Fifth Circuit: Court Strikes Down Tip Credit Rule
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APPLIES TO All Employers |
EFFECTIVE August 23, 2024 |
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Discussion:
In a long-awaited decision, the U.S. Court of Appeals for the Fifth Circuit has overturned the Department of Labor’s (DOL) 2021 regulation regarding how employers pay wages for workers who receive tips. The Fifth Circuit entered an injunction vacating the DOL’s rule making it unenforceable against employers nationwide.
History of the DOL Final Rule
Under the Fair Labor Standards Act (FLSA), a business can use a “tip credit” when paying an hourly employee who regularly receives tips. The law provides that an employer can pay a tipped employee $2.13/hour and allow the tips that the employee receives to make up the difference of the $7.25/hour minimum wage under the FLSA. This means that if employees do not receive enough tips to bring their hourly pay up to the minimum wage, the employer must make up the difference in wages.
Over several years, the DOL has issued various regulations to address the idea that many tipped employees also regularly do work that does not generate tips. In 2021, the DOL issued a Final Rule that confirmed the pre-existing 80/20 rule – allowing an employer to use the tip credit and pay a lower hourly rate only if the employee did non-tipped work for 20% or less of the work time – and went on to instruct that the tip credit did not apply to any continuous amount of non-tipped work over 30 minutes in a daily shift. Instead, for work done over that split, the employer had to pay the full minimum hourly wage.
Fifth Circuit Interpretation
Shortly after the 2021 Final Rule was issued, various business associations brought suit alleging that the rule was in violation of the direct text of the FLSA. Litigation interpreting the validity of the Final Rule has continued over several years; however, following the Supreme Court’s recent decision to overturn the 1984 Chevron case, the Fifth Circuit determined that they were now required to “independently interpret the statute and effectuate the will of Congress.”
In Restaurant Law Center v. U.S. Department of Labor, the court concluded that the rule was arbitrary and capricious because it draws an impermissible, arbitrary line between tip-producing and tip-supporting work, conflicting with the statutory scheme that Congress established under the FLSA. In doing so, the court turned to the definition of a tipped employee under the FLSA: “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” In doing so, it looked at the ordinary meaning of “engaged in” and “occupation” as those terms were defined in 1966 when the tip credit was added to the FLSA. The court concluded that “engaged in an occupation” closely resembles “employed in a job.” Ultimately, the court held that the plain text requires a look at the job as a whole to determine whether it is an occupation that receives tips, rather than looking at individual tasks under that occupation.
The court also indicated that the original 80/20 rule, without the 30-minute limitation, does not meet the intent of the FLSA for the same reasons. However, the ruling did not address the validity of the dual-jobs regulation that preceded the original 80/20 rule. Specifically, in 1967, the DOL issued an interpretive regulation which addressed situations where an employee regularly engages in distinct occupations for the same employer, and allowed tipped employees to “occasionally” perform non-tipped duties. Because the dual-jobs regulation focuses on “whether the employee performs tasks unrelated to his or her tipped occupation,” rather than the “amount of time” spent on untipped tasks, the court distinguished it from the 80/20 rule.
This leaves employers in an ambiguous position as they are left to determine when employees are engaged in tipped occupations. Even the court acknowledged that the statute itself is ambiguous, implying that there is a “line-drawing problem” with the language of the statute. However, the court also acknowledged that the DOL has tools at its disposal to define tipped occupations, such as O*NET, which provides a “fixed list of duties that tipped employees are required by their employers to perform as part of their work.” Going forward, employers should evaluate employee jobs to determine whether they are tipped, consistent with this ruling as well as applicable state law, which may have different rules around how tipped employees must be paid.
Action Items
- Review tip credit practices for compliance.
- Consult with legal counsel when evaluating proper compensation practices for employees who receive tips as part of wages.
Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser. © 2024 ManagEase