Understanding the 80/20 tip rule

Editorial Team

3 min read
Diner signing credit card receipt

In late 2021, the U.S. Department of Labor updated how restaurant owners and other service establishments should determine which tipped employees on their staff qualify for minimum wage, versus relying exclusively on gratuities. Known as the 80/20 tip rule, this regulation can have a huge impact on your business’s payroll and tax filing requirements.

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This article explains what the 80/20 tip rule is, why it exists, and how you can protect your bottom line while remaining compliant.

What is the 80/20 rule for tipped employees?

Under the 80/20 tip rule, you’re required to pay employees minimum wage for any business-related duties that don’t normally generate tips – from setting tables to cleaning dishes to handing out promotional material. Note, however, that to qualify for minimum wage, these non-tipped tasks must consume 20% or more of that employee’s time – or be performed continuously for 30-plus minutes.

If that employee spends at least 80% of the time performing tip-generating duties and up to 20% on unrelated tasks, you – as the employer – qualify for a tip credit that you can apply to your minimum wage obligations.

Why create a new law for tipped employees?

The 80/20 tip rule isn’t really a new law. Rather, it is an updated version of employee tipping regulations that already existed under the Fair Labor Standards Act. The goal of this revised federal law for tipped employees is two-fold.

  • To provide direction and clarity so that employers can correctly compensate staff for the various duties performed throughout the day.
  • To prevent employees from being exploited for their work. Many service industries rely heavily on tips – but not every action performed by an employee on the job leads to gratuities. The 80/20 tip rule exists to help ensure that employers pay their employees for these non-tip-generating duties.

How the 80/20 tip rule could affect your business

If anyone on your team earns $30 or more a month in tips, they are considered “tipped employees” and the 80/20 tip rule is something you need to factor into your payroll and tax reporting. As a result, there’s a good chance that some of your costs will increase.

However, it’s possible to control expenses while still correctly compensating employees for their hard work. For example, you can conduct a careful audit of duties and roles in your business to identify opportunities for adjusting schedules. If one of the waiters on your team is approaching the 80/20 threshold, it might make sense to change his or her hours or tasks. If swapping around employees is too difficult, you may need to refresh tipping policies to control rising costs.

It’s also important to meticulously track employee shifts so that you always understand how their time is being used. Not only is timekeeping an implied requirement of the 80/20 tip rule, but it’s also useful as you continue to refine schedules, duties, and roles moving forward.

How to automate employee payroll and scheduling

Managing a team is time-consuming – especially if you’re a small business owner with limited resources. At Clover, our point of sale (POS) solutions come with employee management tools to help streamline and automate more of your operations.

For example, many restaurant and bar owners use our POS systems to:

  • Calculate gratuities and commissions for every employee on the team
  • Pool tips so they can share and distribute gratuities with employees
  • Modify employee schedules – without needing spreadsheets
  • Put their payroll and benefit needs on autopilot, complete with direct deposit wages

In addition, our POS solutions come with detailed reporting so that you can instantly identify top performers or best sales-generating days of the week. Since all of our solutions are cloud-based, you can access these tools whether you’re on-site, on the road, or at home.

To learn how our POS solutions can automate more of your employee management needs and help you stay compliant with the recently updated 80/20 tip rule, schedule a free consultation with a Clover Business Consultant today.

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