In the latest Weekly Wright Report:
Federal Appeals Court Strikes Down DOL Tip Credit Rules
What is the deal with tips these days! And, I am not talking about tips as in suggestions, I am talking about tips as in extra money for services. Clerks standing at a counter who get paid a full salary are asking for tips? But, I digress, today’s article is about the traditional tip industry for restaurant and hospitality staff who get paid a low base salary in recognition that their income is supplemented by tips. In a recent decision, the U.S. Court of Appeals for the Fifth Circuit in Restaurant Law Center v. U.S. Department of Labor, No. 23-50562 (Aug. 23, 2024) struck down recent Department of Labor (“DOL”) regulations regarding the so-called “tip credit” on a nationwide basis.
The Fair Labor Standards Act (“FLSA”) permits employers to take a tip credit when paying the wages of any tipped employee, which enables the employer to pay tipped employees $2.13 per hour. 29 U.S.C. §203(m)(2)(A). The theory of the tip credit is that a large portion of such employees’ total earnings comes from tips which would make up the difference between the low wage and the federal minimum wage of $7.25 per hour. If the tips and low hourly wage do not add up to the federal minimum wage, the employer must make up the difference. The FLSA defines a “tipped employee” as “any employee engage in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. §203(t).
In 2021, the DOL issued new regulations setting new limits on the tip credit. First, the new regulation defined what “engaged in a tipped occupation” means under the FLSA. Notably, the term “tipped occupation” is not a term used in the FLSA. According to new regulations, an employee is “engaged in a tipped occupation when the employee performs work that is part of the tipped occupation.” Therefore, “[a]n employer may only take a tip credit for work performed by a tipped employee that is part of the employee’ s tipped occupation.” The regulations define three categories of work: (1) directly tip-producing work (e.g., a server “providing table service”); (2) directly supporting work (e.g., a server “setting and bussing tables”); and (3) work not part of the tipped occupation (e.g., a server “preparing food”). Under the regulations, an employer may take the tip credit for tip-producing work. But if more than 20 percent of an employee’s workweek is spent on directly supporting work, the employer cannot claim the tip credit for that excess. Nor can directly supporting work be performed for more than 30 minutes at any given time. An employer may not take the tip credit for any time spent on work not part of the tipped occupation.
The Restaurant Law Center and the Texas Restaurant Association filed suit in the Western District of Texas, seeking to permanently enjoin DOL’ s enforcement of the new regulations. The case went up on appeal twice and was remanded twice until finally the trial court upheld the new regulations.
On appeal, the Fifth Circuit has now ruled that new regulations are contrary to law and arbitrary and capricious because the regulations impermissibly “replaces the Congressionally chosen touchstone of the tip-credit analysis—the occupation—with one of DOL’s making—the timesheet,” it is inconsistent with the text of the FLSA and is invalid.
For now, the restaurant and hospitality industry employers are no longer required to comply with the DOL’s complex tip-producing and tip-supporting work regime. Of course, DOL may seek an en banc review before the Fifth Circuit or seek an appeal to the U.S. Supreme Court. The DOL may also head back to the drawing board and undertake a new rule making process. Further, the outcome of the presidential election may also impact the future of the tip credit regulations, as historically the issue was a political football seeing changes based on whether a democratic or republican administration was in office.
If you have any questions regarding this subject, please contact any member of the WCS Employment & Labor Law Practice Group.
