Payroll Briefs

DOL Puts Pause on Tip Credit and Worker Classification Rules

March 11, 2021

After President Biden’s recent memorandum requesting a pause to allow for the review of new and pending rules, the U.S. Department of Labor (DOL) announced there will be delays to the tip credit and worker classification final rules under the Fair Labor Standards Act (FLSA). Keep reading to learn more about the repercussions the final rules may have on your business when the delays conclude.

Tip Credit

The DOL proposed a final rule amending the FLSA tip credit on Dec. 30, 2020, with an effective date of Mar. 1, 2021. The proposed rule would implement provisions of the Consolidated Appropriations Act while codifying current guidance under the FLSA. The tip credit final rule contains the following provisions:

  • Managers, employers and supervisors are prohibited from keeping tips earned by employees.
  • Regulatory language is removed regarding restrictions placed on an employer’s use of tips when the employer does not take a tip credit. Employers who do not take a tip credit can now add cooks, dishwashers, etc. to their mandatory tip pool.
  • Regulations aren’t impacted providing that employers who take a tip credit may only have a tip pool among their usually tipped employees. Employers can take a tip credit toward their minimum wage obligation for tipped employees totaling the difference between the required cash wage ($2.13 an hour) and the federal minimum wage. Employers who take a tip credit are only allowed to have a tip pool among employees that are usually tipped.
  • Updates the provision on dual jobs, allowing employers to take a tip credit for the duration of time a usually tipped employee performs non-tipped work or within a reasonable time right before or after their usually tipped duties.
  • Creates a new civil penalty of up to $1,100 (and an equal amount in liquidated damages) that may be applied when employers illegally keep tips.

On Feb. 5, 2021, the DOL proposed to delay the implementation of the tip credit rule, and the delay was finalized on Feb. 26, 2021. The tip credit rule’s effective date is now Apr. 30, 2021.

Worker Classification 

In tandem with the tip credit pause is the DOL’s proposal to pause the worker classification final rule. On Jan. 7, 2021, the DOL announced a final rule with an effective date of Mar. 8, 2021, for determining a worker’s status as an employee or an independent contractor under the FLSA. The rule leverages an economic reality test that considers if a worker is in business for themselves (an independent contractor) or if they economically rely on an employer for work (an employee) to determine worker classification. Two key factors help with the determination:

  1. The amount of control a worker has over their work and the nature in which they complete it
  2. The worker’s opportunity for profit or loss based on their contributions

The final rule also adds three criteria to help with the distinction:

  1. The required skill of the work
  2. The degree of permanence in the worker-employer relationship
  3. The work’s role in an integrated unit of production

The delay was first announced on Feb. 5, 2021, and finalized on Mar. 4, 2021; the effective date is now May 7, 2021.

Take Action Now

With these pauses anticipated to end around the beginning of May, employers will benefit from taking preemptive measures now to report their employees’ tips and worker classification. With robust reporting capabilities that only take a few clicks to set up, DM Payroll Solutions is here to streamline your reporting process. Contact us today to learn more.