Real World Impact: The Fifth Circuit Court of Appeals' recent decision vacating the U.S. Department of Labor’s (DOL) rule regarding tipped employees means the rule is no longer in effect nationwide. This is a major victory for employers that have tipped employees and take a tip credit and have been beset by legal claims based on the rule.

Background

On August 23, 2024, in Restaurant Law Center and Texas Restaurant Association v. U.S. Department of Labor, a three-judge panel of the U.S. Fifth Circuit Court of Appeals unanimously vacated the DOL’s rule regarding tipped employees that went into effect on December 28, 2021. The DOL rule provided that in order for an employer to claim a tip credit an employee can spend no more than 20 percent of time a week or more than 30 minutes straight on non-tipped work.

Court Decision

The Court determined that the rule violated the Administrative Procedures Act (APA) in two respects: (1) the rule is contrary to the Fair Labor Standards Act’s (FLSA) clear statutory text and therefore not in accordance with law; and (2) the rule is arbitrary and capricious.

The Fifth Circuit relied on the recent U.S. Supreme Court opinion in Loper Bright Enters. v. Raimondo that eliminated the Chevron deference to agency interpretations. Now courts are free to decide legal questions by applying their own judgment.

The Court made clear that its holding did not address the validity of the dual-jobs regulation which was not challenged in the case and addresses situations where an employee regularly engages in distinct occupations for the same employer.

The Court’s remedy was to vacate the DOL’s rule which has nationwide effect. The DOL could petition the entire Fifth Circuit Court of Appeals to rehear the case; however, that requires a majority of the Circuit Court’s judges to agree to rehear the case. The DOL also could petition the U.S. Supreme Court to take the case on appeal.

The Bottom Line

This decision should result in a substantial reduction of wage and hour claims against employers. It should have an immediate effect on all pending or threatened litigation that relies on the vacated rule.