More Drama and Uncertainty for the DOL’s 80/20 Tipped Employee Rule

The U.S. Court of Appeals for the Fifth Circuit has reversed a federal district court decision denying a request to preliminarily enjoin a final rule issued by the U.S. Department of Labor that reinstated the 80/20 rule applicable to tipped employees and further limited the amount of an employee’s non-tipped work time for which the employer may take a tip credit. Given this ruling, it is likely the federal district court will soon issue a preliminary injunction that will prevent enforcement of the rule.

Tipped Employees and the Tip Credit. Under the FLSA, an employer of tipped employees can satisfy its obligation to pay those employees the federal minimum wage by paying those employees a lower direct cash wage (no less than $2.13 an hour) and counting a limited amount of its employees’ tips (no more than $5.12 per hour) as a partial credit to satisfy the difference between the direct cash wage and the federal minimum wage. (Notably, many states have enacted higher minimum wage rates, including for tipped employees, or have eliminated the tipped rate altogether). This partial credit is known as the “tip credit.” Tipped employees are those who customarily and regularly receive more than $30 per month in tips (including servers, bartenders, and nail technicians). The DOL has recognized that many tipped workers serve in a “dual jobs” situation, in which they are employed in both a tipped and non-tipped occupation. The tip credit may be applied only against the time spent in the tipped occupation.

The 80/20 Rule. Prior to the Trump administration, the DOL took the position that an employer may not take a tip credit for time an employee spends on non-tip producing duties if the time spent on those duties exceeded 20% of the employee’s workweek.  This rule, known as the 80/20 rule, was rejected by the Trump DOL, which issued formal regulations providing that an employer may take a tip credit for any amount of time (without limitation) that an employee in a tipped occupation performs related non-tipped duties contemporaneously with their tipped duties, or for a reasonable time immediately before or after performing the tipped duties.

Immediately following the transition, the Biden DOL delayed the effective date of the Trump-era regulations. It then issued a final rule asserting that work that is part of the tipped occupation is the work that produces tips as well as a non-substantial amount of work that assists the tip-producing work. With regard to the assisting work, DOL reinstated the 80/20 rule with some modification. The final rule provided that if an employee performs work that directly supports tip-producing work either exceeding 20 percent of all of the hours worked during the employee’s workweek or (this is new) exceeding 30 continuous minutes, the employee is not performing labor that is part of the tipped occupation, and the employer may not take a tip credit for that time.

Background of the Case. Several restaurant associations immediately challenged the new final rule in Restaurant Law Center v. DOL. The associations requested a nationwide preliminary injunction to prevent the rule from taking effect while the merits of the case were litigated. The federal district court denied the request for a preliminary injunction, finding that the associations failed to make the necessary showing that they would suffer irreparable harm if the injunction were not granted.

The Court’s Ruling. The Fifth Circuit, however, found that the associations had, in fact, demonstrated irreparable harm. Specifically, the DOL had acknowledged that there would be ongoing compliance costs for employers “to ensure that tipped employees are not spending more than 20 percent of their time on directly supporting work per workweek, or more than 30 minutes continuously performing such duties.” In particular, the new 30-minute limitation requires additional recordkeeping obligations. The Fifth Circuit went on to state that, “The nonrecoverable costs of complying with a putatively invalid regulation typically constitute irreparable harm.” It then remanded the case to the federal district court with the clear expectation that the district court “will proceed expeditiously” with reconsideration of the request for preliminary injunction in line with the Fifth Circuit’s ruling. Thus, we can expect a nationwide preliminary injunction to issue shortly.