by Mary Elizabeth “Betsy” Davis
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Get Your Report Now!Hospitality employers take note: The Department of Labor’s (DOL) tip rule has been struck down. The tip credit is a provision of the Fair Labor Standards Act (FLSA) that allows employers to pay tipped employees a lower direct wage as long as their tips make up the difference to reach the minimum wage. However, the tip credit has been a source of confusion and litigation for many hospitality employers, which have faced conflicting and changing rules from the DOL on how to apply it.
Background
In 2021, the DOL issued a final rule that set strict limits on the amount of time tipped employees could spend performing work that didn’t directly generate tips, such as cleaning tables or preparing food. The rule, which was based on earlier DOL guidance known as the "80/20" or "20%" rule, prohibited employers from taking a tip credit if employees spent more than 20% of their hours in a workweek or more than 30 minutes in a shift on such tasks.
The rule was challenged by restaurant industry groups, which argued it was contrary to the FLSA and arbitrary and capricious. The case went through several rounds of litigation until the U.S. Court of Appeals for the 5th Circuit (which covers employers in Louisiana, Mississippi, and Texas) issued a long-awaited decision on August 23, 2024, striking down the rule and voiding it nationwide.
The 5th Circuit held that the rule was inconsistent with the text of the FLSA, which allows the tip credit for any employee who is engaged in an occupation that customarily and regularly receives tips, regardless of the specific duties of that occupation. The court said the DOL’s rule replaced the occupation standard with a time sheet standard that drew an impermissible, arbitrary line between tip-producing and tip-supporting work.
Takeaway
The court's decision is a significant victory for hospitality employers, which will no longer have to comply with the 2021 rule and its complicated distinctions between different types of work. Employers should be aware, however, of the state-law requirements for taking a tip credit, which may vary from federal law and may not be affected by the court's decision. For information on navigating wage and hour issues and properly applying the tip credit, contact your employment law counsel.
Mary Elizabeth "Betsy" Davis is an attorney with Whiteford, Taylor & Preston, L.L.P., in Richmond, Virginia. Betsy is a partner in the Labor and Employment Group and serves Whiteford as its Co-General Counsel and Co-Chair of the Labor and Employment Group. She focuses her practice on advising management in all areas of labor and employment law and can be reached at bdavis@whitefordlaw.com.