The Latest Regulation to Fall by the Wayside – The DOL’s 80/20 Tipped Employee Rule

The Department of Labor’s final rule governing tipped employees has a tangled history, but the U.S. Court of Appeals for the Fifth Circuit has now struck down the rule, which has been in place since 2021. And in so doing, it provided a stark illustration of how courts will approach agency regulations following the Supreme Court’s overturning of the Chevron doctrine, under which courts had typically given broad deference to agency regulations, earlier this year.

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. Starting in 1988, 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, became a controversial subject that shifted with presidential administrations. It was briefly rescinded in 2009 under President Bush, then reinstated by the Obama administration. It was then again rejected by the Trump DOL, which issued a final rule that was to take effect in 2021, 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 rule. As discussed in detail in our October 2021 E-Update, the Biden DOL 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 performed work that directly supports tip-producing work either exceeding 20 percent of all of the hours worked during the employee’s workweek or (this was new) exceeding 30 continuous minutes, the employee was not performing labor that is part of the tipped occupation, and the employer could not take a tip credit for that time.

Background of the Case. Several restaurant associations immediately challenged the 2021 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. But, as discussed in our May 2023 E-update, the Fifth Circuit found that the associations had, in fact, made such a showing and remanded the case to the federal district court to reconsider its denial of the preliminary injunction specifically in line with the Fifth Circuit’s ruling. We expected a nationwide preliminary injunction to issue shortly.

But to our surprise, the district court once again refused to enjoin the rule, as discussed in our July 2023 E-Update. It also found that the DOL’s interpretation of the FLSA with regard to tipped workers, as set forth in the final rule, was entitled to deference under the Chevron doctrine (under which courts would defer to agency interpretation where such interpretation is not unreasonable and where Congress has not specifically addressed the issue in question). It therefore found the rule to be lawful. Once again, the district court’s ruling was appealed to the Fifth Circuit.

The Fifth Circuit’s Ruling. And once again, the Fifth Circuit has reversed the district court, striking down the final rule as contrary to the clear statutory language of the Fair Labor Standards Act and therefore unlawful. Further, according to the Fifth Circuit, by “impos[ing] a line-drawing regime that Congress did not countenance, it is arbitrary and capricious.”

Of particular note, following the district court’s decision, the U.S. Supreme Court overturned the Chevron doctrine in June 2024 (as discussed in our June 28, 2024 E-lert). This means that courts will now independently evaluate agency regulations, like this final rule, to determine if they appropriately effectuate the law. And in so doing, the Fifth Circuit found that “the logical knots into which DOL invites us to tie ourselves further confirms that its interpretation is not the best reading of the statute.”

The Fifth Circuit found that, in establishing the rule, the DOL inappropriately focused on individual tasks rather than the occupation itself. Specifically, according to the Fifth Circuit, being engaged in a tipped occupation “cannot be twisted to mean being engaged in duties that directly produce tips, or in duties that directly support such tip-producing duties (but only if those supporting duties have not already made up 20 percent of the work week and have not been occurring for 30 consecutive minutes) and not engaged in duties that do not produce tips.” The Fifth Circuit found that the DOL’s rule “applies the tip credit in a manner inconsistent with the FLSA’s text” and is therefore unlawful.

The Fifth Circuit also went on to address whether the rule was arbitrary and capricious, essentially meaning that it is an interpretation of the law that Congress did not intend. Here, the DOL drew a line that focused on a tipped employee’s tip-producing duties and on the amount of time the employee spends on supporting duties. The Fifth Circuit found that line “discounts many core duties of an occupation when those duties do not themselves produce tips,” contrary to the FLSA’s language. It further noted the rule’s “inconsistent treatment of supporting work based only on the work’s duration” – a requirement that is found nowhere in the FLSA’s text. As the Fifth Circuit notes, the DOL’s rule “replaces the Congressionally chosen touchstone of the tip-credit analysis—the occupation—with one of DOL’s making—the timesheet.”

Based on the fact that the rule fails on two separate grounds, the Fifth Circuit vacated the rule in its entirety. This means that the rule is no longer in effect across the nation.

What this means for Employers. As we noted in our June 28, 2024 E-lert, the Supreme Court’s overturning of the Chevron doctrine will undoubtedly lead to more challenges to agency regulations and a greater willingness by courts to strike down such regulations as unlawful or arbitrary and capricious. Whether or not employers support such regulations, this will lead to greater uncertainty in how to interpret and apply the laws in question. And as for employers of tipped employees, this ruling means that they are no longer tied to the 80/20 rule in utilizing the tip credit for tipped workers.