The Weekly Guide to Employment Law Developments

The Rocky Mountain Employer

Labor & Employment Law Updates

Proposed Changes to The Treatment of Tips in Colorado

A.J. Peters, Of Counsel

On September 29, 2023, the Colorado Division of Labor Standards and Statistics (the “Division”) issued proposed amendments to the state’s Overtime & Minimum Pay Standards Order (“COMPS Order #39”).[1]  Among the proposed rule changes are adjustments to the way employers treat the tips some of their employees may receive from customers.  The new changes, which most particularly impact the restaurant and hospitality industries, would go into effect on January 1, 2024. 

How Tip Credits Will Work Under the Proposed Rules

Currently, Colorado employers may apply a $3.02 tip credit to the regular pay rate of “tipped employees.”  What this means is that, if a Colorado employee receives sufficient customer tips, the employer may use up to $3.02 of those tips as a credit toward meeting the Colorado minimum wage,[2] and may pay the employee a regular pay rate no lower than $10.63 per hour (which, with the $3.02 credit, equals $13.65).

COMPS Order #39 does not change the $3.02 tip credit limit.  But the proposed changes do change the definition of “tipped employees” eligible to be paid using a tip credit. 

The prior rule defined “tipped employees” as those working “in an occupation in which s/he customarily and regularly receives more than $30 a month” in tips.  The Division considers this rate, which was implemented in 1977, to be outdated.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.  The new rate of $1.55 per hour is based on the Division’s calculation that $30 per month in 1977 dollars would equal $187.32 per month in 2024 dollars.

Also noteworthy about this change is that an employer can no longer depend on a showing that the employee works in an occupation where workers customarily and regularly receive tips.  Instead, the new definition is solely dependent on the actual tip amounts received by a particular employee.

Tip Pooling Arrangements Under the Proposed Rule

Under the proposed rules, fewer employees will be able to participate in a valid tip pool.  Although the proposed rule still permits an employer to require employees to share or allocate tips and gratuities among other employees, only those employees who “perform significant customer-service functions in contact with patrons” will be eligible.  This change will invalidate existing tip pooling arrangements that include employees who have less customer contact — such as food runners, bussers, or barbacks — meaning that employers will no longer be able to take tip credits toward the minimum wages of those employees. 

Tips and Overtime Pay Rates

Although the tip rule changes of COMPS Order #39 largely favor employees, one change favorably clarifies pay practices of employers.  In response to inquiries to the Division and recent litigation nationwide, the proposed rule clarifies that tips are not included in an employee’s regular rate of pay for purposes of calculating overtime.  In other words, if an employee’s hourly rate of pay is $15 per hour, the employee’s time-and-one-half overtime rate of pay would be $22.50 per hour (1.5 times $15), notwithstanding that the employee might regularly receive, for example, an additional $5 in tips per hour.

Campbell Litigation remains available to assist employers with all manner of state and federal wage and hour concerns applicable to the workforce, including changes to Colorado’s COMPS Order and other wage and hour laws.

 [1]See https://cdle.colorado.gov/sites/cdle/files/PROPOSED%20COMPS%20Order%20%2339%207%20CCR%201103-1%20%28Redline%29%209.29.23.pdf for a redlined version of the proposed rule changes. 

[2] Note that employers are obligated to follow whichever law — federal, state, or even local — is the most generous to employees in terms of minimum wages or overtime. In Colorado, the statewide minimum wage is currently $13.65/hour (which exceeds the current federal minimum wage of $7.25/hour), but local minimum wage rates may be higher, such as in Denver (currently $17.29/hour, but set to increase further in 2024).