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Here’s a tip: Fifth Circuit vacates DOL’s 80/20 tip credit rule

9/16/24

By: Sunshine R. Fellows and Thomas R. Starks

What is the 80/20 tip credit rule? 

An employer is allowed to credit tips towards the federal minimum wage of $7.25, reducing the minimum wage for tipped workers to as low as $2.13 per hour. This means that the employer can be off the hook for up to $5.12 per hour, referred to as the tip credit. 

The tip credit only applies to tipped employees, which the Fair Labor Standards Act (“FLSA”) defines as employees engaged in an occupation in which he or she “customarily and regularly receives more than $30 a month in tips.” 

The 80/20 tip credit rule eliminated the tip credit for employers if an employee spent a continuous period greater than 30 minutes or more than 20% of their workweek performing “directly supporting work.” The U.S. Department of Labor (“DOL”) defines directly supporting work as work performed by a tipped employee to prepare or assist tip-producing customer service work, which is differentiated from tip-producing work that provides service to tipping customers. For example, in a restaurant setting, serving customers is tip-producing work, whereas setting tables or rolling silverware would be considered directly supporting work. If an employee spends over 20% of their workweek or 30 continuous minutes doing directly supporting work, then the employer does not receive the tip credit and is required to pay the full minimum wage.

How was the 80/20 tip credit rule established and why is it being questioned now? 

The 80/20 tip credit rule was established as guidance from the DOL in 1988 and the DOL made it a Final Rule pursuant to its rulemaking authority as it existed in 2021. However, earlier this year, in Loper Bright Enterprises v. Raimondo (“Loper Bright”) the Supreme Court reversed the Chevron doctrine, which deferred to federal agencies to interpret their own statutory authority for rulemaking purposes. Now, this means courts can apply their own interpretation of the statutory authority granted to federal agencies and are not bound to agency interpretations. 

In August of 2024, the Fifth Circuit Court of Appeals held in Restaurant Law Center v. U.S. Department of Labor that the Final Rule failed under the Administrative Procedure Act on two independent grounds. First, the court determined that the 80/20 tip credit rule is contrary to the plain text of the FLSA. Second, the court held that the rule was arbitrary and capricious because it used a line-drawing scheme that Congress “based on impermissible considerations and contrary to the statutory scheme enacted by Congress.” 

80/20 Final Rule is not so final 

The DOL may pursue an appeal of the Fifth Circuit’s decision to the United States Supreme Court. For the time being, restaurant and service employers are not required to comply with the 80/20 tip credit rule, lifting the requirement that employers track the percentage of time tipped employees spend on supporting work versus tipped work. Thus, employers can apply the tip credit even if employees spend greater than 20% of their time on supporting work. 

What DOL rules could be next to go? 

There are numerous challenges to DOL rules making their way through the court system. Notably, there are multiple challenges to the overtime rule that went into effect in July of 2024 that raises the salary threshold for exempt employees under the white-collar exemptions to the FLSA. Some of these challenges are taking place in Texas, which sits in the same circuit that overturned the 80/20 tip credit rule. This could foreshadow more changes to existing DOL rules. 

Is it only recent rules that could be stricken down? 

In addition to the Loper Bright decision, the Supreme Court held in Corner Post, Inc. v. Board of Governors of the Federal Reserve System (“Corner Post”), that causes of action arise when a specific party becomes subject to a regulation, not when the regulation comes into effect. This discarded the six-year statute of limitation based on the regulation’s effective date, instead allowing a challenge by any business (or individual) that recently became subject to the regulation. 

Impact on state tip credit regulations 

The Fifth Circuit’s ruling only addresses federal law; it does not overrule state or local laws regulating tip credits. Employers should be well-versed on applicable state and local tip credit laws to maintain compliance. By keeping up-to-date on the myriad federal, state, and local employment laws affecting tipped employees, employers can avoid costly compliance issues. 

For more information, please contact Sunshine R. Fellows at sunshine.fellows@fmglaw.com or your local FMG attorney.