The Department of Labor (DOL) regulation that set limits on the amount of time that tipped employees can spend performing work that does not directly generate tips has been struck down by the U.S. Court of Appeals for the Fifth Circuit. Restaurant Law Center v. U.S. Department of Labor, No. 23-50562. The federal appeals court vacated the 2021 rule, voiding the provision nationwide which will be welcome news to hospitality employers.
The Fair Labor Standards Act (FLSA) allows employers to take a “tip credit” and pay employees who traditionally receive tips – such as servers – as little as $2.13 an hour, as long as they make at least the standard minimum wage ($7.25 an hour) when tips are factored in. The thought behind this is that these employees generally make most of their income through gratuities.
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.” Whether an employee may be treated as a “tipped employee” is tied solely to their “occupation” and whether it is one in which the employee “regularly receives more than $30 month in tips.”
The DOL’s Wage and Hour Division reinstated the 80/20 rule in December 2021, amending the tip provisions of the FLSA regarding when employers with tipped employees may take a tip credit and altering the definition of work that is considered part of a tipped occupation. Under the rule, employers lose the tip credit for the time spent performing “directly supporting work” — side work like rolling silverware into napkins, as an example — that exceeds 20% of their total hours worked at the tipped rate. The DOL also added that an employer loses the tip credit for the time a tipped employee performs directly supporting work for a continuous period that exceeds 30 minutes.
You can read more about the 2021 rule on our past blog here or the November 2021 issue of FranklyHR on
MyFrankCrum with other past issues (under My Resources, HR Resources).
Several restaurant industry groups sought to halt the rule and saw success with this 5th Circuit appeal. The court’s decision is the latest update in a decade-long back and forth over the correct method to take a tip credit.
The appeals court’s main findings:
- The FLSA says an employer may claim the tip credit for any employee who — when “engaged in” their given occupation — customarily and regularly receives more than $30 a month in tips.
- The FLSA does not consider whether duties of that given occupation are each individually tip producing.
- The DOL’s interpretation threatened to nullify the $30 threshold requirement by focusing on individual tasks.
- If a core duty of a server is bussing and setting up tables, the server is engaged in their occupation. It does not matter whether they are tipped or not for those duties.
- This decision does not affect the DOL’s “dual jobs” regulation.
The 5th Circuit vacated the rule, meaning they intend for their ruling to impact the regulation on a nationwide basis. Although other appeals courts may rule that the 5th Circuit did not have authority to impact on a nationwide basis, employers nationwide can now argue that the 80/20 rule is no longer in place. Cases making similar arguments and relying upon this decision will probably arise in other district courts.
Management of the tip credit process remains key to avoiding compliance issues. Evaluate your business and consider best practices such as training managers on evolving rules relating to tipped employees. Follow the
FLSA requirements on the federal level.
Employers should also assess state-law requirements for taking a tip credit, including a prohibition on use of the tip credit in certain states.