5th Circuit Vacates DOL’s Federal 80/20/30 Tip Credit Rule

The U.S. Court of Appeals for the 5th Circuit recently vacated the U.S. Department of Labor’s (DOL) latest provisions of its Tip Regulations Under the Fair Labor Standards Act, colloquially known as the 80/20/30 Rule through its decision and order in Restaurant Law Center et al. v. U.S. Department of Labor. The 5th Circuit determined on August 23, 2024 that the DOL’s regulations were inconsistent with the text of the Fair Labor Standards Act (FLSA),and were also arbitrary and capricious in violation of the Administrative Procedures Act (APA). However, for New York employers, that state’s 80/20 Rule remains in effect and New York employers who take a tip credit must still comply with the 80/20 Rule.

Background on the Federal Tip Credit: the 80/20/30 Rule

As detailed in our prior alert, under certain circumstances, the FLSA permits an employer to take a tip credit towards its minimum wage and overtime obligations for tipped employees (i.e., an employer can credit a portion of an employee’s anticipated tips towards the employer’s obligations to pay minimum wage). However, where a tipped employee spends a substantial amount of time – which the DOL previously stated is in excess of 20% in a given shift (and redefined below) – performing non-tipped work, no tip credit may be taken for the time spent performing such duties. This is known as the DOL’s 80/20 Rule.

In its October 2021 regulations (referred to in this alert as the Final Rule), the DOL expanded on the 80/20 Rule by dividing a tipped employee’s work duties into three specific categories:

1. Tip-producing work (e.g., a server “providing table service”).
2. Directly supporting work (e.g., a server “setting and bussing tables”).
3. Work that is not part of a tipped occupation (e.g., a server “preparing food”).

For time spent in the second category, “directly supporting work,” employers may compensate tipped-staff at the tip credit rate, but only if the work is not performed for a “substantial amount of time” which is defined as either: (1) more than 30 continuous minutes; or (2) no more than 20% of the hours in the workweek for which the employer has taken a tip credit. This prohibition on the amount of time a tipped employee could spend engaged in directly supporting work was known as the 80/20/30 Rule. Accordingly, under the 80/20/30 Rule, an employer may not pay an employee at the tip credit rate for any time in excess of 30 continuous minutes in which the employee is not directly performing tip-producing work.

Further, under the Final Rule, an employer cannot take a tip credit for any time spent in the third category, work that is not part of a tipped occupation.

The Litigation and the 5th Circuit’s August 2024 Decision

In December 2021, organizations representing national and local restaurant industries (the Associations) commenced a lawsuit in the U.S. District Court for the Western District of Texas against the DOL seeking to permanently enjoin DOL’s enforcement of the Final Rule. In July 2023, the Western District of Texas granted the DOL’s motion for summary judgment and dismissed the Associations’ claims, finding that the 80/20/30 Rule was valid. The Associations appealed the Western District of Texas’s ruling.

On August 23, 2024, the 5th Circuit reversed the lower court’s decision, holding that the Final Rule was invalid for two separate reasons. First, the 5th Circuit held that the 80/20/30 Rule was inconsistent with the FLSA’s text. Specifically, the 5th Circuit noted that the 80/20/30 Rule conflates the term “occupation” with the tasks that a part of an individual’s occupation. 

Indeed, the 5th Circuit remarked that DOL impermissibly “disaggregate[d] the component tasks of a single occupation” — an employee does not cease to be in their respective occupation simply because they perform a different task integral to their primary function. For example, the 5th Circuit provided, under DOL’s interpretation, “if [a] server is idly standing by to serve customers for 21 percent of his workweek, or for 31 continuous minutes, he is no longer engaged in his occupation and is no longer a tipped employee for the duration of that excess time.” The court continued, “[w]hat occupation, then, would he be engaged in? The Final Rule creates a paradox that is not obviously capable of resolution.” As such, the 5th Circuit held that the Final Rule was “not in accordance with law.”

Second, the 5th Circuit found that the 80/20/30 Rule was arbitrary and capricious in violation of the APA “because it draws a line for application of the tip credit based on impermissible considerations and [it is] contrary to the statutory scheme [of the FLSA] enacted by Congress.”

Accordingly, the 5th Circuit held that the DOL improperly issued 80/20/30 Rule and invalidated it nationwide. 

Practical Implications and Next Steps

Notably, the 5th Circuit’s decision was rendered shortly after the Supreme Court overruled Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), through Loper Bright Enters. v. Raimondo, 144 S. Ct. 2244, 2273 (2024). In Loper Bright, the Supreme Court cut back sharply on the power of federal agencies to interpret the laws they administer and ruled that courts should rely on their own interpretation of ambiguous laws. It is likely that the 5th Circuit’s decision will serve as a further basis for challenges to administrative rules, particularly rules that were previously challenged, but upheld based on deference given to the subject administrative agency.

It is uncertain whether the 5th Circuit’s decision will be appealed to the U.S. Supreme Court or whether other circuits will rule differently. For now, the 80/20/30 Rule is invalid nationwide.

It is critical to note that the 5th Circuit’s decision addresses the FLSA alone (which is a federal statute) and it does not supersede or overrule state and local laws regarding tip credits. Therefore, state laws, such as New York’s 80/20 Rule remains in effect. For New York employers, this means that if they take a tip credit, they must comply with the state’s 80/20 Rule. Notably, the invalidation of the 80/20/30 Rule means that New York employers can have employees perform non-tip producing work for more than 30 consecutive minutes. In New York, in order to validly take a tip credit, among other things, employers must ensure that tipped employees do not spend more than 20% of their time nor more than two hours in one day engaged in non-tip producing work.

For more information, contact Carolyn D. Richmond at 212.878.7983 or crichmond@foxrothschild.com, Glenn S. Grindlinger at 212.878.2305 or ggrindlinger@foxrothschild.com, Devin S. Cohen at 212.878.7900 or dscohen@foxrothschild.com, or any other member of the firm's Labor & Employment Department.

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