The DOL Just Formally Withdrew the 80/20 Tip Rule — But Your State May Still Enforce It

If you run a restaurant, bar, salon, or any business where staff earn tips, one of the most confusing rules in wage law just got a formal burial at the federal level. On October 19, 2026, the Department of Labor's Wage and Hour Division issued Field Assistance Bulletin No. 2026-1, withdrawing three decades-old opinion letters that were the foundation of the so-called 80/20 rule. Before you change how you schedule side work, though, read the part about your state. Some states are not following Washington's lead.

What the 80/20 Rule Was

The federal tip credit lets an employer pay a tipped employee a lower cash wage, as little as $2.13 an hour, as long as tips bring the worker up to the $7.25 federal minimum wage. The 80/20 rule limited how much non-tipped side work, such as rolling silverware, restocking, or wiping tables, a tipped employee could do while the employer still claimed the tip credit. Cross the line and, under the rule, the employer owed the full minimum wage for that time.

A 2021 regulation wrote that limit into the Code of Federal Regulations and added a 30-minute cap on continuous stretches of side work. The Fifth Circuit struck that regulation down in 2024, finding it inconsistent with the Fair Labor Standards Act, and DOL had already removed the rule from its enforcement manual.

What the New Bulletin Does

FAB 2026-1 withdraws three opinion letters, issued in 1979, 1980, and 1985, that had been used to support the 80/20 approach. The agency's reasoning, as summarized by law firms tracking the bulletin, is that those letters conflict with the Fifth Circuit's decision. In practice, the bulletin tells employers and investigators that the old guidance no longer reflects federal policy.

DOL also says it is preparing a new proposed rule on tipped employees and will take public comment when it is published. Until then, the legal landscape is a patchwork of court decisions, withdrawn guidance, and state law.

What Does Not Change Federally

The tip credit still exists. You can still pay a $2.13 cash wage if tips bring the employee to $7.25 an hour.
Side work related to the tipped job is still part of that job. Federal law treats work that supports serving customers as part of a tipped occupation.
Tip pooling rules still apply. Managers and owners generally cannot take employees' tips, and the bulletin does not change that.

The State Trap: Colorado Is Keeping the Rule

Federal law sets a floor, not a ceiling. Where a state sets higher wages or stricter conditions, you follow the stricter one. Colorado is the clearest example: its labor division has said it will keep enforcing the 80/20 rule, reasoning that exceptions to minimum wage rights should be read narrowly.

Colorado's state tip credit is $3.02. Employers may take it for side work only if the work meets two tests:

It directly supports serving customers. Refilling condiments or setting tables counts; cleaning restrooms or the kitchen does not.
It takes no more than 20% of the employee's weekly hours and never runs more than 30 minutes at a stretch.

Side work that fails either test must be paid at the full minimum wage. Colorado's division also proposed a rule amendment, COMPS Order #41, on September 30, 2026, with a public hearing scheduled for November 2, 2026.

If you operate in any state with its own tip credit rules, do not assume the federal withdrawal applies to you. Check your state labor department's guidance before changing practices.

A Practical Review for Restaurant and Service Owners

1. Find your state's rule first

Look up whether your state allows a tip credit at all, what the cash wage must be, and whether it regulates side work. Several states bar the tip credit entirely or require full minimum wage for tipped workers.

2. Audit opening and closing shifts

The riskiest hours are usually before doors open and after they close, when servers do setup and cleanup with no tips coming in. A single long cleanup stretch can break a 30-minute limit in states that enforce it.

3. Keep daily records

Track hours worked, tip credits claimed, and the type of work performed. If a wage claim lands, records showing what an employee actually did are your best defense.

4. Separate clearly non-tipped work

Tasks that do not support customer service, such as deep-cleaning the kitchen or restrooms, are the ones most likely to be challenged. Consider assigning them to non-tipped staff or paying full minimum wage for that time.

5. Do not cut pay on the strength of one bulletin

A formal withdrawal reduces federal risk, but a new proposed rule is on the way and could bring different limits. Changing payroll practices now, then reversing later, can create confusion and cost.

Why This Matters for Your Margins

Tipped labor is one of the largest costs for restaurants, and the difference between a $2.13 or $3.02 cash wage and a full minimum wage adds up fast across a team. Understanding your actual exposure belongs in your regular financial review; our guide to the profit and loss statement shows where labor costs should appear so you can see the effect of any change.

Wage-and-hour mistakes can also bring claims that general coverage may not address, so review your policies with a broker. Our overview of business insurance explains the types of coverage owners commonly consider. And if your staff includes people you treat as contractors, the independent contractor vs employee guide covers a related area where misclassification creates wage liability.

The Bottom Line

Federally, the 80/20 rule is now formally off the books and the tip credit itself is intact. Locally, the answer may be different, and a new federal proposal is coming. Verify your state's rule, keep clean records, and hold off on payroll changes until you know what applies to you. This article is general information, not legal advice; consult an employment attorney for your situation.

Photo by Louis Hansel on Unsplash