Restaurant Law Center v. Department of Labor

Due to its conservative bent, the Fifth Circuit has long been a hotbed of litigation challenging regulations of all sorts, typically in cases brought by business groups. In a recent decision, the then-current Department of Labor (DOL) regulation setting limits on when a business can take advantage of the FLSA’s tip credit rules and pay less than the regular minimum wage was struck down, potentially opening the floodgates for restaurants and bars to pay sub-minimum wages to a much greater extent than previously, at least in certain parts of the country where the regulation had arguably displaced case law allowing restaurants free reign as long as a portion of employees’ work constituted “tipped” duties.  Taking up the regulation, the Fifth Circuit vacated the regulation, voiding the provision nationwide.

Background

The Fair Labor Standards Act (FLSA) permits tipped employees to receive $2.13 per hour in a direct wage, so long as the combination of their direct wage and tips equals at least the $7.25 hourly minimum wage.

Consistent with relatively longstanding agency authority (save for the Trump DOL), in 2021, the DOL issued a final rule that codified earlier DOL guidance, often referred to as the “80/20” or “20%” rule. That rule, codified DOL agency position that first appeared in the DOL’s field handbook in 1988, and placed limits on the amount of time an employee could spend on non tip-producing work each week, to the extent the employer wished to take advantage of the tip credit and pay such a worker less than the regular minimum wage.  Specifically, the regulation limited such non-tipped work to 20% of the employee’s hours in a given workweek, if an employer wished to take the tip credit.

The final rule distinguished between tip-producing work, such as waiting tables and bartending, and work that directly supports tip-producing work, such as setting and bussing tables. The final rule challenged also imposed a new “30-minute” restriction.  Under the 30 minute rule, employers could not pay the tipped minimum wage for work exceeding 30 continuous minutes during a shift that a tipped employee may spend performing tasks that are “directly supporting” tipped work.

The Decision

In a decision directly contrary to that from at least 2 sister circuit courts that preceded the current rule, the Fifth Circuit held the 2021 tip rule is contrary to law and arbitrary and capricious because it draws an impermissible, arbitrary line between tip-producing and tip-supporting work, and conflicts with the statutory scheme that Congress established under the FLSA. Thus, the Fifth Circuit struck down and vacated the rule.

Where Does That Leave Us

The appellate court’s decision vacating the 2021 tip rule is a win for restaurant and hospitality industry employers who would prefer to pay sub-minimum wages for as many hours as they can, relying largely on the generosity of their patrons to ensure that their employees make a fair wage. It is unclear whether the DOL will seek en banc review before the full Fifth Circuit or petition the Supreme Court for review, given both Court’s currently overtly business and anti-regulatory bent.

In the meantime, the vacation of the 80/20/30 rule means that the rules in place prior will govern.  However, because the case law differs in different places across the country, with some courts like the 8th and 11th Circuits signaling approval of the preceding 80/20 rule, it appears that the law might differ depending on where a business operates in the country.  Moreover, the Fifth Circuit indicated that the “dual jobs” regulation notwithstanding its opinion.  Thus, there is a likelihood that what was previously characterized as an 80/20 issue will morph to dual jobs litigation, where employees will contend that they are performing duties so untethered from their principal duties as servers that they are actually performing 2 distinct jobs (and the employer violated the law by taking the tip credit relative to the non-tipped job).

This sets up yet another election issue as well.  While both Trump and Harris have signaled that they might be open to a change of tax law to cease taxing tips, the prior Trump DOL supported regulations which allowed restaurant/bar/club employers to pay significantly lower direct wages for many more hours of “non-tipped” work, whereas the regulation struck down was a product of the Biden/Harris DOL.  Thus, it’s likely the Trump DOL would again fight to roll-back tipped employees’ rights, where as a Harris DOL would seek to protect workers and move towards new regulation similar to that which was struck down, but which might pass muster in the courts in the years ahead.

In the meantime, many states’ wage and hour laws will continue to provide more protections for tipped employees than the current federal laws.

If you believe that your employer is not paying you in compliance with applicable federal and state laws, contact Andrew Frisch for a free consultation today.

Click Restaurant Law Center v. Department of Labor to read the entire decision.