A Win for Employers in the Restaurant Industry: Fifth Circuit Strikes Down DOL Tip Credit Rule

Legal Alert

September 6, 2024

Copy of BlogAlertPR Template (12)

On August 23, 2024, in Restaurant Law Center v. U.S. Department of Labor, No. 23-50562 (Aug. 23, 2024), the United States Court of Appeals for the Fifth Circuit 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”).

The FLSA permits employers to take a tip credit when paying the wages of any tipped employee. In essence, the tip credit enables employers to pay tipped employees $2.13 per hour, as opposed to the current federal minimum wage of $7.25 per hour, based on the assumption that a large portion of the employee’s total earnings will come from tips. However, in the event that the employee’s tips do not make up the difference between the $2.13 wage and the standard federal minimum wage, the employer is required to pay the employee the difference to ensure that tipped employees earn at least minimum wage. 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).

In 1988, the DOL first published its “80/20 guidance” which set limits on when an employer could take a tip credit. Specifically, the guidance provided that in order for the employer to claim the full tip credit, no more than 20 percent of an employee’s time in a given workweek could be spent on non-tipped activities related to the tipped occupation. For example, wait staff could spend no more than 20 percent of their time setting tables or seating guests.

In December 2021, the DOL issued a Final Rule effectively codifying its longstanding 80/20 guidance. The final rule distinguished among three categories of work: (1) directly tip-producing work, such as a server waiting on a table; (2) directly supporting tip-producing work, such as a server setting or bussing a table; and (3) work not part of the tipped occupation, such as a server preparing food. Pursuant to the Final Rule, an employer could take the tip-credit for any tip-producing work. However, if more than 20 percent of an employee’s workweek was spent on directly supporting tip-producing work, the employer could not claim the tip credit for the work in excess of 20 percent. Employers were also prohibited from taking the tip credit for any time spent on work that was not part of the tipped occupation. The Final Rule also implemented a new restriction that limited the amount of continuous time that an employee could spend performing directly supporting work to 30 minutes to be paid at the tip credit hourly rate. Additional information can be found in the firm’s previous client alert: Department of Labor Final Rule for Tipped Employees - SGR Law.

In issuing its decision to vacate the tip credit rule, the Fifth Circuit noted that “[t]he FLSA does not ask whether duties composing that given occupation are themselves each individually tip-producing.” Ultimately, the court concluded that the Final Rule applies the tip credit in a manner inconsistent with the FLSA’s plain text and deemed the rule 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.

It is unclear whether the DOL will appeal the Fifth Circuit’s decision to the United States Supreme Court. For now, with the tip credit rule invalidated, restaurant and hospitality employers will no longer be required to comply with the arbitrary distinctions for the types of work set forth in the DOL’s 2021 Final Rule.

Significantly, the Fifth Circuit’s ruling only addresses federal law and does not supersede or overrule state or local laws regarding tip credits. Accordingly, in evaluating current policies employers should also review state and local tip credit laws to ensure compliance with all requirements governing employee payment.

If you have any questions regarding the issues raised in this client alert, please contact your Labor and Employment counsel at Smith, Gambrell & Russell, LLP.