New Federal Regulation will Clarify when Employers can Pay the Tip Rate instead of Massachusetts’ Minimum Wage

The U.S. Department of Labor (“DOL”) is issuing new rules on when employers can pay their workers  less than the minimum hourly wage by using what’s called the tip credit. Recently issued DOL regulations that will take effect late in December 2021 permits employers to use the tip credit only when workers are directly involved in tip-generating work or, for limited time periods, in work that directly supports the generation of tips. Support work can constitute no more than 20 percent of workers’ total weekly hours and cannot be performed for more than 30 consecutive minutes. The new rules are aimed, the DOL writes, at protecting low wage workers, the majority of whom are women, people of color, and immigrants.

The federal rule provides guidance to employers throughout Massachusetts and should be viewed as an adjunct to the Commonwealth’s recently updated and very tough tips statute. Under Massachusetts law, which carries a far higher and yet increasing minimum wage rate than does U.S. law, there exist three categories of tipped workers: wait staff, service employees and service bartenders. Workers in those categories can be paid the tipped rate of $5.55/hour but must still make at least $13.50/hour including tips for all hours they work each day. The minimum rates will increase on January 1, 2022 and again on January 1, 2023. Tips received by credit card must be paid over to employees promptly, and employers can neither instruct nor permit staff within each category of tipped employees to share tips with workers outside of it.

Employers who use the tip credit should take great care to comply with Massachusetts law and the DOL regulations. The penalty for violating state law can be drastic – retroactive denial of the tips credit to all affected employees, regardless how much each made in tips, and a resulting order for payment of up to three times the difference between the tipped and minimum wage rates, plus costs and legal fees. Enforcement actions can be brought by the Massachusetts Attorney General’s office, which has power to impose civil penalties, or by employees, either individually or as a class of workers. Liability on employers for violations is de facto, so even innocent errors can be severely punished.