Hospitality employers take note – the Department of Labor’s (DOL) tip rule has been struck down.

The tip credit is a provision of the Fair Labor Standards Act (“FLSA”) that allows employers to pay tipped employees a lower direct wage, as long as their tips make up the difference to reach the minimum wage. However, the tip credit has been a source of confusion and litigation for many hospitality employers, who have faced conflicting and changing rules from the DOL on how to apply it.

In 2021, the DOL issued a final rule that set strict limits on the amount of time that tipped employees could spend performing work that did not directly generate tips, such as cleaning tables or preparing food. The rule, which was based on an earlier DOL guidance known as the "80/20" or "20%" rule, prohibited employers from taking the tip credit if employees spent more than 20% of their hours in a workweek or more than 30 minutes in a shift on such tasks.

The rule was challenged by restaurant industry groups, who argued that it was contrary to the FLSA and arbitrary and capricious. The case went through several rounds of litigation, until the U.S. Court of Appeals for the Fifth Circuit issued a long-awaited decision on August 23, 2024, striking down the rule and voiding it nationwide.

The Fifth Circuit held that the rule was inconsistent with the text of the FLSA, which allows the tip credit for any employee who is engaged in an occupation that customarily and regularly receives tips, regardless of the specific duties that compose that occupation. The court said that the DOL’s rule replaced the occupation standard with a timesheet standard that drew an impermissible, arbitrary line between tip-producing and tip-supporting work.

The court's decision is a significant victory for hospitality employers who will no longer have to comply with the 2021 rule and its complicated distinctions between different types of work. Employers should also be aware of the state-law requirements for taking a tip credit, which may vary from the federal law and may not be affected by the court's decision.