Tip credit rule struck down by 5th Circuit

Published: August 23, 2024 | by Michael Cardman, Senior Legal Editor at Brightmine

A 2021 US Department of Labor (DOL) regulation that made it more difficult for employers to claim a minimum wage tip credit was struck down today by a federal appellate court.

The 5th Circuit Court of Appeals ruled in Restaurant Law Center v. US Department of Labor that the regulation is 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.”

Often referred to as the “80/20 plus 30 rule,” the regulation allowed employers to claim a tip credit only during the time their employees spend on tip-producing work or on directly supporting work that takes up no more than 20% of their workweek and no more than 30 continuous minutes at any one time.

Significantly, the 5th Circuit said the U.S. Supreme Court’s recent ruling striking down the Chevron doctrine — which had required courts to defer to an administrative agency’s interpretation of a law if the text of the law is ambiguous and the agency’s interpretation is a reasonable one — made the appellate court “depart from the district court’s analysis at the very start.”

Background

A Fair Labor Standards Act (FLSA) regulation allows employers to claim the minimum wage tip credit for some of the time that a tipped employee spends in duties related to their occupation (known in the industry as “sidework”), even though the duties are not by themselves directed toward producing tips. For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip-producing.

Longstanding DOL enforcement guidance had prohibited an employer from taking a tip credit for time spent performing related duties / sidework if they took up more than 20% of an employee’s workweek. Commonly referred to as the “80/20 rule,” it was the basis of several lawsuits.

In 2018, under the Trump administration, the DOL issued an opinion letter, followed up by a field assistance bulletin in 2019, superseding the 80/20 rule. The DOL said it would no longer limit the amount of related duties / sidework that could be performed as long as the work was performed “contemporaneously with” or for a “reasonable time” before or after direct customer-service duties and all other requirements of the FLSA were met.

In 2020, the DOL issued a final rule that would have, among other things, codified this stance into a notice-and-comment regulation entitled to deference from the courts.

Under the Biden administration, the DOL changed course. In 2021, it postponed the Trump administration’s rule — withdrawing the “reasonable time” standard and replacing it with the 80/20-plus-30 rule.