Contested DOL Rule on Tip Credit Invalidated by Fifth Circuit

Recently, the United States Court of Appeals for the Fifth Circuit issued a decision on the Department of Labor's (DOL) rule concerning tipped employees. This final rule, introduced in 2021, addresses the amount of time a tipped employee can spend on "tip-producing work" versus "non-tip-producing work.

Generally, the Fair Labor Standards Act (“FLSA”) allows employers of tipped employees to take a “tip credit” equal to the difference between the direct wage, the cash wage it pays directly to the tipped employee and the federal minimum wage. The final rule aimed to codify DOL guidance that first appeared in the DOL’s field handbook since the 1980s—commonly referred to as the “80/20” rule.

Historically, the 80/20 rule stipulated that employees could not spend more than 20% of their hours in a given workweek performing “non-tipped” work, such as rolling silverware, cleaning work areas or restocking food. However, the 2021 rule went one step further stating that an employer’s workers were not available for the tip credit if they spent more than 30 minutes continuously performing non-tipped work.

The Fifth Circuit found that this final rule was not only “arbitrary and capricious,” but also directly went against the text of the FLSA, finding that this rule failed the Administrative Procedure Act “twice over.” While the 2021 final rule was invalidated in this decision, employers outside of the Fifth Circuit (Louisiana, Mississippi and Texas) may still be subject to the traditional 80/20 rule that was first introduced in 1988.

What Employers Need to Know

Employers with tipped employees are now relieved of the daunting task of tracking their employees’ activities thirty minutes at a time. While the decision may be appealed en banc, and possibly further to the Supreme Court of the United States, the rule is likely to remain ousted given the upcoming presidential election.

Tips have been at the center of both presidential campaigns with both parties’ nominees promising to eliminate the tax on tips. Additional congressional action on this issue may accompany this promise which has flipped back and forth since 2009 with each change in administration. Employers should stay cognizant of updates on each administration’s plan for tips and tipped workers in general. Historically, Republican administrations have opposed the 80/20 rule, while Democratic administrations have supported it, including the most recent expansion in December of 2021.

Are you an employer with questions about workers who receive tips? Contact your local Dinsmore & Shohl LLP office for further assistance.