How Advanced Technology Can Foster a Fair Environment Amid New Tipping Regulations

The proposed changes to restaurant tipping regulations under the Fair Labor Standards Act (FLSA) that are in consideration with the U.S. Department of Labor have sparked intense reaction among restaurants and labor advocates. The regulations would eliminate the “80/20” rule that previously mandated employees earning a tipped minimum wage could only spend 20 percent of their shift performing non-tipped tasks. In addition, restaurant owners would be able to utilize all tips earned from service staff to redistribute this income amongst the entire operating team – enabling operators to establish non-traditional gratuity pools that can now be used to create higher wages for back-house staff such as line cooks, dishwashers and janitorial without increasing their operational labor spend.

On March 25, the Wage and Hour Division of the Department of Labor proposed an eight-month delay for the effective date of the regulations, which would put them into effect on December 31, 2021, in order to “further consider issues of law, policy and fact.” The Department of Labor will announce its final ruling on April 30.  

Last year, the National Restaurant Association praised the regulations as a victory for the restaurant industry and its workers. In stark contrast to this view, restaurant labor advocates fear employers could manipulate the system by increasing back-house wages at the expense of front-house staff, and by blurring the lines between tipped and non-tipped work — forcing front-house employees to complete the work of the latter while still getting paid at the $2.13 federal minimum tipped wage (in tip credit states) plus a percentage of the tip pool that can only equate to the minimum wage rate as established federally or by locality.  This could also reduce the need for certain non-tipped positions, creating a situation that employees and labor advocates may view as unfair.

An answer can be found in the world of workforce optimization. Amid these new regulations, the use of advanced labor management technology could mitigate the dispute by creating a more equal playing field for restaurants and their employees.

Flexible Scheduling and Automated Wage Adjustments 

The elimination of the 80/20 rule signifies that it will be up to each individual restaurant to preserve a fair labor environment. In reality, employers have a great deal of leverage in this situation. To reduce the cost of labor, they can simply transfer more non-tipped responsibilities to the servers making $2.13 per-hour. Why outsource a cleaning service to vacuum and sanitize the building overnight at $9 per hour, when you can have your front-house staff spend an extra hour cleaning at the beginning and end of their shifts? For a dinner rush, why pay three dishwashers the non-tipped minimum of $7.25 per hour when you can schedule one dishwasher, and require front-house employees (on the tipped $2.13 minimum) to occasionally help with dishes?

Employers will have the ability to manipulate the situation to their own benefit, recognizing that the pay gap between the tipped and non-tipped employees will be made up from the distribution of tips earned by the front-house service staff. At the same time, with some of the tips now being distributed to back-house positions, those employees will see an increase in their pay, which isn’t unreasonable considering each staff member does have an impact– either directly or indirectly – upon the customer experience.  

However, a fairer option exists. Advanced time and attendance technology provides flexible scheduling and automated mid-shift wage adjustment capabilities that can enable restaurants to compensate their employees for the tasks they are completing while still capitalizing on the new regulations. Through flexible scheduling, employers can quickly adjust weekly schedules and shift durations based on the peaks and valleys of demand. The proactive approach to navigating volatility optimizes their non-traditional gratuity distribution, in turn allowing restaurants to maximize profits during peaks and minimize losses during valleys. 

By streamlining mid-shift wage adjustments, restaurants can ensure employees are still paid the fair market rate for the work they are doing, while leveraging non-traditional gratuity structures to improve their staff’s income equality without raising operational costs. If a server spends two hours completing food prep, their hourly wage is raised from $2.13 plus tips to the $9 per hour flat rate that back-house normally earn. Then, when the employee returns to the floor, the system will automatically change their classification and revert their hourly wage back to $2.13. The tip system can then be used to fairly distribute tips on a weighted average based on the hours expended in each job class.

Optimized Hybrid Tipping Structures 

An advanced labor management system can also be used by employers to optimize their tipping vs. non-tipping labor structures for maximizing return on labor. With artificial intelligence forecasting capabilities, the system provides actionable data insights on aligning tipping structures with demand swings to ensure quality service without overspending on labor. By acting on their data, employers can pinpoint sweet spots between tipped and non-tipped hours to reduce operational costs. In addition, they can use the advanced labor management system to develop hybrid tipping models that establish a more equitable pay scale. A hybrid structure tightens the earnings gap between front-house and back-house staff, but still rewards the employees who generate the most money for the business. 

Historically, tipped employees followed an industry norm of distributing a portion of their tips to various non-tipped staff members at their own discretion. For example, if Lisa made $400 in gratuity over a five-hour shift while serving guests in a 20 percent tip out structure, she would pocket $320 and contribute $80 to the tip pool. Meanwhile, if her co-worker, John, made $300 in gratuity over that same span, he would pocket $240 and contribute $60 to the pool. Combined with the tips from their fellow servers, the tip distribution to back-house staff would total $140. However, the reality is that Lisa would have effectively earned around $65 per hour (including the min. wage) while John earned around $50 per hour – both far greater than the back-house cook who prepared the food and even received a small portion of the tip pool.

While the new tipping structure would’ve created a total pool of $700 in the previous example, a fairer distribution model could be established between participants.  This model would account for hours worked, earned tips per hour and a rating of tasks in relation to customer experience – thereby establishing a more equal work compensation environment.  In this simple scenario, Lisa would receive a slightly higher payout than John based on the extra tips she earned, and back-house staff would still get a share of the pot. 

The proposed tipping regulations represent a new era for the restaurant landscape that will either significantly help or hurt the industry’s post-pandemic recovery process.  Utilizing advanced labor management technology will be key to ensuring the regulations benefit everyone involved – not just one side or the other. With the integration of workforce optimization solutions, restaurants can harness the power of digital innovation to establish a fair labor pay structure that still boosts their bottom line.