Restaurant Law Center v. United States Department of Labor – Fifth Circuit Vacates the DOL’s 2021 Regulations Regarding Tip Credits
Gina Glatt, Associate
On August 23, 2024, the Court of Appeals for the Fifth Circuit held that the Department of Labor’s (“DOL’s”) 2021 regulations governing tip credits (the “2021 Rules”) were invalid and vacated the same. The Fifth Circuit’s decision in Restaurant Law Center v. United States Department of Labor is yet another example of increasing (and successful) judicial challenges to administrative rulemaking implemented under the Biden administration in the wake of the U.S. Supreme Court’s abrogation of Chevron deference.
Tip Credits Under the FLSA and the DOL’s 2021 Rules
Under the federal Fair Labor Standards Act (“FLSA”), a deviation from the $7.25/hour minimum wage exists for tipped employees. In general, a tipped employee is defined as someone who typically receives more than $30/month in tips. An employee’s per hour rate may be lower than the applicable minimum wage as long as tips add up to put the employee at or over minimum wage, making up the amount with what is known as a tip credit. In 2021, the DOL re-evaluated the regulations for tipped employees and their employers through the Tip Regulation Under the Fair Labor Standards Act (FLSA); Partial Withdrawal.[1]
The 2021 Rules allowed employers to take tip credits for time spent performing “tip producing” work (i.e. providing table service) and work that “directly supports” the tip producing work (i.e. rolling silverware), with the caveat that the time spent on the directly supportive work was not a “substantial amount of time.”[2] A “substantial amount of time” is time that exceeds 20% of the total hours in a workweek. In other words, for an employer to take a tip credit on an employee’s full wages for the workweek, the employee could not spend more than 20% of his or her time performing non-tipped activities - even if they related to the tipped occupation as a whole. If the employee’s non-tipped activities exceeded 20% of the hours worked during the workweek, then the employer was prohibited from taking tip credits for that time in excess of 20%. This standard is commonly known as the 80/20 rule.
The 80/20 rule was commonly applied to tip credit analyses prior to 2021, but the DOL codified the standard in the 2021 Rules. Of note, the 2021 Rules added a new element to the traditional 80/20 standard called the “continuous 30-minute rule.” Under the continuous 30-minute rule, and in addition to the 80/20 rule, if an employee’s non-tipped work exceeded 30 minutes in duration, then the employer could not take a tip credit on the work performed in excess of 30 minutes.
The Restaurant Law Center Litigation
Restaurant Law Center and the Texas Restaurant Association challenged the 2021 Rules (both the codified 80/20 standard and the continuous 30-minute rule) in the District Court for the Western District of Texas, arguing that the 2021 Rules’ modifications were contrary to the plain language of the FLSA and were otherwise arbitrary and capricious.
The district court found that the 2021 Rules were lawful on the merits.[3] Plaintiffs appealed, and the Fifth Circuit reversed the district court, finding that the 2021 Rules were contrary to the plain text of the FLSA, which only states that employers may take tip credits when an employee is engaged in an occupation in which the employee customarily and regularly receives more than $30 in tips per month.[4] In other words, the FLSA itself contains no limiters based on the workweek percentage of individual tasks performed (like the 80/20 standard) or the length of time spent performing one task versus another (like the continuous 30-minute rule). The court recognized that the traditional 80/20 rule may have been an industry and DOL practice for almost forty years, but such practices and interpretations could not control the plain language of the statute itself, which always controls.
Likewise, the court found that the 2021 Rules were arbitrary and capricious because they drew nonexistent lines for the application of tip credits based on impermissible considerations relating to the specific types of tasks performed in a workweek and the length of time performing such tasks, when the focus should be on the occupation and whether persons in the occupation regularly and customarily receive tips. Whether the DOL will elect to appeal the Fifth Circuit’s decision to the Supreme Court remains to be seen.
Employer Considerations
While the Supreme Court may ultimately decide the validity of the DOL’s 2021 Rules, at least for now, Colorado employers in occupations that customarily rely on tips for employee compensation are no longer constrained by the limitations imposed by the 80/20 standard and the continuous 30-minute rule, and are only limited by the amount of tip credits that they may take against a tipped employee’s wages. Keep in mind, however, that Colorado employers must still follow the tip credit regulations set forth in the COMPS Order, which only permit up to $3.02/hour in tips credits (versus $5.12/hour under federal law). Moreover, while Colorado’s regulations are silent as to the 80/20 standard or the continuous 30-minute rule (and, therefore, the federal 2021 Rules applied to fill in those gaps), given the Fifth Circuit’s vacating of the 2021 Rules, it is at least possible that the General Assembly or the Colorado Department of Labor and Employment may choose to adopt and apply these standards to Colorado employers and employees in future legislative or regulatory sessions. Campbell Litigation will continue to monitor these and other developments in wage and hour laws at the federal and state level
[1] See 29 C.F.R. § 531.56(e), (f).
[2] See 29 C.F.R. § 531.56(f)(4).
[3] See generally Rest. L. Ctr. v. U.S. Dep’t of Lab., 2023 WL 4375518 (W.D. Tex. July 6, 2023).
[4] Rest. L. Ctr. v. U.S. Dep’t of Lab., --- F.4th ----, 2024 WL 3911308, at *8-9 (5th Cir. Aug. 23, 2024).