On Friday, August 23, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit vacated a Final Rule issued by the U.S. Department of Labor that sought to restrict when employers could claim a “tip credit” under the Fair Labor Standards Act.

In Restaurant Law Center et. al., v. United States Department of Labor, the Fifth Circuit panel issued a unanimous decision holding that a Final Rule issued by the U.S. DOL in 2021 was “not in accordance with law” and was “arbitrary and capricious” under the Administrative Procedure Act. The DOL could seek en banc review of the decision by the full Fifth Circuit, or review by the U.S. Supreme Court. Otherwise, the Final Rule will remain vacated.

A brief history of the “80-20” rule

The FLSA permits employers to take a “tip credit” when paying tipped employees their wages. An employer can pay the tipped employee $2.13 per hour ($5.12 per hour less than the current federal minimum wage) under the theory that the employee’s tips will make up (and often far exceed) the difference. If the difference (tip credit) is not covered by an employee’s tips, the employer must pay supplemental wages to ensure the tipped employee is making the full minimum hourly wage, currently $7.25 an hour.

In 1967, the year after Congress amended the FLSA to include the tip credit, the DOL issued its “dual jobs” regulation, addressing the situation in which an employee works two distinct jobs for the same employer (for example, maintenance worker by day and bartender by night). Little by little, the DOL continued to encroach on an employer’s ability to use the tip credit, issuing several opinion letters from 1979 to 1985, and in 1988 publishing the “80/20” guidance in its Field Operations Handbook. The 80/20 guidance provided that no more than 20 percent of an employee’s time could be spent on non-tipped activities related to the tipped occupation (for example, a waiter who sets tables or makes coffee) while the employer uses the tip credit.

Recently, the tip credit has become a political pinball, bouncing back and forth with each new presidential administration. In January 2009, the outgoing Bush Administration issued an Opinion Letter rescinding the 80/20 guidance. Then, the incoming Obama Administration promptly withdrew more than thirty Opinion Letters that had been issued in the last weeks of the Bush Administration, including the one that had rescinded the 80/20 guidance. Next, in 2018, the Trump Administration reissued the 2009 Opinion Letter that had been withdrawn, thereby doing away with the 80/20 guidance. The Trump Administration then issued a Final Rule in 2020 that was set to take effect in March 2021 that would have formally done away with the 80/20 concept. The Trump rule never took effect, however. The new Biden Administration delayed its effective date and subsequently issued a different Final Rule in December 2021, effectively codifying 80/20 and defining three categories of work:

• Direct tip producing work (for example, a waiter serving food).
• Direct supporting work (for example, a waiter setting and bussing tables).
• Work that is not part of the tipped occupation (for example, a server preparing food).

The 2021 Final Rule stated that an employer could apply the tip credit to work that fell into the first category and could not apply it to work that fell into the third category. Work that fell into the second category could be paid with application of the tip credit only if the time was (1) not more than 30 continuous minutes; or (2) not more than 20 percent of the hours in the workweek for which the employer used the tip credit.

These two limitations on use of the tip credit– created massive practical compliance headaches for employers and spurned waves of so-called “80/20 litigation.”

The Fifth Circuit decision

In a unanimous decision from the three-judge panel, the Fifth Circuit reversed a district court decision, vacated the 2021 Final Rule, and granted summary judgment to the restaurant associations that were challenging the rule, reasoning that “[b]ecause the Final Rule is contrary to the Fair Labor Standards Act’s clear statutory text, it is not in accordance with law,” and “because it imposes a line-drawing regime that Congress did not countenance, it is arbitrary and capricious.”

The panel noted that, in the wake of the Supreme Court’s decision in Loper Bright Enters. v. Raimondo, it was not required to defer to the DOL’s interpretation of the statute and instead was required to apply its own judgment. The panel then criticized the 2021 Final Rule, taking issue with the DOL’s focus on the particular tasks an employee completes instead of occupation in which the employee is employed. The panel concluded,

[B]eing “engaged in an occupation in which [the employee] customarily and regularly receives more than $30 a month in tips” cannot be twisted to mean being “engaged in duties that directly produce tips, or in duties that directly support such tip-producing duties (but only if those supporting duties have not already made up 20 percent of the work week and have not been occurring for 30 consecutive minutes) and not engaged in duties that do not produce tips.”

In short, the panel found that “the Final Rule replaces the Congressionally chosen touchstone of the tip-credit analysis—the occupation—with one of the DOL’s making—the timesheet.” It is the employee’s occupation, not a minute-by-minute breakdown of the tasks an employee performs, that determines whether an employer can use the tip credit

What’s next

The Restaurant Law Center decision is nothing short of a major victory for employers of tipped employees, though it is likely that litigation will continue over the issue of whether the tip credit can be applied to side duties performed by servers.

The 2021 Final Rule is now vacated and employers who use the tip credit have much stronger compliance arguments after this decision. However, they must still be mindful of potential 80/20 challenges outside the Fifth Circuit based on previous DOL sub-regulatory guidance and existing case law. Moreover, many states have their own requirements for paying tipped employees, and this decision does not preempt state or local laws that provide more rights to employees.