DOL Schedules New Proposed Rule for Tipped Employees in August 2026 Agenda

For decades, the American restaurant industry has operated on a fundamental financial tension: who pays the server? Under federal law, employers can shift the bulk of that payroll burden directly to customers through a mechanism known as the "tip credit," paying workers a direct cash wage of just $2.13 an hour. But the exact boundary of what work qualifies for that subminimum wage—whether rolling silverware, brewing coffee, or sweeping floors counts—has sparked relentless litigation and regulatory whiplash. Now, the U.S. Department of Labor (DOL) is preparing to redraw those lines once again, setting the stage for a new compliance era in the hospitality sector.[5]

According to the agency's 2026 regulatory agenda released in early July, the DOL's Wage and Hour Division has officially scheduled a notice of proposed rulemaking for August 2026 to amend the Fair Labor Standards Act (FLSA) regulations governing tipped employees. The upcoming proposal, identified in the federal registry as RIN 1235-AA54, signals a major regulatory shift. While the exact text remains under drafting, the move is widely viewed as the administration's attempt to stabilize a volatile area of labor law that affects millions of service workers and the operational models of countless restaurants, hotels, and bars.[1][2][3]

To understand the stakes of the August proposal, one must first examine the mechanics of the tip credit itself. The FLSA mandates a baseline federal minimum wage of $7.25 per hour. However, for employees who "customarily and regularly" receive tips, employers are permitted to claim a tip credit of up to $5.12 per hour against that obligation. This allows the employer to pay a direct cash wage of $2.13, provided the employee's actual tips make up the difference. If a worker's tips fall short during a slow shift or a given workweek, the employer is legally required to cover the gap out of pocket to ensure the $7.25 threshold is met.[4][5]

The core legal battleground, however, lies in the "dual jobs" scenario. Tipped workers frequently perform non-tipped "side work" during their shifts, such as cleaning tables, restocking condiment stations, or preparing garnishes. For years, the DOL enforced an "80/20" rule, stipulating that if an employee spent more than 20% of their time on these non-tipped duties, the employer could not claim the tip credit for that excess time. In 2021, the Biden administration expanded this framework into the "80/20/30" rule, adding a restriction that employers would immediately lose the tip credit if a worker performed directly supporting work for more than 30 consecutive minutes.[4]

That strict temporal framework collapsed in 2024 when the 5th U.S. Circuit Court of Appeals vacated the 80/20/30 rule, ruling that the DOL had exceeded its statutory authority under the FLSA. The appellate decision effectively erased the federal time limits on side work, leaving a regulatory vacuum. Without the 30-minute or 20-percent caps, employers in jurisdictions bound by the 5th Circuit have operated under broader interpretations of what constitutes a tipped occupation, while other regions face a confusing patchwork of state-level restrictions. The August 2026 proposal is expected to be the DOL's strategic response to this defeat, attempting to establish a new, legally durable standard for side work.[1][4]

Beyond the mechanics of side work, the upcoming rule may address the fundamental definition of a tipped employee. The regulatory landscape shifted significantly earlier this year when the Internal Revenue Service (IRS) finalized regulations for the "No Tax on Tips" deduction, a high-profile provision passed under the One Big Beautiful Bill Act (OBBB Act). The new IRS rules allowed workers in over seventy qualifying occupations to deduct up to $25,000 in qualified tips from their federal income tax. Legal analysts anticipate the DOL may seek to harmonize its FLSA definitions with this new IRS tax framework, potentially expanding the scope of who qualifies as a "customarily and regularly tipped" worker.[1]

The proposal may also revisit the complex rules surrounding tip pooling. Current FLSA regulations permit "traditional" tip pools among customarily tipped staff—such as servers, bellhops, and bussers—regardless of the base wage paid. However, "nontraditional" pools, which distribute tips to back-of-house staff like dishwashers and line cooks, are only lawful if the employer pays all participants the full $7.25 minimum wage directly and takes absolutely no tip credit. Any regulatory adjustments to these pooling definitions could fundamentally alter restaurant compensation models and back-of-house hiring strategies.[4]

For employers, the August rulemaking represents a critical compliance juncture. The hospitality industry relies heavily on the tip credit to manage labor costs in a notoriously low-margin business environment, and any new time-tracking mandates will require immediate operational adjustments. For workers, the exact phrasing of the new rule will dictate how much time they can be required to perform non-tip-producing labor at a subminimum base wage. As the DOL finalizes its draft, both labor advocates and industry groups are preparing for a high-stakes public comment period that will shape the economic realities of American service work for years to come.[3][4]