Tipped Worker Downtime Wage Rule Invalidated by Fifth Circuit
Contact Clara (C.B.) Burns, Gilbert L. Sanchez, Isaac J. Blanco, Metzeri A. Camacho and Lillian Sanchez Porras -
August 26, 2024
Related Attorneys
Related Practice
On August 23, 2024, the Fifth Circuit Court of Appeals in Restaurant Law Center v. U.S. Department of Labor struck down the Department of Labor’s (DOL) “80/20/30 Rule.” This regulation had been established under the Fair Labor Standards Act (FLSA) and governed when an employer could claim tip credit when paying tipped employees. The Fifth Circuit found that the rule was inconsistent with the text of the FLSA.
Previous Rule
The DOL's regulation of tipped workers has a long and complex history. The 80/20 guidance, formalized in 1988, imposed a bright-line rule: employers could not claim a tip credit for time spent on non-tip-producing activities if those activities consumed more than 20% of an employee’s workweek. This guidance persisted until 2009, when its interpretation began to shift with each change in administration. The 80/20/30 Rule, which took effect under the Biden Administration in December 2021, represented the most recent development. The rule divided work into three categories:
Previous Rule
The DOL's regulation of tipped workers has a long and complex history. The 80/20 guidance, formalized in 1988, imposed a bright-line rule: employers could not claim a tip credit for time spent on non-tip-producing activities if those activities consumed more than 20% of an employee’s workweek. This guidance persisted until 2009, when its interpretation began to shift with each change in administration. The 80/20/30 Rule, which took effect under the Biden Administration in December 2021, represented the most recent development. The rule divided work into three categories:
- tip-producing - work that “provides service to customers for which tipped employees receive tips”
- directly supporting - work “performed in preparation of or to otherwise assist tip-producing customer service work”; and
- not part of the tipped occupation - work that is neither tip-producing nor directly supporting.
The 80/20/30 rule imposed strict time limits on when employers could pay the tipped wage rate ($2.13) for tasks in these categories. Work that fell within the second category could be paid at a tip credit rate, but only if the work did not consume a "substantial amount of time."
The rule defined "substantial" as either: (1) more than 30 continuous minutes, or (2) more than 20% of the total hours in the workweek for which the employer claimed a tip credit. No tip credit could be claimed over work that fell within the third category.
The Fifth Circuit’s decision to vacate the 80/20/30 Rule rested on a straightforward principle: the FLSA does not permit the “disaggregation of an employee’s tasks within a single occupation.” Relying on the Supreme Court’s recent decision in Loper Bright, which removed judicial deference to federal agency regulations, the Fifth Circuit rejected the DOL’s approach, deeming it an unwarranted departure from the statute’s focus on the occupation as a whole.
New Rule
In rejecting the Biden Administration’s 80/20/30 rule, the Fifth Circuit concluded that the DOL’s 1967 “dual jobs” regulation as a permissible interpretation, emphasizing that it properly distinguished between separate occupations rather than the time spent on individual tasks within a single job. In other words, the Fifth Circuit concluded that tipped employees lose their tipped employee status only when they take on duties in an entirely different occupation, not simply because they spend time on tasks within their tipped role that might not directly yield tips. For instance, a restaurant server using her mechanical skills to repair a refrigerator is clearly not performing the work of a server in that moment and, therefore, cannot be paid using the tip credit.
Practical Effects
This ruling has significant implications for employers in the Fifth Circuit (Texas, Louisiana, and Mississippi). Effective immediately, employers will no longer need to abide by the 80/20/30 rule and be able to claim tip credit for both tip-producing and work that directly supports tip producing work. This change simplifies the regulatory landscape but highlights that employers must remain vigilant. The ruling does not affect other circuits, and state laws may impose additional requirements. The decision serves as a reminder that employers must stay up to date on both federal and state regulations to remain in compliance.
The rule defined "substantial" as either: (1) more than 30 continuous minutes, or (2) more than 20% of the total hours in the workweek for which the employer claimed a tip credit. No tip credit could be claimed over work that fell within the third category.
The Fifth Circuit’s decision to vacate the 80/20/30 Rule rested on a straightforward principle: the FLSA does not permit the “disaggregation of an employee’s tasks within a single occupation.” Relying on the Supreme Court’s recent decision in Loper Bright, which removed judicial deference to federal agency regulations, the Fifth Circuit rejected the DOL’s approach, deeming it an unwarranted departure from the statute’s focus on the occupation as a whole.
New Rule
In rejecting the Biden Administration’s 80/20/30 rule, the Fifth Circuit concluded that the DOL’s 1967 “dual jobs” regulation as a permissible interpretation, emphasizing that it properly distinguished between separate occupations rather than the time spent on individual tasks within a single job. In other words, the Fifth Circuit concluded that tipped employees lose their tipped employee status only when they take on duties in an entirely different occupation, not simply because they spend time on tasks within their tipped role that might not directly yield tips. For instance, a restaurant server using her mechanical skills to repair a refrigerator is clearly not performing the work of a server in that moment and, therefore, cannot be paid using the tip credit.
Practical Effects
This ruling has significant implications for employers in the Fifth Circuit (Texas, Louisiana, and Mississippi). Effective immediately, employers will no longer need to abide by the 80/20/30 rule and be able to claim tip credit for both tip-producing and work that directly supports tip producing work. This change simplifies the regulatory landscape but highlights that employers must remain vigilant. The ruling does not affect other circuits, and state laws may impose additional requirements. The decision serves as a reminder that employers must stay up to date on both federal and state regulations to remain in compliance.
