that the removal of 

the 20 percent cap on related duties 

could cost workers millions each year. 

In its comment, EPI cited to a blog post 

where it had published an analysis 

claiming, ‘‘the proposed rule would cost 

workers more than $700 million 

annually if finalized.’’ 53 EPI argued that 

employers will ‘‘exploit’’ this new 

regulation by shifting non-tipped work 

from traditionally non-tipped to tipped 

staff, paying an hourly rate less than the 

full minimum wage for that work, and 

then applying a tip credit from tips 

received by the tipped staff for tipped 

work. The blog post estimates the 

change in total earnings that could 

occur if this shift took place. The 

Department carefully considered EPI’s 

blog analysis, but concluded that flaws 

in EPI’s premise and methodology 

render the analysis an inadequate 

estimate of any potential transfer.54

The Department conducted additional 

sensitivity analyses of the outsideoptions estimate conducted in the tip 

pooling section. For example, two 

variations were evaluated that more 

closely align with the EPI’s outside 

option wage regression used to estimate 

the impacts of the 80/20 provision. 

When EPI’s linear regression model is 

used instead of a quartile regression, 

estimated transfers are approximately 42 

percent higher, but this analysis did not 

include control variables, which the 

Department believes would better 

analyze whether location is simply 

being captured by the transfer 

calculation rather than regional 

variability. The Department believes a 

quantile regression is more appropriate 

because it compares more similar 

workers. In addition, EPI did not 

include veteran status and metro status 

as control variables in the regression; 

when these are removed from the 

Department’s model, the results are 

essentially unchanged. Furthermore, EPI 

did not provide information on the 

methodological specifications, 

including details on central 

assumptions, upon which their analysis 

relied. 

The analysis described in EPI’s blog 

post does not consider the amount of 

time tipped employees currently spend 

on tipped versus related, non-tipped 

duties or how this final rule would 

affect that amount. Instead, it assumes 

that the final rule would enable certain 

duties-shifting practices that employers 

may use to reduce tipped employees’ 

earnings and estimates the amount of 

that reduction. This assumption, which 

undergirds EPI’s entire analysis, 

proceeds from a fundamental 

misunderstanding of this final rule and 

the 80/20 approach it replaces. 

According to the blog post, EPI is 

concerned that replacing the 80/20 

approach with the final rule would 

enable the following type of dutiesshifting practice: ‘‘a restaurant that 

employs a cleaning service to clean the 

restaurant each night’’ could avoid 

paying a direct cash wage of at least the 

full Federal minimum wage of $7.25 per 

hour for cleaning services by 

‘‘requir[ing] servers to spend an extra 

hour or two performing such work and 

only pay them the tipped minimum 

wage of $2.13 per hour,’’ and then 

applying a tip credit to make up the 

difference. However, taking a tip credit 

under these circumstances is clearly 

prohibited under this final rule. 

Consistent with the discussion in 

Section III.D.ii, an employee who 

performs related, non-tipped duties for 

‘‘an extra hour or two’’ each night after 

the end of a shift would not be 

performing those related, non-tipped 

duties contemporaneously with tipped 

duties or for a reasonable time 

immediately before or after tipped 

duties. As such, the employer could not 

take a tip credit for time spent on the 

related, non-tipped duties performed 

well after tipped duties. Moreover, the 

practice that EPI is concerned about is 

presently permitted under the 80/20 

approach, which allows a restaurant to 

apply a tip credit to time a server 

spends cleaning each night at the end of 

his or her shift if the arbitrary ratio is 

maintained. For example, a restaurant 

could apply a tip credit where it 

requires its servers to clean the dining 

area for up to 2 hours after finishing an 

8-hour shift. 

As a second example, EPI’s blog post 

envisions a situation in which a 

restaurant that needs three dishwashers 

would purposefully employ only a 

single dishwasher and ‘‘require all 

servers to wash dishes periodically over 

the course of their shifts’’ to fill the 

expected gap. Again, this practice is 

permitted under the 80/20 approach, as 

long as the restaurant maintains the 

arbitrary ratio between tipped service 

duties and non-tipped dishwashing 

duties. A restaurant with a dozen 

servers could easily require them to 

perform the work of two dishwashers 

and still maintain the 80/20 ratio 

86786 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

55The second example in EPI’s blog post is 

distinguishable from the Department’s example in 

section III.D.ii explaining that the final rule would 

permit a hotel to take a tip credit for time when a 

bellhop performing related, non-tipped duties in 

between serving guests during a slow shift. In the 

Department’s example, the natural pace of business 

needs dictates when the bellhop performs related, 

non-tipped duties versus tipped customer service 

duties. By contrast, in EPI’s example, maintaining 

close temporal proximity between non-tipped and 

tipped duties, as oppose to actual business needs, 

dictates when servers perform service versus 

dishwashing duties. The restaurant would need to 

direct servers’ minute-by-minute tasks to ensure 

this artificial objective is given priority over the 

restaurant’s actual business needs of serving 

customers and washing dishes. 

56According to EPI’s blog post, the duties-shifting 

enables a restaurant to pay $2.13 per hour for nontipped duties instead of the Federal minimum wage 

of $7.25 per hour, thus achieve labor cost saving of 

$5.12 per hour for the non-tipped duties. 

57SBA, Summary of Size Standards by Industry 

Sector, 2017, www.sba.gov/document/support-- 

table-size-standards. 

58 Id., Subsector 722. 

needed to apply a tip credit to the 

dishwashing work. But this same 

practice would actually not be feasible 

under the final rule, which requires 

related non-tipped dishwashing duties 

to be performed contemporaneously or 

for a reasonable time immediately 

before or after tipped service duties. To 

be sure, a restaurant could theoretically 

micromanage servers to ensure that they 

perform dishwashing and service duties 

in close temporal proximity, but that 

effort would likely be prohibitively 

costly. The restaurant would have to 

hire managers to supervise servers’ 

minute-by-minute tasks, and major 

business disruptions would result 

because servers’ use of time would be 

dictated by maintaining temporal 

proximity between serving and 

dishwashing, rather than by any actual 

need to serve customers or wash 

dishes.55 No rational restaurant would 

bear these managerial expenses and 

business disruptions just to save a 

maximum of approximately $5 per hour 

on dishwashing.56 As such, it would be 

highly infeasible for a restaurant to shift 

dishwashing duties onto servers as 

contemplated by EPI under the final 

rule. Furthermore, this does not even 

begin to address the shock this 

supposed shift in duties would deliver 

to the underlying business model that 

relies on many duties occurring 

simultaneously to provide quality of 

service concentrated around common 

meal times, which would make it 

impossible for wait staff and bartenders 

to take on the full scope of additional 

duties that EPI hypothesized. 

In sum, EPI’s calculation is based 

entirely on the premise that replacing 

the 80/20 approach with this final rule 

would increase certain duties-shifting 

practices that it deems exploitative. But 

the opposite may very well be true 

because those ‘‘exploitative’’ practices 

are permitted under the 80/20 approach 

and prohibited under the final rule. The 

Department does not believe it is 

possible to overcome the flawed 

premise that is central to EPI’s attempt 

to quantify the potential transfers 

occasioned by the rule. That said, the 

Department acknowledges that such 

transfers could occur in some cases, but 

believes that employees will 

nonetheless benefit from this rule. For 

instance, replacing the 80/20 approach 

with this final rule would prevent the 

exploitative practices described in EPI’s 

blog post. And employees may receive 

higher earnings as a result of the 

efficiencies that this rule advances. 

As explained in the NPRM, the 

Department believes there will be 

considerable cost savings and 

efficiencies associated with this change. 

In particular, the Department believes— 

and several commentators agreed—that 

by eliminating the cost to scrutinize 

employees’ time to demonstrate 

compliance with the 80/20 approach, 

employers will see a reduction in 

regulatory cost and be able to adopt 

work arrangements that better serve 

customers, leading to more business and 

greater tips. Additionally, the revisions 

add clarity by referring to the list of 

duties presumed to be related on 

O*NET. The Department anticipates 

that the cost of occasionally referring to 

O*NET to ensure that employees’ nontipped duties are related to their tipped 

duties will be significantly less than the 

cost of continually monitoring the time 

employees have spent performing 

particular tasks. 

iv. Summary of Transfers and Costs 

Below is a summary table of the 

quantified transfers and costs for the 

RIA. Transfer costs in years two through 

ten are assumed to be the same as in 

Year 1. 

TABLE 4—SUMMARY OF TRANSFERS AND COSTS CALCULATIONS

[2019 Dollars] 

Potential tip transfers 

(millions) 

Regulatory 

familiarization costs 

(millions) 

$108.6 (range: $0 to $217.2) ................. $4.0 

10-Year Annualized Estimates 

3% Discount Rate ................................................................................................... $108.6 (range: $0 to $217.2) ................. 0.5 

7% Discount Rate ................................................................................................... $108.6 (range: $0 to $217.2) ................. 0.6 

VI. Regulatory Flexibility Act 

Analysis—Certification 

The Regulatory Flexibility Act of 1980 

(RFA), 5 U.S.C. 601 et seq., as amended 

by the Small Business Regulatory 

Enforcement Fairness Act of 1996, 

Public Law 104–121 (1996), requires 

Federal agencies engaged in rulemaking 

to consider the impact of their rules on 

small entities, consider alternatives to 

minimize that impact, and solicit public 

comment on their analyses. The RFA 

requires the assessment of the impact of 

a regulation on a wide range of small 

entities, including small businesses, 

not-for-profit organizations, and small 

governmental jurisdictions. 

Accordingly, the Department examined 

the regulatory requirements of the rule 

to determine whether they would have 

a significant economic impact on a 

substantial number of small entities. 

In its analysis, the Department used 

the Small Business Administration size 

standards, which determine whether a 

business qualifies for small-business 

status.57 According to the 2017 

standards, Full-service Restaurants 

(NAICS 722511) and Drinking Places 

(Alcoholic Beverages) (NAICS 722410) 

have a size standard of $7.5 million in 

annual revenue.58 The Department used 

this number to estimate the number of 

small entities. Any establishments with 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86787 

59U.S. Census Bureau, 2012 Economic Census, 

Accommodation and Food Services: Subject 

Series—Estab. & Firm Size: Summary Statistics by 

Sales Size of Establishments for the U.S., 2012, 

https://factfinder.census.gov/faces/tableservices/jsf/ 

pages/productview.xhtml. 60The small-business size standard for the two 

industries is $7.5 million in annual revenue. 

However, the final size category reported in the 

table is $5 million–$9 million. This is a data 

limitation because the 2012 Economic Census 

reported this category of $5 million–$9 million and 

not $5 million–$7.5 million. Thus, the total number 

of firms shown may be slightly higher than the 

actual number of small entities. 61A Compensation/Benefits Specialist ensures 

company compliance with Federal and state laws, 

including reporting requirements; evaluates job 

positions, determining classification, exempt or 

non-exempt status, and salary; plans, develops, 

evaluates, improves, and communicates methods 

and techniques for selecting, promoting, 

compensating, evaluating, and training workers. See 

BLS, ‘‘13–1141 Compensation, Benefits, and Job 

Analysis Specialists,’’ https://www.bls.gov/oes/ 

current/oes131141.htm (last visited July 27, 2020). 

annual sales revenue less than this 

amount were considered small entities. 

The Department used the U.S. Census 

Bureau’s 2012 Economic Census to 

obtain the number of establishments 

(operating the entire year) and annual 

sales/receipts for the two industries in 

the analysis: Full-service Restaurants 

and Drinking Places (Alcoholic 

Beverages).59 From annual receipts/ 

sales, the Department can estimate how 

many establishments fall under the size 

standard. Table 5 shows the number of 

private, year-round establishments in 

the two industries by revenue.60

The Department assumes that a 

Compensation, Benefits, and Job 

Analysis Specialist (SOC 13–1141) (or a 

staff member in a similar position) with 

a mean wage of $33.58 per hour in 2019 

will review the rule.61 Given the change 

in this rule, the Department assumes 

that it will take on average about 15 

minutes to review the final rule. The 

Department has selected a small time 

estimate because it is an average for 

both establishments making changes to 

their compensation structure and those 

who are not (and consequently will 

have negligible or no regulatory 

familiarization costs). Further, the 

change effected by this regulation is 

unlikely to cause major burdens or 

costs. Assuming benefits are paid at a 

rate of 46 percent of the base wage, and 

overhead costs are 17 percent of the 

base wage, the reviewer’s effective 

hourly rate is $54.74; thus, the average 

cost per establishment is $13.68 for 15 

minutes of review time. The Department 

applied this cost to all sizes of 

establishments since each establishment 

would incur this cost regardless of the 

number of affected workers. Finally, the 

impact of this rule was calculated as the 

ratio of annual cost per establishment to 

average sales receipts per establishment. 

As shown, the annual cost per 

establishment is less than 0.02 percent 

of average annual sales for 

establishments in all small entity size 

classes. The impact of this rule on small 

establishments will be de minimis. The 

Department certifies that the rule will 

not have a significant economic impact 

on a substantial number of small 

entities. 

TABLE 5—COSTS TO SMALL ENTITIES

Annual revenue/sales/receipts Number of 

establishments a

Average annual 

sales per 

establishment 

($) b

Annual cost per 

establishment 

($) c

Annual cost per 

establishment 

as percent of 

sales/receipts 

722511 Full-Service Restaurants 

<$100,000 ........................................................................ 10,211 $69,548 $13.68 0.02 

$100,000 to $499,999 ...................................................... 28,651 197,202 13.68 0.01 

$250,000 to $499,999 ...................................................... 39,554 412,801 13.68 0.00 

$500,000 to $999,999 ...................................................... 46,793 806,378 13.68 0.00 

$1,000,000 to $2,499,999 ................................................ 45,173 1,759,168 13.68 0.00 

$2,500,000 to $4,999,999 ................................................ 17,039 3,816,221 13.68 0.00 

$5,000,000 to $9,999,999 ................................................ 3,531 7,252,978 13.68 0.00 

722410 Drinking Places (Alcoholic Beverages) 

<$100,000 ........................................................................ 4,622 70,992 13.68 0.02 

$100,000 to $249,999 ...................................................... 11,610 192,269 13.68 0.01 

$250,000 to $499,999 ...................................................... 9,059 394,111 13.68 0.00 

$500,000 to $999,999 ...................................................... 5,138 775,656 13.68 0.00 

$1,000,000 to $2,499,999 ................................................ 3,386 1,694,767 13.68 0.00 

$2,500,000 to $4,999,999 ................................................ 755 3,772,747 13.68 0.00 

$5,000,000 to $9,999,999 ................................................ 164 7,445,953 13.68 0.00 

a Limited to establishments operated for the entire year. 

b Inflated to $2019 using the GDP deflator. 

cThe annual cost per establishment is the regulatory familiarization cost per establishment calculated in section V.B.iii.1. 

VII. Unfunded Mandates Reform Act 

Analysis 

The Unfunded Mandates Reform Act 

of 1995, 2 U.S.C. 1532, requires agencies 

to prepare a written statement, which 

includes an assessment of anticipated 

costs and benefits, before proposing any 

Federal mandate that may result in 

excess of $100 million (adjusted 

annually for inflation) in expenditures 

in any one year by state, local, and tribal 

governments in the aggregate, or by the 

private sector. This rulemaking is not 

expected to affect state, local, or tribal 

governments. While this rulemaking 

would affect employers in the private 

sector, it is not expected to result in 

expenditures greater than $100 million 

in any one year. See section V.B for an 

assessment of anticipated costs and 

benefits to the private sector. 

VIII. Executive Order 13132, 

Federalism 

The Department has reviewed this 

final rule in accordance with Executive 

Order 13132 regarding federalism and 

determined that it does not have 

federalism implications. The final rule 

would not have substantial direct effects 

on the states, on the relationship 

between the National Government and 

the states, or on the distribution of 

86788 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

power and responsibilities among the 

various levels of government. 

IX. Executive Order 13175, Indian 

Tribal Governments 

This final rule would not have 

substantial direct effects on one or more 

Indian tribes, on the relationship 

between the Federal Government and 

Indian tribes, or on the distribution of 

power and responsibilities between the 

Federal Government and Indian tribes. 

List of Subjects 

29 CFR Part 10 

Administrative practice and 

procedure, Construction industry, 

Government procurement, Law 

enforcement, Reporting and 

recordkeeping requirements, Wages. 

29 CFR Part 516 

Minimum wages, Reporting and 

recordkeeping requirements, Wages. 

29 CFR Part 531 

Wages. 

29 CFR Part 578 

Penalties, Wages. 

29 CFR Part 579 

Child labor, Penalties. 

29 CFR Part 580 

Administrative practice and 

procedure, Child labor, Penalties, 

Wages. 

Signed in Washington, DC, this 21st day of 

December, 2020. 

Cheryl M. Stanton, 

Administrator, Wage and Hour Division. 

For the reasons set forth above, the 

Department amends title 29, parts 10, 

516, 531, 578, 579, and 580 of the Code 

of Federal Regulations as follows: 

PART 10—ESTABLISHING A MINIMUM 

WAGE FOR CONTRACTORS 

■ 1. The authority citation for part 10 is 

revised to read as follows: 

Authority: 5 U.S.C. 301; section 4, E.O. 

13658, 79 FR 9851, 3 CFR, 2014 Comp., p. 

219; Secretary of Labor’s Order No. 01–2014 

(Dec. 19, 2014), 79 FR 77527 (Dec. 24, 2014). 

■ 2. Amend § 10.28 by revising 

paragraphs (b)(2), (c), (e), and (f) to read 

as follows: 

§ 10.28 Tipped employees. 

* * * * * 

(b) * * * 

(2)(i) In some situations an employee 

is employed in a dual job, as, for 

example, where a maintenance person 

in a hotel also works as a server. In such 

a situation the employee, if he or she 

customarily and regularly receives more 

than $30 a month in tips for his or her 

work as a server, is a tipped employee 

only with respect to his or her 

employment as a server. The employee 

is employed in two occupations, and no 

tip credit can be taken for his or her 

hours of employment in the occupation 

of maintenance person. 

(ii) Such a situation is distinguishable 

from that of an employee who spends 

time performing duties that are related 

to his or her tip-producing occupation 

but not themselves directed toward 

producing tips. For example, a server 

may spend part of his or her time 

cleaning and setting tables, toasting 

bread, making coffee, and occasionally 

washing dishes or glasses. Likewise, a 

counter attendant may also prepare his 

or her own short orders or may, as part 

of a group of counter attendants, take a 

turn as a short order cook for the group. 

An employer may take a tip credit for 

any hours that an employee performs 

related, non-tipped duties 

contemporaneously with his or her 

tipped duties, or for a reasonable time 

immediately before or after performing 

the tipped duties. 

(iii) In addition to the examples 

described in paragraph (b)(2)(ii) of this 

section, a non-tipped duty is presumed 

to be related to a tip-producing 

occupation if the duty is listed as a task 

in the description of the tip-producing 

occupation in the Occupational 

Information Network (O*NET) at 

www.onetonline.org. Occupations not 

listed in O*NET may qualify as tipped 

occupations. For those occupations, 

duties usually and customarily 

performed by employees are presumed 

to be related duties as long as they are 

included in the list of duties performed 

in similar O*NET occupations. 

(c) Characteristics of tips. A tip is a 

sum presented by a customer as a gift or 

gratuity in recognition of some service 

performed for the customer. It is to be 

distinguished from payment of a fixed 

charge, if any, made for the service. 

Whether a tip is to be given, and its 

amount, are matters determined solely 

by the customer. Customers may present 

cash tips directly to the employee or 

may designate a tip amount to be added 

to their bill when paying with a credit 

card or by other electronic means. 

Special gifts in forms other than money 

or its equivalent such as theater tickets, 

passes, or merchandise, are not counted 

as tips received by the employee for 

purposes of determining wages paid 

under the Executive order. 

* * * * * 

(e) Tip pooling. Where tipped 

employees share tips through a tip pool, 

only the amounts retained by the tipped 

employees after any redistribution 

through a tip pool are considered tips in 

applying the provisions of FLSA section 

3(t) and the wage payment provisions of 

section 3 of the Executive order. There 

is no maximum contribution percentage 

on mandatory tip pools. However, an 

employer must notify its employees of 

any required tip pool contribution 

amount, may only take a tip credit for 

the amount of tips each employee 

ultimately receives, and may not retain 

any of the employees’ tips for any other 

purpose. 

(f) Notice. An employer is not eligible 

to take the tip credit unless it has 

informed its tipped employees in 

advance of the employer’s use of the tip 

credit. The employer must inform the 

tipped employee of the amount of the 

cash wage that is to be paid by the 

employer, which cannot be lower than 

the cash wage required by paragraph 

(a)(1) of this section; the additional 

amount by which the wages of the 

tipped employee will be considered 

increased on account of the tip credit 

claimed by the employer, which amount 

may not exceed the value of the tips 

actually received by the employee; that 

all tips received by the tipped employee 

must be retained by the employee 

except for a tip pooling arrangement; 

and that the tip credit shall not apply to 

any worker who has not been informed 

of the requirements in this section. 

PART 516—RECORDS TO BE KEPT BY 

EMPLOYERS 

■ 3. Revise the authority citation for part 

516 to read as follows: 

Authority: Sec. 11, Pub. L. 75–718, 52 Stat. 

1066, as amended (29 U.S.C. 211). Section 

516.28 also issued under 29 U.S.C. 203(m), 

as amended by sec. 2105(b), Pub. L. 104–188, 

110 Stat. 1755; sec. 8102(a), Pub. L. 110–28, 

121 Stat. 112; and sec. 1201, Div. S., Tit. XII, 

Pub. L. 115–141, 132 Stat. 348. Section 

516.33 also issued under Pub. L. 75–718, 52 

Stat. 1060, as amended (29 U.S.C. 201 et 

seq.). Section 516.34 also issued under Sec. 

7, Pub. L. 101–157, 103 Stat. 944 (29 U.S.C. 

207(q)). 

■ 4. Amend § 516.28 by revising the 

section heading and adding paragraph 

(b) to read as follows: 

§ 516.28 Tipped employees and employeradministered tip pools. 

* * * * * 

(b) With respect to employees who 

receive tips but for whom a tip credit is 

not taken under section 3(m)(2)(A), any 

employer that collects tips received by 

employees to operate a mandatory tippooling or tip-sharing arrangement shall 

maintain and preserve payroll or other 

records containing the information and 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86789 

data required in § 516.2(a) and, in 

addition, the following: 

(1) A symbol, letter, or other notation 

placed on the pay records identifying 

each employee who receive tips. 

(2) Weekly or monthly amount 

reported by the employee, to the 

employer, of tips received (this may 

consist of reports made by the 

employees to the employer on IRS Form 

4070). 

PART 531—WAGE PAYMENTS UNDER 

THE FAIR LABOR STANDARDS ACT 

OF 1938 

■ 5. Revise the authority citation for part 

531 to read as follows: 

Authority: 29 U.S.C. 203(m) and (t), as 

amended by sec. 3(m), Pub. L. 75–718, 52 

Stat. 1060; sec. 2, Pub. L. 87–30, 75 Stat. 65; 

sec. 101, sec. 602, Pub. L. 89–601, 80 Stat. 

830; sec. 29(B), Pub. L. 93–259, 88 Stat. 55 

sec. 3, sec. 15(c), Pub. L. 95–151, 91 Stat 

1245; sec. 2105(b), Pub. L. 104–188, 110 Stat 

1755; sec. 8102, Pub. L. 110–28, 121 Stat. 

112; and sec. 1201, Div. S., Tit. XII, Pub. L. 

115–141, 132 Stat. 348. 

■ 6. Revise § 531.50 to read as follows: 

§ 531.50 Statutory provisions with respect 

to tipped employees. 

(a) With respect to tipped employees, 

section 3(m)(2)(A) provides that, in 

determining the wage an employer is 

required to pay a tipped employee, the 

amount paid such employee by the 

employee’s employer shall be an 

amount equal to— 

(1) The cash wage paid such 

employee which for purposes of such 

determination shall not be less than the 

cash wage required to be paid such an 

employee on August 20, 1996 [i.e., 

$2.13]; and 

(2) An additional amount on account 

of the tips received by such employee 

which amount is equal to the difference 

between the wage specified in 

paragraph (a)(1) of this section and 

section 6(a)(1) of the Act. 

(b) Section 3(m)(2)(A) also provides 

that an employer that takes a tip credit 

against its minimum wage obligations to 

its tipped employees must inform those 

employees of the provisions of that 

subsection, and that the employees must 

retain all of their tips, although the 

employer may require those employees 

to participate in a tip pool with other 

tipped employees that customarily and 

regularly receive tips. 

(c) Section 3(m)(2)(B) provides that an 

employer may not keep tips received by 

its employees for any purposes, 

including allowing managers and 

supervisors to keep any portion of 

employees’ tips, regardless of whether 

the employer takes a tip credit under 

section 3(m)(2)(A). 

(d) ‘‘Tipped employee’’ is defined in 

section 3(t) of the Act as any employee 

engaged in an occupation in which he 

or she customarily and regularly 

receives more than $30 a month in tips. 

■ 7. Revise the first sentence of § 531.51 

to read as follows: 

§ 531.51 Conditions for taking tip credits 

in making wage payments. 

The wage credit permitted on account 

of tips under section 3(m)(2)(A) may be 

taken only with respect to wage 

payments made under the Act to those 

employees whose occupations in the 

workweeks for which such payments 

are made are those of ‘‘tipped 

employees’’ as defined in section 3(t). 

* * * 

■ 8. Revise § 531.52 to read as follows: 

§ 531.52 General restrictions on an 

employer’s use of its employees’ tips. 

(a) A tip is a sum presented by a 

customer as a gift or gratuity in 

recognition of some service performed 

for the customer. It is to be 

distinguished from payment of a charge, 

if any, made for the service. Whether a 

tip is to be given, and its amount, are 

matters determined solely by the 

customer. An employer that takes a tip 

credit against its minimum wage 

obligations is prohibited from using an 

employee’s tips for any reason other 

than that which is statutorily permitted 

in section 3(m)(2)(A): As a credit against 

its minimum wage obligations to the 

employee, or in furtherance of a tip pool 

limited to employees who customarily 

and regularly receive tips. Only tips 

actually received by an employee as 

money belonging to the employee may 

be counted in determining whether the 

person is a ‘‘tipped employee’’ within 

the meaning of the Act and in applying 

the provisions of section 3(m)(2)(A) 

which govern wage credits for tips. 

(b) Section 3(m)(2)(B) of the Act 

provides that an employer may not keep 

tips received by its employees for any 

purposes, regardless of whether the 

employer takes a tip credit. 

(1) An employer may exert control 

over an employee’s tips only to 

distribute tips to the employee who 

received them, require employees to 

share tips with other employees in 

compliance with § 531.54, or, where the 

employer facilitates tip pooling by 

collecting and redistributing employees’ 

tips, distribute tips to employees in a tip 

pool in compliance with § 531.54. 

(2) An employer may not allow 

managers and supervisors to keep any 

portion of an employee’s tips, regardless 

of whether the employer takes a tip 

credit. A manager or supervisor may 

keep tips that he or she receives directly 

from customers based on the service 

that he or she directly provides. For 

purposes of section 3(m)(2)(B), the term 

‘‘manager’’ or ‘‘supervisor’’ shall mean 

any employee whose duties match those 

of an executive employee as described 

in § 541.100(a)(2) through (4) or 

§ 541.101 of this chapter. 

■ 9. Revise § 531.54 to read as follows: 

§ 531.54 Tip pooling. 

(a) Monies counted as tips. Where 

employees practice tip splitting, as 

where waiters give a portion of their tips 

to the busser, both the amounts retained 

by the waiters and those given the 

bussers are considered tips of the 

individuals who retain them, in 

applying the provisions of sections 

3(m)(2)(A) and 3(t). Similarly, where an 

accounting is made to an employer for 

his or her information only or in 

furtherance of a pooling arrangement 

whereby the employer redistributes the 

tips to the employees upon some basis 

to which they have mutually agreed 

among themselves, the amounts 

received and retained by each 

individual as his or her own are counted 

as his or her tips for purposes of the Act. 

Section 3(m)(2)(A) does not impose a 

maximum contribution percentage on 

mandatory tip pools. 

(b) Prohibition against keeping tips— 

(1) Meaning of ‘‘keep.’’ Section 

3(m)(2)(B)’s prohibition against keeping 

tips applies regardless of whether an 

employer takes a tip credit. Section 

3(m)(2)(B) expressly prohibits 

employers from requiring employees to 

share tips with managers or supervisors, 

as defined in § 531.52(b)(2), or 

employers, as defined in 29 U.S.C. 

203(d). An employer does not violate 

section 3(m)(2)(B)’s prohibition against 

keeping tips if it requires employees to 

share tips with other employees who are 

eligible to receive tips. 

(2) Full and prompt distribution of 

tips. An employer that facilitates tip 

pooling by collecting and redistributing 

employees’ tips does not violate section 

3(m)(2)(B)’s prohibition against keeping 

tips if it fully distributes any tips the 

employer collects no later than the 

regular payday for the workweek in 

which the tips were collected, or when 

the pay period covers more than a single 

workweek, the regular payday for the 

period in which the workweek ends. To 

the extent that it is not possible for an 

employer to ascertain the amount of tips 

that have been received or how tips 

should be distributed prior to 

processing payroll, tips must be 

distributed to employees as soon as 

practicable after the regular payday. 

(c) Employers that take a section 

3(m)(2)(A) tip credit. When an employer 

86790 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

takes a tip credit pursuant to section 

3(m)(2)(A): 

(1) The employer may require an 

employee for whom the employer takes 

a tip credit to contribute tips to a tip 

pool only if it is limited to employees 

who customarily and regularly receive 

tips; and 

(2) The employer must notify its 

employees of any required tip pool 

contribution amount, may only take a 

tip credit for the amount of tips each 

employee ultimately receives, and may 

not retain any of the employees’ tips for 

any other purpose. 

(3) An employer may not participate 

in such a tip pool and may not include 

managers and supervisors in the pool. 

(d) Employers that do not take a 

section 3(m)(2)(A) tip credit. An 

employer that pays its tipped employees 

the full minimum wage and does not 

take a tip credit may impose a tip 

pooling arrangement that includes 

dishwashers, cooks, or other employees 

in the establishment who are not 

employed in an occupation in which 

employees customarily and regularly 

receive tips. An employer may not 

participate in such a tip pool and may 

not include supervisors and managers in 

the pool. 

■ 10. Revise § 531.55(a) to read as 

follows: 

§ 531.55 Examples of amounts not 

received as tips. 

(a) A compulsory charge for service, 

such as 15 percent of the amount of the 

bill, imposed on a customer by an 

employer’s establishment, is not a tip 

and, even if distributed by the employer 

to its employees, cannot be counted as 

a tip received in applying the provisions 

of sections 3(m)(2)(A) and 3(t). 

Similarly, where negotiations between a 

hotel and a customer for banquet 

facilities include amounts for 

distribution to employees of the hotel, 

the amounts so distributed are not 

counted as tips received. 

* * * * * 

■ 11. Amend § 531.56 by revising the 

second and third sentences in paragraph 

(a) and paragraphs (c), (d), and (e) to 

read as follows: 

§ 531.56 ‘‘More than $30 a month in tips.’’ 

(a) * * * An employee employed in 

an occupation in which the tips he or 

she receives meet the minimum 

standard in the preceding sentence is a 

‘‘tipped employee’’ for whom the wage 

credit provided by section 3(m)(2)(A) 

may be taken in computing the 

compensation due him or her under the 

Act for employment in such occupation, 

whether he or she is employed in it full 

time or part time. An employee 

employed full time or part time in an 

occupation in which he or she does not 

receive more than $30 a month in tips 

customarily and regularly is not a 

‘‘tipped employee’’ within the meaning 

of the Act and must receive the full 

compensation required by the 

provisions of the Act in cash or 

allowable facilities without any 

deduction for tips received under the 

provisions of section 3(m)(2)(A). 

* * * * * 

(c) Individual tip receipts are 

controlling. An employee must him- or 

herself customarily and regularly 

receive more than $30 a month in tips 

in order to qualify as a tipped employee. 

The fact that he or she is part of a group 

which has a record of receiving more 

than $30 a month in tips will not qualify 

him or her. For example, a server who 

is newly hired will not be considered a 

tipped employee merely because the 

other servers in the establishment 

receive tips in the requisite amount. For 

the method of applying the test in initial 

and terminal months of employment, 

see § 531.58. 

(d) Significance of minimum monthly 

tip receipts. More than $30 a month in 

tips customarily and regularly received 

by the employee is a minimum standard 

that must be met before any wage credit 

for tips is determined under section 

3(m)(2)(A). It does not govern or limit 

the determination of the appropriate 

amount of wage credit under section 

3(m)(2)(A) that may be taken for tips 

under section 6(a)(1) (tip credit equals 

the difference between the minimum 

wage required by section 6(a)(1) and the 

cash wage paid (at least $2.13 per 

hour)). 

(e) Dual jobs. (1) In some situations an 

employee is employed in a dual job, as 

for example, where a maintenance 

person in a hotel also works as a server. 

In such a situation the employee, if he 

or she customarily and regularly 

receives more than $30 a month in tips 

for his or her work as a server, is a 

tipped employee only with respect to 

his or her employment as a server. The 

employee is employed in two 

occupations, and no tip credit can be 

taken for his or her hours of 

employment in the occupation of 

maintenance person. 

(2) Such a situation is distinguishable 

from that of an employee who spends 

time performing duties that are related 

to his or her tip-producing occupation 

but are not themselves directed toward 

producing tips. For example, a server 

may spend part of his or her time 

cleaning and setting tables, toasting 

bread, making coffee and occasionally 

washing dishes or glasses. Likewise, a 

counter attendant may also prepare his 

or her own short orders or may, as part 

of a group of counter attendants, take a 

turn as a short order cook for the group. 

An employer may take a tip credit for 

any hours that an employee performs 

related, non-tipped duties 

contemporaneously with his or her 

tipped duties, or for a reasonable time 

immediately before or after performing 

the tipped duties. 

(3) In addition to the examples 

described in paragraph (e)(2) of this 

section, a non-tipped duty is presumed 

to be related to a tip-producing 

occupation if the duty is listed as a task 

in the description of the tip-producing 

occupation in the Occupational 

Information Network (O*NET) at 

www.onetonline.org. Occupations not 

listed in O*NET may also qualify as 

tipped occupations. For those 

occupations, duties usually and 

customarily performed by employees 

are presumed to be related duties as 

long as they are included in the list of 

duties performed in similar O*NET 

occupations. 

■ 12. Revise § 531.59 to read as follows: 

§ 531.59 The tip wage credit. 

(a) In determining compliance with 

the wage payment requirements of the 

Act, under the provisions of section 

3(m)(2)(A) the amount paid to a tipped 

employee by an employer is increased 

on account of tips by an amount equal 

to the formula set forth in the statute 

(minimum wage required by section 

6(a)(1) of the Act minus cash wage paid 

(at least $2.13)), provided that the 

employer satisfies all the requirements 

of section 3(m)(2)(A). This tip credit is 

in addition to any credit for board, 

lodging, or other facilities which may be 

allowable under section 3(m). 

(b) As indicated in § 531.51, the tip 

credit may be taken only for hours 

worked by the employee in an 

occupation in which the employee 

qualifies as a ‘‘tipped employee.’’ 

Pursuant to section 3(m)(2)(A), an 

employer is not eligible to take the tip 

credit unless it has informed its tipped 

employees in advance of the employer’s 

use of the tip credit of the provisions of 

section 3(m)(2)(A) of the Act, i.e.: The 

amount of the cash wage that is to be 

paid to the tipped employee by the 

employer; the additional amount by 

which the wages of the tipped employee 

are increased on account of the tip 

credit claimed by the employer, which 

amount may not exceed the value of the 

tips actually received by the employee; 

that all tips received by the tipped 

employee must be retained by the 

employee except for a tip pooling 

arrangement limited to employees who 

Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 86791 

customarily and regularly receive tips; 

and that the tip credit shall not apply to 

any employee who has not been 

informed of the requirements in this 

section. The credit allowed on account 

of tips may be less than that permitted 

by statute (minimum wage required by 

section 6(a)(1) minus the cash wage paid 

(at least $2.13)); it cannot be more. In 

order for the employer to claim the 

maximum tip credit, the employer must 

demonstrate that the employee received 

at least that amount in actual tips. If the 

employee received less than the 

maximum tip credit amount in tips, the 

employer is required to pay the balance 

so that the employee receives at least 

the minimum wage with the defined 

combination of wages and tips. With the 

exception of tips contributed to a tip 

pool limited to employees who 

customarily and regularly receive tips as 

described in § 531.54, section 3(m)(2)(A) 

also requires employers that take a tip 

credit to permit employees to retain all 

tips received by the employee. 

■ 13. Revise § 531.60 to read as follows: 

§ 531.60 Overtime payments. 

When overtime is worked by a tipped 

employee who is subject to the overtime 

pay provisions of the Act, the 

employee’s regular rate of pay is 

determined by dividing the employee’s 

total remuneration for employment 

(except statutory exclusions) in any 

workweek by the total number of hours 

actually worked by the employee in that 

workweek for which such compensation 

was paid. (See part 778 of this chapter 

for a detailed discussion of overtime 

compensation under the Act.) In 

accordance with section 3(m)(2)(A), a 

tipped employee’s regular rate of pay 

includes the amount of tip credit taken 

by the employer per hour (not in excess 

of the minimum wage required by 

section 6(a)(1) minus the cash wage paid 

(at least $2.13)), the reasonable cost or 

fair value of any facilities furnished to 

the employee by the employer, as 

authorized under section 3(m) and this 

part, and the cash wages including 

commissions and certain bonuses paid 

by the employer. Any tips received by 

the employee in excess of the tip credit 

need not be included in the regular rate. 

Such tips are not payments made by the 

employer to the employee as 

remuneration for employment within 

the meaning of the Act. 

PART 578—TIP RETENTION, MINIMUM 

WAGE, AND OVERTIME 

VIOLATIONS—CIVIL MONEY 

PENALTIES 

■ 14. The authority citation for part 578 

is revised to read as follows: 

Authority: 29 U.S.C. 216(e), as amended by 

sec. 9, Pub. L. 101–157, 103 Stat. 938, sec. 

3103, Pub. L. 101–508, 104 Stat. 1388–29, 

sec. 302(a), Pub. L. 110–233, 122 Stat. 920, 

and sec. 1201, Div. S., Tit. XII, Pub. L. 115– 

141, 132 Stat. 348; Pub. L. 101–410, 104 Stat. 

890 (28 U.S.C. 2461 note), as amended by 

sec. 31001(s), Pub. L. 104–134, 110 Stat. 

1321–358, 1321–373, and sec. 701, Pub. L. 

114–74, 129 Stat 584. 

■ 15. The heading of part 578 is revised 

to read as set forth above. 

■ 16. Revise § 578.1 to read as follows: 

§ 578.1 What does this part cover? 

Section 9 of the Fair Labor Standards 

Amendments of 1989 amended section 

16(e) of the Act to provide that any 

person who repeatedly or willfully 

violates the minimum wage (section 6) 

or overtime provisions (section 7) of the 

Act shall be subject to a civil money 

penalty not to exceed $1,100 for each 

such violation. In 2001, the Wage and 

Hour Division (WHD) adjusted this 

penalty for inflation pursuant to the 

Federal Civil Penalties Inflation 

Adjustment Act of 1990 (Pub. L. 101– 

410), as amended by the Debt Collection 

Improvement Act of 1996 (Pub. L. 104– 

134, section 31001(s)). The Genetic 

Information Nondiscrimination Act of 

2008 amended section 16(e) of the Act 

to reflect this increase. See Public aw. 

110–233, sec. 302(a), 122 Stat. 920. 

Section 1201(b)(3) of the Consolidated 

Appropriations Act, 2018, amended 

section 16(e) to add that any person who 

violates section 3(m)(2)(B) of the Act 

shall be subject to a civil money penalty 

not to exceed $1,100. The Federal Civil 

Penalties Inflation Adjustment Act of 

1990 (Pub. L. 101–410), as amended by 

the Debt Collection Improvement Act of 

1996 (Pub. L. 104–134, section 31001(s)) 

and the Federal Civil Penalties Inflation 

Adjustment Act Improvements Act of 

2015 (Pub. L. 114–74, section 701), 

requires that inflationary adjustments be 

annually made in these civil money 

penalties according to a specified costof-living formula. This part defines 

terms necessary for administration of 

the civil money penalty provisions, 

describes the violations for which a 

penalty may be imposed, and describes 

criteria for determining the amount of 

penalty to be assessed. The procedural 

requirements for assessing and 

contesting such penalties are contained 

in part 580 of this chapter. 

■ 17. Revise § 578.3 to read as follows: 

§ 578.3 What types of violations may result 

in a penalty being assessed? 

(a) In general. (1) A penalty of up to 

$1,162 per violation may be assessed 

against any person who repeatedly or 

willfully violates section 3(m)(2)(B) of 

the Act. 

(2) A penalty of up to $2,074 per 

violation may be assessed against any 

person who repeatedly or willfully 

violates section 6 (minimum wage) or 

section 7 (overtime) of the Act. The 

amount of the penalties stated in 

paragraphs (a)(1) and (2) of this section 

will be determined by applying the 

criteria in § 578.4. 

(b) Repeated violations. An 

employer’s violation of section 

3(m)(2)(B), section 6, or section 7 of the 

Act shall be deemed to be ‘‘repeated’’ 

for purposes of this section: 

(1) Where the employer has 

previously violated section 3(m)(2)(B), 

section 6, or section 7 of the Act, 

provided the employer has previously 

received notice, through a responsible 

official of the Wage and Hour Division 

or otherwise authoritatively, that the 

employer allegedly was in violation of 

the provisions of the Act; or 

(2) Where a court or other tribunal has 

made a finding that an employer has 

previously violated section 3(m)(2)(B), 

section 6, or section 7 of the Act, unless 

an appeal therefrom which has been 

timely filed is pending before a court or 

other tribunal with jurisdiction to hear 

the appeal, or unless the finding has 

been set aside or reversed by such 

appellate tribunal. 

(c) Willful violations. (1) An 

employer’s violation of section 

3(m)(2)(B), section 6, or section 7 of the 

Act shall be deemed to be ‘‘willful’’ for 

purposes of this section where the 

employer knew that its conduct was 

prohibited by the Act or showed 

reckless disregard for the requirements 

of the Act. All of the facts and 

circumstances surrounding the violation 

shall be taken into account in 

determining whether a violation was 

willful. 

(2) For purposes of this section, the 

employer’s receipt of advice from a 

responsible official of the Wage and 

Hour Division to the effect that the 

conduct in question is not lawful can be 

sufficient to show that the employer’s 

conduct is knowing, but is not 

automatically dispositive. 

■ 18. Revise § 578.4(a) to read as 

follows: 

§ 578.4 Determination of penalty. 

(a) In determining the amount of 

penalty to be assessed for any repeated 

or willful violation of section 3(m)(2)(B), 

section 6, or section 7 of the Act, the 

Administrator shall consider the 

seriousness of the violations and the 

size of the employer’s business. 

* * * * * 

86792 Federal Register / Vol. 85, No. 250 / Wednesday, December 30, 2020 / Rules and Regulations 

PART 579—CHILD LABOR 

VIOLATIONS—CIVIL MONEY 

PENALTIES 

■ 19. The authority citation for part 579 

is revised to read as follows: 

Authority: 29 U.S.C. 203(m), (l), 211, 212, 

213(c), 216; Reorg. Plan No. 6 of 1950, 64 

Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88 Stat. 

72, 76; Secretary of Labor’s Order No. 01– 

2014 (Dec. 19, 2014), 79 FR 77527 (Dec. 24, 

2014); 28 U.S.C. 2461 Note. 

■ 20. Amend § 579.1 by: 

■ a. Revising paragraph (a) introductory 

text; 

■ b. Redesignating paragraph (a)(2) as 

paragraph (a)(2)(i); and 

■ c. Adding paragraph (a)(2)(ii). 

The revision and addition read as 

follows: 

§ 579.1 Purpose and scope. 

(a) Section 16(e), added to the Fair 

Labor Standards Act of 1938 (FLSA), as 

amended, by the Fair Labor Standards 

Amendments of 1974, and as further 

amended by the Fair Labor Standards 

Amendments of 1989, the Omnibus 

Budget Reconciliation Act of 1990, the 

Compactor and Balers Safety Standards 

Modernization Act of 1996, the Genetic 

Information Nondiscrimination Act of 

2008, and the Consolidated 

Appropriations Act of 2018, provides 

for the imposition of civil money 

penalties in the following manner: 

* * * * * 

(2) * * * 

(ii) Any person who repeatedly or 

willfully violates section 203(m)(2)(B) of 

the FLSA, relating to the retention of 

tips, shall be subject to a civil penalty 

not to exceed $1,162 for each such 

violation. 

* * * * * 

■ 21. Amend § 579.2 by revising the 

definition of ‘‘Willful violations’’ to read 

as follows: 

§ 579.2 Definitions. 

* * * * * 

Willful violations under this section 

has several components. An employer’s 

violation of section 12 or section 13(c) 

of the Act relating to child labor or any 

regulation issued pursuant to such 

sections, shall be deemed to be willful 

for purposes of this section where the 

employer knew that its conduct was 

prohibited by the Act or showed 

reckless disregard for the requirements 

of the Act. All of the facts and 

circumstances surrounding the violation 

shall be taken into account in 

determining whether a violation was 

willful. In addition, for purposes of this 

section, the employer’s receipt of advice 

from a responsible official of the Wage 

and Hour Division to the effect that the 

conduct in question is not lawful can be 

sufficient to show that the employer’s 

conduct is knowing, but is not 

automatically dispositive. 

PART 580—CIVIL MONEY 

PENALTIES—PROCEDURES FOR 

ASSESSING AND CONTESTING 

PENALTIES 

■ 22. The authority citation for part 580 

continues to read as follows: 

Authority: 29 U.S.C. 9a, 203, 209, 211, 212, 

213(c), 216; Reorg. Plan No. 6 of 1950, 64 

Stat. 1263, 5 U.S.C. App; secs. 25, 29, 88 Stat. 

72, 76; Secretary’s Order 01–2014 (Dec. 19, 

2014), 79 FR 77527 (Dec. 24, 2014); 5 U.S.C. 

500, 503, 551, 559; 103 Stat. 938. 

■ 23. Revise the first sentence of § 580.2 

to read as follows: 

§ 580.2 Applicability of procedures and 

rules. 

The procedures and rules contained 

in this part prescribe the administrative 

process for assessment of civil money 

penalties for any violation of the child 

labor provisions at section 12 of the Act 

and any regulation thereunder as set 

forth in part 579 of this chapter, and for 

assessment of civil money penalties for 

any repeated or willful violation of the 

tip retention provisions of section 

3(m)(2)(B), the minimum wage 

provisions of section 6, or the overtime 

provisions of section 7 of the Act or the 

regulations thereunder set forth in 29 

CFR subtitle B, chapter V. * * * 

■ 24. Revise the first sentence of § 580.3 

to read as follows: 

§ 580.3 Written notice of determination 

required. 

Whenever the Administrator 

determines that there has been a 

violation by any person of section 12 of 

the Act relating to child labor or any 

regulation thereunder as set forth in part 

579 of this chapter, or determines that 

there has been a repeated or willful 

violation by any person of section 

3(m)(2)(B), section 6, or section 7 of the 

Act, and determines that imposition of 

a civil money penalty for such violation 

is appropriate, the Administrator shall 

issue and serve a notice of such penalty 

on such person in person or by certified 

mail. * * * 

■ 25. Amend § 580.12 by revising the 

first sentence of paragraph (b) of to read 

as follows: 

§ 580.12 Decision and Order of 

Administrative Law Judge. 

* * * * * 

(b) The decision of the Administrative 

Law Judge shall be limited to a 

determination of whether the 

respondent has committed a violation of 

section 12, or a repeated or willful 

violation of section 3(m)(2)(B), section 

6, or section 7 of the Act, and the 

appropriateness of the penalty assessed 

by the Administrator. * * * 

* * * * * 

■ 26. Amend § 580.18 by revising the 

third sentence in paragraph (b)(3) to 

read as follows: 

§ 580.18 Collection and recovery of 

penalty. 

* * * * * 

(b) * * * 

(3) * * * A willful violation of 

sections 3(m)(2)(B), 6, 7, or 12 of the Act 

may subject the offender to the penalties 

provided in section 16(a) of the Act, 

enforced by the Department of Justice in 

criminal proceedings in the United 

States courts. * * * 

[FR Doc. 2020–28555 Filed 12–29–20; 8:45 am] 

BILLING CODE 4510–27–P