On August 23, 2024, in Restaurant Law Center v. U.S. Department of Labor, the U.S. Court of Appeals for the Fifth Circuit vacated the U.S. Department of Labor’s (“DOL”) December 2021 final rule that had set strict limits on the amount of time that employers could apply a “tip credit” to tipped employees performing non-tipped job duties (the “Tip Credit Rule”). As a result, the Tip Credit Rule has been voided on a nationwide basis.

The FLSA and Tip Credits

Under the Fair Labor Standards Act (“FLSA”), employers may take advantage of a “tip credit” for employees engaged in occupations in which they customarily and regularly receive more than $30 per month in tips. This “tip credit” allows the employer to pay tipped employees $2.13 per hour, so long as the employee makes at least $7.25 per hour (i.e., the federal minimum wage) when tips are added to the total amount of wages paid to the employee.

The Tip Credit Rule

In 1988, the DOL first published the “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 job duties (i.e., setting tables, making coffee, etc.), the employer must pay the employee the full minimum wage for the time spent on such “directly supporting work” and may not apply any tip credit to lower the employee’s wages for that work.

The 80/20 rule remained in place until the DOL rescinded the guidance in a 2009 opinion letter, but the rule was later re-issued in 2018 under the Trump administration. In December 2021, the DOL issued the Tip Credit Rule, which largely codified the 80/20 rule described above, but identified three categories of work that dictated whether employers could apply a tip credit to work performed by tipped employees. Namely, the categories of work included: (1) tip-producing work (i.e., providing table service); (2) directly supporting work (i.e., setting tables); and (3) work not part of the tipped occupation (i.e., preparing food). The Tip Credit Rule also stated 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 Fifth Circuit’s Decision

In Restaurant Law Center v. U.S. Department of Labor, the Restaurant Law Center and Texas Restaurant Association challenged the Tip Credit Rule before it took effect, but the federal district court in Texas denied their request for injunctive relief prohibiting the DOL from enforcing the Tip Credit Rule. Subsequently, the district court granted summary judgment in favor of the DOL and ultimately upheld the Tip Credit Rule.

In the latest decision issued in this case, the Fifth Circuit reversed the district court’s ruling, finding the Tip Credit Rule to be unlawful under federal law and arbitrary and capricious. In the wake of the U.S. Supreme Court’s June 2024 decision in Loper Bright Enterprises v. Raimondo, which upended the Chevron precedent holding that federal courts should defer to federal agencies when it comes to interpreting federal laws, the Fifth Circuit concluded that the Tip Credit Rule is contrary to the FLSA’s clear statutory text. The Court also found that the Tip Credit Rule drew an arbitrary distinction between tip-producing and tip-supporting work.

Employer Takeaway

The Restaurant Law Center v. U.S. Department of Labor decision is seen as a big win for hospitality employers that can now apply tip credits more liberally without carefully tracking tipped employees’ activities minute-by-minute throughout the workday. That being said, employers should stay tuned for any future developments as the DOL may appeal the decision and it is possible that other courts outside of the Fifth Circuit may rule that the Court lacked authority to impact the Tip Credit Rule on a nationwide basis.  Notably, this ruling does not impact the DOL’s “dual jobs” regulation, which provides that when an employee is working for the same employer in both a tipped and non-tipped occupation (i.e., a waiter and a maintenance person), the employer may only take tip credits for the work performed as part of the employee’s tipped occupation. Employers should also be wary of any state or local laws or regulations governing tipped employees.