In a significant decision for the hospitality and restaurant industries, the U.S. Court of Appeals for the Fifth Circuit recently struck down a Department of Labor (DOL) rule regarding the payment of tipped employees.
The August 23, 2024, ruling in Restaurant Law Center v. U.S. Department of Labor effectively vacated the controversial 80/20/30 rule introduced by the Biden administration in 2021. This ruling follows the U.S. Supreme Court's recent trend of curtailing federal agency power, specifically targeting the deference traditionally afforded to such agencies when interpreting ambiguous laws.
Read on to find out more about this decision and how this ruling may affect your business.
What is the 80/20/30 rule?
The 80/20/30 rule, formally enacted by the DOL in 2021, placed strict limitations on how hospitality employers could apply the federal tip credit, a provision under the Fair Labor Standards Act (FLSA). The rule categorized employees' work into three types:
- Directly tip-producing work (e.g., serving customers)
- Directly supporting work (e.g., setting tables, bussing)
- Non-tip-producing work (e.g., preparing food)
Under the rule, employers could not claim a tip credit for employees spending more than 20% of their time on "directly supporting work" or for any continuous period exceeding 30 minutes spent on this type of work. The rule sought to ensure that tipped employees, who can legally be paid as little as $2.13 per hour as long as their tips bring their total wages up to the federal minimum wage of $7.25, would receive full pay when performing tasks unrelated to earning tips.
The hospitality industry viewed the rule as burdensome and arbitrary. Several industry groups, led by the Restaurant Law Center and Texas Restaurant Association, challenged the rule, arguing that it exceeded the DOL's authority and imposed impractical time-keeping requirements. They further claimed the rule was contrary to the intent of Congress when drafting the FLSA.
What did the Fifth Circuit rule?
In siding with the restaurant industry, the Fifth Circuit applied a new legal standard following the U.S. Supreme Court's Loper Bright Enterprises v. Raimondo decision from June 2024. This landmark ruling abolished the Chevron doctrine, which for decades had required courts to defer to federal agencies' interpretations of ambiguous statutes. The Supreme Court's decision now requires courts to apply independent judgment when interpreting such laws.
Relying on this precedent, the Fifth Circuit panel, led by Circuit Judge Jennifer Walker Elrod, concluded that the 80/20/30 rule was "arbitrary and capricious" and inconsistent with the FLSA's plain text. Judge Elrod emphasized that the rule drew lines regarding tip credit eligibility that were not contemplated by Congress. The court stated that determining an employee's status as a tipped worker should focus on their occupation, not their specific tasks or the time they spend on those tasks.
Why should businesses pay attention to this ruling?
This ruling is a major victory for employers in the restaurant and hospitality sectors. By striking down the 80/20/30 rule, the Fifth Circuit has alleviated the complex compliance burdens it imposed. Employers no longer have to track employees' time spent on tip-producing versus non-tip-producing tasks as rigidly, offering greater flexibility in day-to-day operations.
However, businesses should not view this ruling as a blanket exemption. While the Fifth Circuit intended its ruling to have national applicability, whether the decision applies nationwide remains unresolved. Other federal circuits could take a different approach, and the DOL could appeal the decision or revise its regulations in response. Furthermore, state laws governing tipped employees may impose stricter standards than federal law, and employers must remain compliant with local requirements.
While the immediate impact of the Fifth Circuit's decision is significant, the full ramifications depend on whether the DOL will appeal, modify its rule, or attempt to implement changes in other ways. In the meantime, businesses should take these steps:
- Reassess wage practices: For now, businesses under the Fifth Circuit's jurisdiction—Texas, Louisiana, and Mississippi—can apply the ruling. Employers in other states should consult legal counsel to determine whether to apply this ruling, particularly given the ongoing legal uncertainty.
- Review state laws: Employers must continue to monitor state-specific wage laws, as several states impose higher minimum wages or stricter rules governing tipped employees than the FLSA.
- Evaluate compliance: Employers may now take a more holistic approach to the work performed by tipped employees, focusing on their overall occupation rather than individual tasks.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
