August 30, 2024

The 80/20 Rule is No More: Fifth Circuit Invalidates DOL Tip Duties Rules

In a landmark decision on August 23, 2024, the Fifth Circuit Court of Appeals delivered a major victory for restaurants and other establishments that employ tipped workers. The court invalidated the Department of Labor’s (DOL) Final Rule for Tipped Employees in the case of Restaurant Law Center v. United States Department of Labor’s Wage and Hour Division. This ruling marks a significant shift in the landscape of wage and hour law, particularly concerning the application of the “tip credit” provision of the Fair Labor Standards Act (FLSA).

Background: The DOL’s 80/20 Rule

The DOL’s Final Rule, which has now been struck down, attempted to define when an employer could take a “tip credit” toward the payment of wages. Most notably, it imposed:

An 80/20 requirement: 80% of a tipped employee’s work had to be “tip producing.”
A 30-minute rule: Supporting work could not exceed 30 minutes at any given time.

These rules placed restaurant-employers in the difficult position of having to prove what duties were performed and for how long, often resulting in settlements to avoid legal expenses and risks.

The Fifth Circuit’s Ruling

The Fifth Circuit Court of Appeals upheld a summary judgment victory for the restaurant industry and invalidated the DOL’s rule on two primary grounds:

The rule is contrary to the clear statutory text of the Fair Labor Standards Act.
The rule engaged in a “line-drawing regime that Congress did not countenance,” making it arbitrary and capricious.

Instead of the DOL’s complex rule, the Court held that the statute only requires that the tipped employee be engaged in an occupation that “customarily and regularly receives more than $30 a month in tips” for the employer to be able to use the tip credit. Importantly, the Court specifically disfavored any task-based analysis approach to applying the tip credit.

Implications for Employers

This ruling is a significant win for employers with tipped employees, as it addresses one of the most common claims brought by plaintiffs’ counsel. However, it’s crucial to note that the ruling does not impact other aspects of tip-related regulations, including:

Rules for Tip Pools

Tip Notice Requirements

Regulations on Kickbacks or Unlawful Tip Sharing

Treatment of Employees Who Work in Dual Occupations

What This Means for Restaurant Owners

As the first circuit court to “confront the permissibility of the Final Rule under the FLSA,” the Fifth Circuit’s decision opens the door for employers across the country to challenge the DOL’s “80/20” rule. With the recent overturning of the Chevron doctrine by the U.S. Supreme Court in 2024, courts are no longer obliged to defer to agencies’ interpretations of ambiguous statutory terms.

For restaurant owners, this ruling (assuming the Supreme Court does not overturn it) simplifies the application of the tip credit. You no longer need to:

Calculate whether a server is working more than 20% of the workweek performing work that may or may not be “directly supporting.”

Monitor whether a tipped employee is performing “directly supporting work” for more than 30 minutes continuously.

This eliminates a complicated responsibility that was particularly challenging given the hectic nature of the restaurant industry.

Looking Ahead

While this ruling is currently binding only in the Fifth Circuit, it is likely to influence decisions in other circuits. Employers across the country may challenge the DOL’s Final Rule based on the Restaurant Law Center decision.

Action Items for Employers

Despite this favorable ruling, employers should remain cautious and take the following steps:

Review any tip pooling arrangements to ensure they comply with current law.
If you have employees in two or more occupations, verify that any tip credit is being applied appropriately.
Ensure that you are documenting the required notices for tipped employees.
Stay informed about potential challenges to the DOL’s rule in other circuits.
Consult with legal counsel to understand how this ruling may apply to your specific situation, especially if you operate in multiple jurisdictions.

This decision marks a significant change in how the tip credit is applied and understood. While it provides more flexibility for employers, it’s crucial to remain vigilant and ensure compliance with all aspects of wage and hour law. As always, we recommend consulting with a Kelley Kronenberg employment attorney if you have any questions about how this ruling may affect your business practices.

David S. Harvey
Partner, Labor & Employment
Kelley Kronenberg-Tampa, FL
(813) 223-1697
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Felipe Gonzalez
Attorney, Labor & Employment
Kelley Kronenberg-Miami, FL
(305) 503-0850
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