The Fifth Circuit Court of Appeals recently found in Restaurant Law Center v. U.S. Department of Labor that the Department of Labor’s (DOL’s) Final Rule relating to tip credits for tipped employees was arbitrary and capricious and not in accordance with the law.
Specifically, the Circuit Court determined that the language of the Fair Labor Standards Act (FLSA) was clear regarding when an employer can take a tip credit. Under the FLSA, “an employer may claim a tip credit for any employee who, when engaged in their given occupation…customarily and regularly receives more than $30 a month in tips.” The Circuit Court decided the Final Rule applied the tip credit in a manner inconsistent with the clear text of the FLSA.
Background
The Final Rule at issue provided that an employer could not take a tip credit for work that is:
After the Final Rule went into effect in December 2021, the Restaurant Law Center and the Texas Restaurant Association (the plaintiffs) filed a lawsuit against the DOL to challenge the rule. This ruling essentially agreed and blocked enforcement of the rule.
Fifth Circuit Court Decision
The Circuit Court found that the Final Rule creates a paradox. The Circuit Court noted that under the Final Rule, if a server is idle during a slow shift for more than 20% of their workweek or for more than 30 continuous minutes, that server is no longer a tipped employee and no longer engaged in their occupation for the duration of the excess time even though nothing had changed. The Circuit Court asks, if that is the case, then what occupation is the idle server engaged in?
Instead, the Circuit Court found the language of the FLSA is clear that “an employer may claim the tip credit for any employee who, when ‘engaged in’ her given ‘occupation…customarily and regularly receives more than $30 a month in tips.’” The FLSA does not require a breakdown of duties to determine if each are tip-producing.
The Circuit Court ruled that the Final Rule’s tip credit is inconsistent with the FLSA’s text, and thus, found that the Final Rule is not in accordance with the law.
It remains unclear if the DOL will appeal the decision. After the decision, the DOL’s guidance relating to claiming a tip credit is unclear. The DOL may claim the prior 80/20 guidance still stands. At a minimum, employers will want to consider whether the employee is engaged in an occupation in which they customarily and regularly receive at least $30 a month in tips when determining whether to claim a tip credit. Employers Council will provide an update if we learn new information relating to the applicable guidance.
Since this article is related to the FLSA, it is important to check your state laws before utilizing tip credits to ensure you are compliant with applicable state law. If you have any questions regarding tip credits, please contact Employers Council to speak with an attorney.
Hannah Nelson is an attorney for Employers Council.