ARTICLE
3 September 2024

FLSA Tip Credit Rule Vacated, But Where Does Pennsylvania's Tip Credit Rule Stand?

A few days ago, we reported on the recent decision by the federal fifth Circuit Court of Appeals striking down and vacating a 2021 Final Rule promulgated by the U.S. Department of Labor related to Employer "tip-credits"...
United States Pennsylvania Employment and HR
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A few days ago, we reported on the recent decision by the federal fifth Circuit Court of Appeals striking down and vacating a 2021 Final Rule promulgated by the U.S. Department of Labor related to Employer "tip-credits" under the federal Fair Labor Standards Act ("FLSA"). Our Client Alert can be found here. In summary, the federal Appeals Court held that the rule was contrary to the text of the FLSA, the agency was no longer entitled to Chevron deference in interpreting its statutes, and the rule was otherwise "arbitrary and capricious". The Court was loud and clear about how it, as a federal appeals court, will scrutinize federal agency rulemaking action, particularly where the subject matter is not specifically addressed by Congress in the statute itself, as was the case in this tip credit rule before the Court.

When a rule or regulation is VACATED by a Court, it has no further legal effect.

However, the FLSA does not pre-empt, or overrule, state laws and regulations that are more protective to workers, and Pennsylvania has its own tip credit regulations. So where does that leave Pennsylvania employers while the DOL tries to remedy this fatal defect? When it comes to wage and hour laws and rules, the Pennsylvania Minimum Wage Act, ("PMWA") 43 P.S. Sec. 333.101-115 must be analyzed in addition to the federal FLSA regulations. In some instances, the Pa. Department of Labor & Industry ("L&I") aims for consistency with the FLSA if the laws are substantially similar and the legislative bodies are seeking to address the same issue. However, Pennsylvania's wage and hour regulations do NOT always follow the FLSA lockstep on the same subject matter. So, it is important that our clients are aware of differences between state laws and/or regulations on the same subject matter as a similar federal law/rule.

On the subject of tip credits, in 2022, Pennsylvania L&I took a somewhat rare approach to rulemaking. Apparently wanting to be consistent with the DOL tip credit rule, rather than actually publish the text of its own tip credit rule, L&I chose to "incorporate by reference" (with one exception) the DOL tip credit rule, including the 80/20 rule — the same rule that a federal appeals court just vacated!

We now have an invalid federal rule, and a state rule that incorporates it by reference. That poses some unique legal questions as to whether Pennsylvania can/will attempt to enforce its tip credit rule, and the 80/20 rule in particular, under the circumstances. A review of the regulatory history of the Pennsylvania 2022 tip credit rule suggests that it may have to be scuttled and re-published, but it's also possible L&I may stand by its language, because the PMWA does specifically address "gratuities" and specifically authorizes the Secretary to promulgate rules on that subject matter. And unlike the U.S. Supreme Court, our Pennsylvania Supreme Court has not abandoned the deference it gives to state agencies in interpreting statutes and engaging in rulemaking.

We reached out to and are hoping for clarity from the Secretary of the Pa. Department of Labor & Industry and her Office of Chief Counsel. We will keep you posted if and when guidance is released.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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