On Aug. 23, 2024, a three-judge panel of the 5th United States Circuit Court Appeals unanimously struck down the 2021 Department of Labor Final Rule regarding tipped employees.
The Details:
Under the Fair Labor Standards Act (FLSA), employers are allowed to count a portion of tips received by a “tipped employee” toward meeting the federal minimum wage. A “tipped employee” is defined as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” Currently an employer may take a tip credit of $5.12 per hour and pay a cash wage of $2.13 per hour. However, the cash wage of $2.13 and the tips received must equal at least $7.25 (federal minimum wage). If the cash wage and tips are less than $7.25, the employer must pay the employee the additional amount necessary to bring the employee to at least $7.25.
In 1967 the Department of Labor (DOL) issued the “dual jobs” regulation addressing situations where an employee engages in distinct jobs for the same employer. Under that regulation, for example, a maintenance worker in a hotel who also works as a server in the hotel’s restaurant would be considered a “tipped employee” only when working as a server. The August 2024 Federal Appeals Court decision did not impact the DOL “dual jobs” rule.
80/20 Rule:
In 1988, the DOL revised its Field Operations Handbook (FOH) to specify there are three categories of activity for tipped employees as follows:
(1) tip-producing work, like taking a customer’s order; (2) activities related to tip-producing work, like re-filling salt and pepper shakers; and (3) activities unrelated to tip-producing work, like taking garbage to the dumpster. The FOH declared that employers may take no tip credit for time spent on the third “unrelated” category, and that the employer would lose the tip credit for any time spent on the second “related” category if the employee spends more than 20% of the workweek on that type of activity.
The 80/20 rule proved to be controversial. The Bush administration rescinded the rule only to have the Obama administration reinstate it. Subsequently, the Trump administration adopted a regulation stating that workers could be paid the tipped minimum wage if they primarily performed tipped duties.
80/20/30 Rule:
In October of 2021, the Biden Administration issued a Final Rule known as the 80/20/30 rule and established three categories of work:
(1) Directly tip-producing work, such as a server providing table service.
(2) Directly supporting work, such as setting and bussing tables.
(3) Work that is not part of the tipped occupation, such as preparing food.
The Final Rule stipulated that an employer may take a tip credit for tip-producing work. If an employee spends more than 20% of his or her working time on directly supporting work, the employer cannot take the tip credit for any time beyond 20%. Additionally, a new rule was introduced stating that if an employee spends more than 30 continuous minutes in directly supporting work, then the employer cannot take a tip credit for the time after the first 30 minutes. Finally, any time spent in the third category (work that is not part of the tipped occupation) had to be compensated at full minimum wage (i.e., no tip credit could be taken).
Challenges to 80/20/30 Final Rule:
Several restaurant industry groups sought to halt the rule on the grounds that it is “arbitrary, capricious, contrary to the FLSA, promulgated in violation of the Administrative Procedures Act, and a violation of separation of powers.” A lower federal court judge, Robert Pittman, ultimately sided with the DOL and denied the industry groups’ request relying on the “Chevron doctrine”, which required courts to defer to a federal agency’s position (such as the DOL) on the law when a statute is open to interpretation.
The restaurant groups appealed the lower federal court decision to the Fifth Circuit Court of Appeals (Fifth Circuit) which has jurisdiction over Louisiana, Mississippi and Texas. The following June, in unrelated litigation, the United State Supreme Court overturned the Chevron doctrine in Loper Bright Enterprises v. Raimondo and directed courts to make their own independent determination of an agency’s authority rather than deferring to agencies.
80/20/30 Final Rule Vacated:
As noted above, on Aug. 23, 2024, the 5th Circuit vacated the 80/20/30 Final Rule. The 5th Circuit relied in part on the Loper Bright decision mentioned above in concluding that the Final Rule is “arbitrary and capricious because it draws a line for application of the tip credit based on impermissible considerations and contrary to the statutory scheme enacted by Congress.” In short, the Fifth Circuit found that tipped employees are no longer tipped employees only if they engage in unrelated occupations; not because of the amount of time they spend within their tipped occupations performing tasks that may not generate tips. The Fifth Circuit indicated, by way of example, that if a core duty of a tipped employee server is bussing and setting up tables, the server is still undoubtedly engaged in their occupation. It does not matter whether they are tipped or not for those duties.
Next Steps:
As of now, the DOL has not responded to the 5th Circuit panel ruling so it is not known whether the DOL will appeal to the full 5th Circuit Court. By vacating the Final Rule, the 5th Circuit intended that their ruling to override the 80/20/30 rule on a nationwide basis. However, other appeals courts may rule that the 5th Circuit did not have the authority to rule on a nationwide basis. This is yet to be seen.
Employers with tipped employees should discuss with their legal counsel whether to apply the 5th Circuit ruling on a nationwide basis or apply the ruling only to employers under the jurisdiction of the 5th Circuit (e.g. Louisiana, Mississippi and Texas).
Employers should also keep in mind that state law may differ. For example, some states have different requirements relating specifically to tips – with some completely prohibiting use of the tip credit.
ADP will continue to monitor and report on further developments.
Please contact your service professional if you have any questions.