Tipping The Scales: Fifth Circuit Strikes Down DOL Tip Rule

On Aug. 23, the Fifth Circuit Court of Appeals invalidated the DOL’s 2021 rule on tip credits under the Fair Labor Standards Act. While the tip credit lives on, the Fifth Circuit’s ruling simplifies compliance for many employers by removing the need to track the daily activities of tipped employees. More broadly, following the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo, employers are now better positioned to contest federal regulations, as demonstrated by the Restaurant Law Center and Texas Restaurant Association’s successful challenge in this case.

DOL’s 80-20 Rule

In December 2021, the DOL issued its latest iteration of a rule allowing employers to take a tip credit for tipped employees performing work that is part of the employee’s tipped occupation, with some limitations. A tip credit is a way for employers, primarily restaurants and bars, to include customer tips when calculating an employee’s wages. The employee always earns at least the minimum wage, but the employer can shift some of that to the customers. If an employee’s tips do not add up to at least the minimum wage, the employer cannot claim the entire credit. Federal law allows for a maximum tip credit of $5.12 per hour, the difference between $7.25 (federal minimum wage) and $2.13 (federal minimum wage for tipped occupations).

The DOL’s 80-20 rule classified work into three categories: (1) directly tip-producing (e.g., table service), (2) directly supporting (e.g., setting tables) and (3) non-tipped (e.g., food prep). If more than 20% of an employee’s workweek or a single stretch of 30-plus minutes involved directly supporting tasks, the tip credit could not be used for that time.

Fifth Circuit’s Decision

The Fifth Circuit covers Texas, Louisiana and Mississippi, and the Court’s decision arose from a lawsuit brought by the Restaurant Law Center and Texas Restaurant Association challenging the DOL’s 80-20 rule. The Court invalidated the rule, deeming it arbitrary and capricious. It found that the rule misapplied the tip credit in a way inconsistent with the FLSA’s text, which does not require a certain proportion of duties to be individually tip-producing to classify an occupation as a “tipped occupation.”

Employer Implications and Next Steps

For employers in states without their own tip-credit requirements, this ruling simplifies the application of tip credits by eliminating the DOL’s 80-20 rule. Instead of tracking specific duties, employers only need to determine whether employees are working in a tipped role. If an employee works dual roles and earns tips in one but not the other, the tip credit applies to all hours worked in the tipped role and none in the other. For example, a hotel maintenance worker who also waits tables in the hotel restaurant would be subject to the tip credit for all hours worked as a waiter but none in the maintenance role.

Additional considerations for affected employers include:

• Local Law Compliance: Some states and localities have their own rules – more strict than federal law – that limit or completely disallow tip credits.
• Assigned Duties and Dual Roles: Assess the duties currently assigned or not assigned to tipped employees, and how employees with dual roles are classified for payroll purposes.
• Legal Challenges: The DOL or lawyers representing employees may argue that the 1988 version of the 80-20 rule remains in place outside the Fifth Circuit.  
• Training and Education: Invest in training for managers, payroll and HR to ensure they understand and implement the new rules effectively.

Although it is not clear whether the DOL will petition for further review (by the entire Fifth Circuit bench or SCOTUS), Robinson Bradshaw’s Employment & Labor Practice Group will closely monitor and report on the latest developments regarding the Fifth Circuit’s decision and any future decisions promulgated by other jurisdictions. For assistance in evaluating next steps for your workplace, please contact a member of our team.