The United States Court of Appeals for the Fifth Circuit vacated a Department of Labor (DOL) Rule on Aug. 23 that established when an employer could claim a tip credit for tipped employees. This opinion is one of the first vacating a federal rule since the United States Supreme Court overruled Chevron earlier this year.
The Fair Labor Standards Act (FLSA) establishes that an employer may pay a tipped employee $2.13 per hour if the employee's tips make up the difference between the wage the employee is paid and the federal minimum wage of $7.25 per hour. The FLSA defines a tipped employee as "any employee engaged in an occupation in which he customarily and regularly receives more than $20 a month in tips."
In 2021, the DOL promulgated a final rule interpreting the tip credit provisions of the FLSA. The final rule determined that there are three categories of tasks for tipped workers:
- Directly tip-producing work
- Directly supporting work
- Work not part of the tipped occupation
The final rule also codified the long-standing DOL 80/20 guidance. This guidance provides that if more than 20% of an employee's workweek was spent on directly supporting work, the employer could not claim the tip credit for that time. Additionally, directly supporting work could not be performed for more than 30 minutes at any given time.
The Restaurant Law Center and the Texas Restaurant Association brought suit against the DOL, arguing that the 2021 final rule violated the FLSA. The Fifth Circuit agreed, holding that the "Final Rule fails under the Administrative Procedure Act twice over."
First, the Fifth Circuit acknowledged that its analysis of the final rule would be governed by the Administrative Procedure Act as opposed to the long-standing Chevron deference standard. Therefore, the Fifth Circuit independently interpreted the statute using the traditional tools of statutory interpretation instead of giving deference to the DOL as experts on labor matters.
The court then held that the final rule was inconsistent with the FLSA's text. Focusing on the phrase "engaged in an occupation," the Fifth Circuit explained that the 80/20 rule impermissibly required the court to analyze the specific tasks that an employee was doing throughout their workweek instead of the general type of job that the employee held. Using various examples, the court emphasized that "giving tips to an employee based on each individual activity that the employee performs is simply not how tipping works in practice." Therefore, whether an employer should be able to claim a tip credit should not depend on the specific tasks that an employee engages in throughout the day. The court concluded: "We are not persuaded that the 80/20 standard, however longstanding, can defeat the FLSA's plain text."
Finally, the court held that the final rule was arbitrary and capricious under the Administrative Procedure Act, as it forced courts to engage in an impermissible line-drawing exercise to determine whether an employer was allowed to claim a tip credit under the law. Because the rule was deemed arbitrary and capricious, the court determined that vacating the final rule was the appropriate remedy under the law.
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