Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.

By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: Proposed New Rules Under Colorado’s Overtime & Minimum Pay Standards Order Would Narrow Employers’ Use of the Tip Credit and Tip Pools. Meanwhile, Chicago eliminates its tip credit, while state and local efforts to eliminate the tip credit proliferate across the U.S.

Here at TIPS, we’re keeping track of the flurry of legislation making its way through state houses and municipal governments all across the country, in which states and localities seek to eliminate the tip credit.  We previously wrote about such an effort—which failed this year—to eliminate the tip credit in Connecticut.  Restaurant and hospitality employers have come to rely on the tip credit for many decades as a way to manage their labor costs while acknowledging the reality that tips usually boost tipped workers’ earnings well above the minimum wage.

But equally as important as the question of whether an employer can take a tip credit is the related question: Who counts as a tipped worker in the first place? If an employer takes a tip credit for a worker (or group of workers) who don’t qualify, then they risk violating federal and state minimum wage and overtime laws.  We previously wrote about ongoing litigation over the federal government’s “80/20” rule, which focuses on the amount of time a tipped worker can spend on non-tip-producing work to still qualify.

The states, though, may have different and more stringent rules relating to tipped workers.  Recently, on September 29, 2023, the Colorado Division of Labor Standards and Statistics issued proposed amendments to the state’s Overtime & Minimum Pay Standards Order (“COMPS Order #39”).  A public hearing on the proposed changes is scheduled for October 30.  Among other changes, the Division proposes changes to: (1) the definition of “tipped employee” under Colorado law, and (2) which employees may participate in a valid tip pool.  If enacted, restaurant and hospitality employers in Colorado will need to carefully review and update their pay practices with respect to the use of the tip credit and tip pooling.

Currently, Colorado law, consistent with federal law, considers a tipped employee to be “any employee engaged in an occupation in which s/he customarily and regularly receives more than $30 per month in tips.”  The Division says that the $30/month threshold, which has been in place since 1977, is outdated.  The proposed changes would instead define a tipped employee as “any employee who regularly receives more than $1.55 per hour in tips” over a workweek.  In accompanying commentary to the proposed rule, the Division notes that this hourly rate was derived from the estimated inflation-adjusted monthly equivalent of $30 in 2024 dollars—$187.32.  Note also that the change means it will no longer be sufficient for an employer to show that an employee works in an occupation in which workers customarily and regularly receive tips—the new definition makes the inquiry individualized to the particular employee. 

Moreover, under the proposed new Colorado rules, fewer employees will be able to participate in a valid tip pool.  Only those employees who “perform significant customer-service functions in contact with patrons” will be eligible.  This seems to be a significant departure from current law and federal law, which generally permit employees who may have less frequent customer contact than servers or service bartenders—such as bussers, food runners, and barbacks—to participate in a valid tip pool.

Here at TIPS, we’ll keep you posted on the rulemaking process for the proposed new wage order, which could have significant implications.

Meanwhile, the push to eliminate the tip credit continues to spread in states and localities all over the U.S.  Last week, for example, the Chicago City Council voted to approve a “One Fair Wage” bill phasing out the tip credit for tipped workers.  We’re also tracking active bills to eliminate the tip credit in Ohio, Maryland, Massachusetts, New York, Illinois, and Wisconsin, among others.

In short, restaurant and hospitality employers have never faced a more diverse and ever-changing patchwork of laws and regulations in this space.  Luckily, the team at Seyfarth has a repository of frequently updated, nifty survey charts — available for free to our clients — that map out the various federal and state requirements. As always, if you want more in-depth analysis of the rules of the road for taking the tip credit, tip pooling, or the broader panoply of wage and hour obligations affecting the fast-paced restaurant and lodging sectors, do not hesitate to reach out to the authors, or your favorite member of Seyfarth’s Wage and Hour Practice Group.