Tipping in the Age of COVID-19

One of the most common questions we have been receiving at Empowered Hospitality recently is around tipping. How to navigate tipping in the age of COVID-19, when our staffing structure has completely changed?

While the rules governing tipping have not changed, our environment has. Many owners and operators are left considering how much they are willing to bend the rules to support their teams during the pandemic. If your job roles have changed, if you are struggling to figure out who can lawfully receive tips on your team, if you are experimenting with takeout and delivery for the first time, if you are completely staffed by managers or employees who don't meet the 80/20 rule, you are not alone.

We reached out to Alexei Leonard, Labor and Employment Partner at Golenbock Eiseman Assor Bell & Peskoe LLP, for some guidance on this complicated topic:

Who is technically eligible to receive tips? What is the 80/20 rule?

Generally speaking, "80/20” refers to a few overlapping federal, state, and local requirements specifying what duties (and their duration) a tip-eligible employee is allowed to perform.

Compliance with the 80/20 rule is significant for two main reasons.

1. It determines who may (lawfully) participate in a restaurant, bar, lounge, club, or hotel’s tip pool and/or tip share, and;
2. It determines who may have a “tip credit” deducted from their hourly rate (e.g., paying $10 per hour versus $15 per hour currently in New York City). 

“Tipped” work comprises duties where the employee generally interacts with guests and customers. “Non-tipped” work arguably does not (e.g., side work, opening/closing duties, cleaning, inventory, training, paperwork, making coffee, expediting, back-of-house "second shifts,” etc.).

In New York, this restriction on non-tipped duties applies to both the day AND workweek. Employees receiving tips may not spend (i) more than 20% of their shift or 2 hours (whichever is less) in any workday engaging in non-tipped duties, nor (ii) most of the workweek engaging in non-tipped duties. All side duties and non-tipped work is added together for this purpose.

NOTE: There are also other requirements for lawful tip participation as well, such as written notice requirements, anti-deduction restrictions, restrictions on management’s participation, etc.

What are the challenges associated with 80/20?

The 80/20 rule is vexing for employers. It reduces a hospitality venue’s flexibility in using front-of-house staff as needed. Generally, restaurants cannot police or “time” such “non-tipped” duties given the fast pace of a restaurant and, as an example, 20% of a 5-hour shift only permits 1 hour of non-tipped work per day. An employee in New York cannot, say, work as a prep cook in the morning and enter the tip pool as a busser in the evening, regardless of how much you pay them. Moreover, if a practice is challenged, it is difficult to disprove an employee’s claim that their work violated 80/20. Absent video, it is hard to obtain conclusive evidence. 

Non-compliance with 80/20 can also carry draconian penalties including loss of the tip credit and disgorgement of tips, up to 6 years prior, plus “liquidated” damages that doubles amounts owed, as well as interest and attorneys’ fees.

Who can receive tips?

Generally, “standard” front-of-house tipped positions can more safely receive tips. These are your servers, bartenders, runners, and bussers. 

You aren’t out of the woods, however, by simply relying on job title to determine tip-eligibility. Beware of side-jobs, side work, and “specialty assignments.” Sometimes you have a “runner” on paper who is assigned to expedite. In other cases you have a busser who doubles as a barista, polisher, or floater. These assignments all potentially count against the 80/20 rule compliance. You need to verify what happens in practice.

Next, you have the “uncommon” front-of-house positions, depending on the type of venue. These are your service bartenders, captains, sommeliers, and hosts. These positions more easily violate 80/20 and/or include management functions. Take a deep look at these positions on a case-by-case basis before allowing them to receive tips. I generally recommend against it if you can help it.

Finally, you have the “problematic” positions. Generally, these positions cannot participate in tips absent exceptional circumstances. This may include back-of-house roles, ma?tre d’s, event directors, corporate employees, managers, packers, expediters, and polishers. The short answer to these positions participating in tips is “no” unless you significantly modify their duties.

Also, remember to watch out for “dual-role” employees. For example, a common issue is a part-time manager on Monday-Wednesday who would like to be a server on Thursday-Sunday. This is problematic.

What if only managers are currently working? Can they receive tips?

There has debate by various law firms on this topic in light of COVID-19. Managers are usually the key employees you want to recall and engage first, but you may only have delivery business or limited outdoor dining for them to perform, and no traditional management functions other than “tipped work.”

If there are absolutely ZERO tip-eligible employees working the ENTIRE DAY, managers technically can retain tips, as they become “directly tipped.” However, I HIGHLY recommend avoiding this scenario.

First, it appears inappropriate, even if technically lawful. This perception can send employees to lawyers, which can cost you in other ways even if the employee’s complaint is baseless.

If you search hard enough, you generally can find a non-exempt employee who could more appropriately receive these tips. This may include:

1. Giving these tips to tip-eligible staff working other days during that workweek
2. Holding tips until your tip-eligible staff is recalled
3. Paying out tips to tip-eligible staff who are currently temporarily laid-off with intent to recall
4. Giving these tips to other hourly employees working that day

These strategies may have other legal compliance issues, but the penalties and costs of a tip dispute are severe and best to be avoided.

Related Issue: Be careful if managers are only performing hourly functions. It may hinder your “executive exemption” if the managers are simply doing line-work and not “managing.” The U.S. Department of Labor has put out helpful guidance that supports non-exempt duty work in an “emergency” such as COVID-19, and the DOL opines this does not ruin your exempt status depending on the facts. However, as far as I know New York has not specifically affirmed this guidance under its laws.

What if none of our current employees meet the 80/20 rule?

Avoid giving tips to any managers or owners, even if arguably lawful. Save the tips and find some group of employees that is tip-eligible and can appropriately receive the tips now or in the future. If there are truly none, give the tips to the hourly employees working that day as a last resort. Also, remember that if employees are breaking the 80/20 rule they must receive the FULL minimum wage without tip credits (i.e. $15 an hour currently in New York City).

What are the potential consequences of including an ineligible employee in a tip pool?

Potentially:

1. “Loss of tip credit” for all tip pool or tip share participants (currently $5 an hour for every hour worked by tipped hourly employees, up to 6 years prior, in NYC)
2. “Disgorgement” of tips given to ineligible employees (reimbursement by the company, and again going back up to 6 years in NY)
3. Liquidated damages (generally this “doubles” the lost tip credit and tip disgorgement)
4. Reasonable attorneys’ fees and costs incurred by the employees, as well as interest

This can add up very quickly. These claims can also be asserted on a class and/or collective basis, which may encompass all your front-of-house hourly employees.

Is the risk reduced if no tip-eligible employees are currently working?

Yes, it is a reduced risk as no group of employees will be damaged and have cause to complain, but it is still a risk. The plaintiffs’ bar is creative and industrious. An hourly employee in the restaurant (perhaps in the back of house) will claim that he or she was eligible for front-of-house tips instead of management, or perhaps the temporarily laid off employees will assert a novel claim for the tips.

How does not taking a tip credit help mitigate the risk in tip pooling? 

Eliminating tip credits reduces the employees’ potential recovery in a lawsuit. “Loss of tip credit” is usually the largest amount of damages. If there were no tip credits taken, this cannot be a claim.

If no tip credit is taken, what would be the consequences of including an ineligible employee in a tip pool? 

Just because the recovery is reduced, this doesn’t mean there isn’t still a risk. There are still other damages that may be recovered, such as “tip disgorgement” for all tips improperly given to an ineligible employee in a tip pool, plus liquidated damages, plus attorneys’ fees.

How does a 'gratuity included' model work, and should we consider it?

This is a very nuanced issue. Generally, “gratuity included” means you raise prices and pay employees at a higher wage and instruct guests not to leave tips. This model may be worth looking into, but in my experience is difficult to implement for most operators outside of very high-end fine dining, private dining, and catering. 

One of the biggest pluses to gratuity included is the ability to reward better performers directly. However, as much as we would love to see gratuities go away, tipping is ingrained in our culture (both for employees and guests). Gratuity included can also come with several risks and drawbacks:

• First and foremost, the language used if you go the no-tipping route must be carefully crafted to avoid a claim that your charges “purport to be gratuities” and are owed to your staff.
• Next, higher menu prices may cause “sticker shock” to your guests even if the costs are ultimately the same overall. A key alternative to higher pricing in this model would be adding an administrative fee, however administrative fees on a-la-carte dining are still prohibited by the NYC Dep’t of Consumer Affairs.
• “Gratuity-free” dining generally costs more to the guest than tipping due to how taxes are calculated. It also costs more to the employer in vacation and overtime pay, as well as other administrative costs. It is not a one-to-one exchange between eliminated gratuities and increased prices. In addition, you still have to contend with “palmed” or “dropped” tips guests leave, despite the venue’s instructions. This money has to go somewhere.

We’ve all seen the recent news of USHG returning more venues to a tipping model. If a sophisticated group such as USHG, which was an early adopter and has long advocated for the gratuity-free model, has now returned to tipping, I wouldn’t get your hopes up that the gratuity-included model will work for you. It does, but for only a select few.

What’s happening with tip-eligibility, federally?

Federally, the 80/20 rule generally applies to the workweek, but is being challenged. The Trump administration has attempted to limit/repeal 80/20’s application, however some courts nationally have not agreed with nor caught up with the change. Stay tuned.

Interested in more information about tipping in the post-pandemic world? Check out Changing Your Tip Structure by Ashley Oberdorff at Reopen Hospitality.