In a highly anticipated decision published on August 23, 2024, the United States Court of Appeals for the Fifth Circuit struck down the Department of Labor’s (DOL) Final Rule that limited the circumstances under which an employer could claim a “tip credit” for certain tipped employees under the Fair Labor Standards Act (FLSA). The Fifth Circuit’s decision in Restaurant Law Center v. U.S. Department of Labor, No. 23-50562 (Aug. 23, 2024), now makes it easier for employers to claim a “tip credit.”
The Tip Credit
The FLSA permits employers to take what is commonly called a “tip credit” when paying the wages of any “tipped employee.” 29 U.S.C. § 203(m)(2)(A). The tip credit enables the employer to pay tipped employees $2.13 per hour—significantly below the current federal minimum wage of $7.25 per hour—under the theory that a large portion of such employees’ total earnings comes from tips.
The FLSA defines a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. § 203(t).
The DOL Final Rule
The DOL was concerned that employers would abuse the tip credit and pay employees less across the board. As a result, the DOL issued various rules addressing the permissibility for claiming the tip credit. These rules went through a variety of updates and clarifications until 2021, when the DOL issued the Final Rule at the center of the Fifth Circuit’s decision.
The Final Rule required a determination of whether an employee’s primary job duties fell within one of several categories created by the DOL: (1) directly tip-producing work; (2) directly supporting work; or (3) work not part of the tipped occupation. The Final Rule then required an individualized assessment of the length of time each employee spent on each job duty and an ultimate determination on a week-by-week basis of whether the proper percentage of time was spent between these various categories of work so as to qualify as a “tipped employee.”
The Fifth Circuit Ruling
The Fifth Circuit invalidated the Final Rule holding it was contrary to the plain text of the FLSA and also arbitrary and capricious. As such, employers no longer need to abide by the DOL Final Rule. Instead, employers can simply take a tip credit for any tipped employee as defined by the FLSA. This is a far less burdensome test to fulfill and administer and is a welcome decision to many employers in the restaurant and hospitality industries.
Takeaways
The DOL Final Rule is no longer enforceable, even outside of the geographic footprint of the Fifth Circuit. It is likely that the DOL will appeal this decision by requesting a rehearing before the Fifth Circuit or appealing to the United States Supreme Court. In light of the Supreme Court’s recent decisions limiting deference to federal agencies, the Supreme Court may not be a welcoming forum to any possible appeal by the DOL. The presidential election will also impact the future of this tip credit issue, as the next president may take action affecting the DOL’s tip rule.
Importantly, the decision in Restaurant Law Center v. U.S. Department of Labor does not affect any state laws. Many states have laws which either do not allow for a tip credit or are different from the FLSA. As such, employers should be wary of any possible differences between their state law and the FLSA and be mindful of the fact that the FLSA does not preempt more protective state or local laws.
