In a highly anticipated opinion, on August 23, 2024, the Fifth Circuit in Restaurant Law Center v. U.S. Department of Labor (Case No. 23-50562) struck down a Final Rule promulgated by the U.S. Department of Labor (DOL) that restricted when employers may claim a “tip credit” for “tipped employees” under the Fair Labor Standards Act (FLSA).

Under the FLSA, employers may pay a tipped employee $2.13 per hour (which is below the federal minimum hourly wage of $7.25) and take a “tip credit” for the delta between the employee’s hourly wage and the federal minimum wage, provided that the employee’s tips make up the difference. (There are several states in which tipped employees must be paid considerably more than $2.13 per hour, including some that do not permit a tip credit at all.) Litigation involving under what circumstances employers may take a tip credit has been frequent, with the rules, regulations and DOL guidance addressing the issue often changing along with the presidential administration. In December 2021, the DOL issued a Final Rule that codified its long-standing guidance that a maximum of 20% of an employee’s time could be spent on non-tipped activities related to the tipped occupation—e.g., a waiter rolling silverware—for the employer to claim the full tip credit. Put another way, if more than 20% of the tipped employee’s time was spent on non-tip-producing activities in a given workweek, the employer is required to pay the employee the federal hourly minimum wage of $7.25. This has commonly been referred to as the “80/20” or “20%” rule. To purportedly aid the analysis, the Final Rule distinguished between tip-producing work (such as waiting tables), work that directly supports tip-producing work (such as cleaning around a beverage station), and work that does not support tip-producing work (such as cleaning bathrooms). The Final Rule also imposed a new restriction that limited to 30 minutes the amount of continuous time during a shift that a tipped employee could perform work that was not tip-producing.

In Restaurant Law Center, the plaintiffs challenged the Final Rule on the ground that it was invalid under the Administrative Procedure Act because the DOL’s actions were arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law. After the case took a trip to the Fifth Circuit regarding injunctive relief, the district court granted summary judgment to the DOL and upheld the Final Rule after analyzing it under the Chevron standard of deference in effect at the time. The plaintiffs appealed that decision to the Fifth Circuit.

With the appeal pending, the Supreme Court overruled the doctrine of Chevron deference in Loper Bright Enterprises et al. v. Raimondo & Relentless, Inc. (Case No. 22-451), requiring courts to now exercise their independent judgment in deciding whether an agency has acted within its statutory authority and prohibiting courts from deferring to an agency interpretation of a law simply because the statute may be ambiguous. Following that directive, the Fifth Circuit overturned the district court’s summary judgment decision, and held that the Final Rule was contrary to the text of the FLSA and also arbitrary and capricious “because it draws a line for application of the tip credit based on impermissible considerations and contrary to the statutory scheme enacted by Congress.” Central to the panel’s decision was its observation that the DOL’s Final Rule was “attempting to answer a question that the DOL itself, not the FLSA, has posed.” The FLSA does not permit a tip credit only when a worker is performing individual tip-producing duties. Nor does the FLSA ask which of a position’s duties are individually tip producing or how much time is spent completing each duty. Rather, the worker must simply be “engaged in” an “occupation in which he customarily and regularly receives more than $30 a month in tips.” Thus, in distinguishing between tip-producing duties and “directly supporting work,” “the Final Rule replaces the Congressionally chosen touchstone of the tip-credit analysis—the occupation—with one of DOL’s making—the timesheet,” rendering the Final Rule invalid.

This is an important win for employers with tipped employees, such as those in the restaurant and hospitality industries. However, this is unlikely to be the end of litigation in this case or DOL action on the issue generally. For instance, the DOL could petition the Fifth Circuit for a rehearing en banc or petition the U.S. Supreme Court to grant certiorari. Additionally, Donald Trump and Kamala Harris have both expressed a desire to eliminate federal taxes on tips, which could be accompanied by further DOL regulation or even an amendment to the FLSA. Employers should continue to monitor changes at both the federal and state levels to remain compliant with the law, particularly given the recent push for states to increase the minimum hourly wage rate for tipped employees or entirely bar employers’ use of a tip credit.

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