On August 23, 2024, the Fifth Circuit Court of Appeals struck down a 2021 regulation by the U.S. Department of Labor restricting employers’ use of the tip credit for tipped employees under the Fair Labor Standards Act. The ruling effectively does away with the DOL’s longstanding “80-20” rule.

The case is Restaurant Law Center, v. U.S. Dept. of Labor, 5th Cir., No. 23-50562, August 23, 2024.

Background

The Fair Labor Standards Act requires employers to pay employees a specified minimum wage, currently $7.25 per hour for most employees. However, under FLSA Section 3(m), employers are allowed to count up to $5.12 per hour of a “tipped employee’s” tips against their total minimum wage obligation. (State and local laws vary.) In 1967, the year after Congress added the tip credit to the FLSA, the DOL issued a regulation addressing situations where an employee engages in distinct jobs for the same employer. Under that regulation, for example, a maintenance worker in a hotel who also works as a waiter in the hotel would be considered a “tipped employee” only when working as a waiter. The regulation contrasted this with the example of a waitress who spends part of her day “cleaning and setting tables, toasting bread, making coffee and occasionally washing dishes or glasses.” The waitress in that case was considered a “tipped employee” when performing these related duties even though the duties themselves were not directed toward producing tips.

In 1988, the DOL published its so-called “80/20” rule in its Field Operations Handbook. Under that rule, if an employee spends more than 20% of their time during a workweek performing non-tipped activities like setting tables or making coffee, the employer must pay the employee the full minimum wage for the excess time spent on those supporting duties.

The 80/20 rule remained in place until 2009, when the DOL briefly rescinded the guidance in an opinion letter. That opinion letter was rescinded shortly thereafter by the Obama administration, but then re-issued in 2018 under the Trump administration. In 2020, the DOL under President Trump issued a final rule set to take effect in March 2021 that would have permitted employers to claim the tip credit for all non-tipped duties so long as they were related to the employee’s tipped occupation and performed reasonably contemporaneously with the employee’s tipped duties. The Biden administration withdrew that rule before it could take effect.

In December 2021, the DOL issued a different final rule that codified the longstanding 80/20 guidance. The 2021 rule identified three categories of work: (1) directly tip-producing work (e.g., providing table service); (2) directly supporting work (e.g., setting and bussing tables), and (3) work not part of the tipped occupation (e.g., preparing food). The rule specified that an employer can take the tip credit for tip-producing work, but that if more than 20 percent of an employee’s workweek is spent on “directly supporting” work, the employer cannot claim the tip credit for that excess. The rule also added a new wrinkle, providing that an employee must be paid the full minimum wage if they spend more than 30 minutes on “directly supporting” work at any given time.

The Court’s Decision

The Restaurant Law Center and Texas Restaurant Association filed a lawsuit in federal district court seeking to block the 2021 rule. While the district court initially upheld the rule, the Fifth Circuit Court of Appeals has now reversed that ruling. Until recently, federal courts were required by the so-called Chevron doctrine to defer to administrative agencies’ interpretations of ambiguous laws, so long as their interpretation was reasonable. However, in the wake of the Supreme Court’s recent decision in Loper Bright Enterprises, the Fifth Circuit found that it was no longer required to defer to the DOL’s interpretation of the FLSA. The Fifth Circuit found that while the FLSA tip credit provision applies to “tipped employees,” the 2021 rule impermissibly focused on whether given tasks performed by tipped employees fall within the DOL’s view of a “tipped occupation.” In so doing, the rule “is attempting to answer a question that DOL itself, not the FLSA, has posed,” the court found.

Because the 2021 rule was not a permissible interpretation of the FLSA, the Fifth Circuit vacated the rule as a whole. The ruling also effectively rejects the 80/20 rule embodied in the DOL’s pre-2009 guidance. As a result, the FLSA regulations effectively revert to the 1967 rule that distinguished between employees holding dual jobs, but did not impose a time limitation on activities performed by a tipped employee within the scope of their regular job.

Implications for Employers

The 2021 rule was one of those regulations destined to create confusion and inadvertent violations that inevitably expose employers to legal risk. In a restaurant environment, few managers are going to stand over employees with a stopwatch, recording the amount of time spent on “supplemental duties” versus core “tip producing” work to ensure that employees don’t cross into the forbidden 20% / 30 minute territory. Reasonable minds may differ on whether the tipped minimum wage is a good idea. Some states and local governments are considering or have already moved to phase out the tip credit. Chicago, for example, will fully phase out the tip credit by July 1, 2028. However, the tip credit remains part of federal law for the time being. The Fifth Circuit’s ruling will make it easier for employers to apply the tip credit without risking liability for failure to carefully track each tipped employee’s activities over the course of the work day.