Tipping the Scales: Fifth Circuit Strikes Down DOL Tip Rule

On Aug. 23, the Fifth Circuit Court of Appeals invalidated the DOL’s 2021 rule on tip credits under the Fair Labor Standards Act. While the tip credit lives on, the Fifth Circuit’s ruling simplifies compliance for many employers by removing the need to track the daily activities of tipped employees. More broadly, following the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, which instructed lower courts to abandon a practice of deferring to federal regulatory agencies in certain circumstances, employers are now better positioned to contest federal regulations, as demonstrated by the Restaurant Law Center and Texas Restaurant Association’s successful challenge in this case.

DOL’s 80-20 Rule

In December 2021, the DOL issued its latest iteration of a rule allowing employers to take a tip credit for tipped employees performing work that is part of the employee’s tipped occupation, with some limitations. A tip credit is a way for employers, primarily restaurants and bars, to apply customer tips towards an employee’s minimum wage. The employee always earns at least the minimum wage, but the employer can count up to $5.12 per hour in tips towards the employee’s minimum wage. (The maximum tip credit is the difference between $7.25, federal minimum wage, and $2.13, federal minimum wage for tipped occupations.) If an employee’s tips do not equal at least $5.12 per hour, the employer cannot claim the entire credit.

The DOL’s 80-20 rule classified work into three categories: (1) directly tip-producing (e.g., table service), (2) directly supporting (e.g., setting tables) and (3) non-tipped (e.g., food prep). If more than 20% of an employee’s workweek or a single stretch of 30-plus minutes involved directly supporting tasks, the tip credit could not be used for that time.

Fifth Circuit’s Decision

The Fifth Circuit covers Texas, Louisiana and Mississippi, and the Court’s decision arose from a lawsuit brought by the Restaurant Law Center and Texas Restaurant Association challenging the DOL’s 80-20 rule. In Restaurant Law Center v. U.S. Department of Labor, the Court invalidated the rule nationwide, deeming it arbitrary and capricious. It found that the rule misapplied the tip credit in a way inconsistent with the FLSA’s text, which does not require a certain proportion of duties to be individually tip-producing to classify an occupation as a “tipped occupation.”

The Fifth Circuit’s decision to strike down the 80-20 rule was heavily influenced by its interpretation of the Supreme Court’s ruling in Loper Bright Enterprises v. Raimondo, which overturned the practice known as Chevron deference under which federal courts deferred to administrative agencies when interpreting ambiguous statutes. No longer having to follow Chevron deference, the Fifth Circuit assessed whether the DOL’s interpretation of the FLSA was consistent with the statutory text and intent, rather than deferring to the agency’s view. This reflects a broader judicial trend towards a more stringent examination of agency interpretations of statutes, challenging the extent of deference traditionally granted. Without Chevron, the validity of rules, and new rules, that depend on an administrative agency’s interpretation of applicable law is less certain.

Employer Implications and Next Steps

For employers in states without their own tip-credit requirements, this ruling simplifies the application of tip credits by eliminating the DOL’s 80-20 rule. Instead of tracking specific duties within employees’ roles, employers only need to determine whether employees are working in a tipped role. If an employee works dual roles and earns tips in one but not the other, the tip credit applies to all hours worked in the tipped role and none in the other. For example, a hotel maintenance worker who also waits tables in the hotel restaurant would be subject to the tip credit for all hours worked as a waiter but none in the maintenance role.

Additional considerations for affected employers include:

• Local Law Compliance: Some states and localities have their own rules – more strict than federal law – that limit or completely disallow tip credits.
• Assigned Duties and Dual Roles: Assess the duties currently assigned or not assigned to tipped employees, and how employees with dual roles are classified for payroll purposes.
• Legal Challenges: Employers outside the Fifth Circuit should be aware that the DOL or employees may argue that an older version of the DOL’s 80-20 rule still applies in those jurisdictions. However, because the older version of the 80-20 rule relied on the Supreme Court’s now-repudiated Chevron deference doctrine, federal courts outside the Fifth Circuit may strike down the older version of the 80-20 rule in those jurisdictions too under similar reasoning as the Fifth Circuit’s Restaurant Law Center v. U.S. Department of Labor.
• Training and Education: Invest in training for managers, payroll and HR to ensure they understand and implement the new rules effectively.

Although it is not clear whether the DOL will petition for further review (by the entire Fifth Circuit bench or SCOTUS), Robinson Bradshaw’s Employment & Labor Practice Group will closely monitor developments regarding the Fifth Circuit’s decision and any future decisions promulgated by other jurisdictions. For assistance in evaluating next steps for your workplace, please contact a member of our team.