Federal Appeals Court Deals Mortal Blow to Tipped Employee Regulations

Details

Hospitality employers with tipped employees received welcome news late last month when a federal appeals court overturned the Department of Labor’s (DOL) so-called 80/20/30 Rule, the highlight of a new set of regulations that would have dished out a huge serving of timekeeping and compliance headaches.

The August 23 ruling by the Court of Appeals for the Fifth Circuit vacated the DOL regulations, holding them to be contrary to the statutory text of the Fair Labor Standards Act (FLSA) and “arbitrary and capricious.” Rest. Law Ctr. v. United States DOL, 2024 U.S. App. LEXIS 21449 (5th Cir. Aug. 23, 2024).

Background

Under the FLSA, the primary federal law that regulates wage and hour issues, employers can count certain tips received by a “tipped employee” – one who regularly receives more than $30 a month in tips – toward their federal minimum wage obligation. The employer can pay the tipped employee a much lower hourly wage of $2.13 as long as the employee earns enough in tips to make up the difference.

If the employee’s tips don’t cover the difference between the regular minimum wage of $7.25 and the tipped minimum wage of $2.13, the employer must pay the remainder. Employees who don’t earn tips get the full federal minimum wage.

The FLSA has provided for a reduced wage to tipped employees since 1966. But the details of the DOL’s enforcement policy have switched back and forth over the years, often depending on which political party held the White House.

In the late 1980s, the DOL revised its Field Operations Handbook to include a new policy that an employer could not claim the tip credit for time a tipped employee spent on activities unrelated to tipped work (for instance, taking garbage to the dumpster) and also would lose the credit for any workweek when the employee spent more than 20% of their time on activities merely supporting tip-producing work (such as setting tables or making coffee).

This so-called 80/20 Rule was rescinded in the waning days of the George W. Bush administration, then reinstated a few weeks later by the incoming Obama administration. The Trump administration later rescinded the rule again, but the Trump recision didn’t become effective until after the Biden administration had taken power. The Biden administration ultimately withdrew the Trump recision, then in October 2021, it issued its own regulations.

Under the Biden administration, if a tipped employee spends more than 20% of his or her time on supporting work, the employer cannot claim the tip credit for the portion above 20%. In other words, if a tipped server spends 30% of his or her time on supporting work, such as folding napkins, the employer can claim the tip credit for only 20%; for the other 10%, the server must be paid the full minimum wage.

Also, the Biden administration contained a new restriction that if the tipped employee spends more than 30 continuous minutes in supporting work, the employer cannot claim the tip credit for the time after the first 30 minutes. Thus, the “80/20 Rule” became the “80/20/30 Rule.”

Ruling

The Fifth Circuit held that the 80/20/30 Rule was “arbitrary and capricious” because it drew a line for the application of the tip credit based on impermissible considerations and was contrary to the FLSA’s “clear statutory text.”

The Court held that the text of the FLSA explicitly allows an employer to claim the tip credit for any employee who, when “engaged in” his or her occupation, customarily and regularly receives more than $30 a month in tips. There is no need to parse to a greater degree what it means to be “engaged in” one’s occupation. “The FLSA does not ask whether duties composing that given occupation are themselves each individually tip-producing,” the Court wrote.

The Court held that the DOL’s interpretation of the tip rule “threatens to turn the $30-threshold requirement to a nullity by focusing instead on individual tasks.” A waitress “doing typical waitress duties remains a waitress, even if (in five-minute increments throughout her workweek) she spends 60% of her time waiting tables, 10% cleaning tables, 10% toasting bread, 10% making coffee, and 10% washing dishes.”

The Court vacated the DOL’s regulations, holding that they “suffer from a fundamental defect that the DOL could not rectify on remand.”

Implications

There remains a chance that the DOL will seek further appellate review or appeal to the U.S. Supreme Court. Also, it is possible that other federal courts will disagree with the Fifth Circuit’s ruling, which could create a split that would have to be resolved by the U.S. Supreme Court.

While the Fifth Circuit’s ruling may not be the final word on this issue, for now it appears that the 80/20/30 Rule has (at least) one foot in the grave.

It is critical for employers to note that several states have their own versions of the tipped employee rule. This ruling affects only the federal FLSA, and state laws will continue to apply. Make certain you know the wage and hour law of the state in which you are operating.

If you have any questions regarding the tipped employee rule, please reach out to the author or a member of Steptoe & Johnson’s Labor & Employment Compliance Team.