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On August 23, 2024, the Fifth Circuit struck down the U.S. Department of Labor’s (“DOL”) “80/20” rule on how tipped employees must be paid under the Fair Labor Standards Act (“FLSA”). This is welcomed news for employers in the restaurant and hospitality sectors as navigating this complex rule can be challenging. However, employers should beware that there are a growing number of states that have done away with the tip credit entirely and require full minimum wage payments for all work.
The FLSA’s Tip Credit
Under the FLSA, employees who “regularly and customarily” receive tips need not be paid the full minimum wage in the form of hourly wage payments. Instead, employers may pay a subminimum wage, as low as $2.13 per hour under federal law, and rely on tips to meet the remainder of the minimum wage obligations.
DOL’s Renewed 80/20 Rule
In December 2021, the DOL reinstated the historic “80/20” rule, which required employers to pay employees at least the minimum wage if they spend more than 20% of their time working on tasks that do not specifically generate tips (duties referred to in the industry as “side work”). For example, such side work would include dining room prep, folding napkins and general cleaning work. The DOL also added a new provision that indicated an employer could lose the tip credit where a tipped employee performs “directly-supporting work” for more than 30 minutes.
Fifth Circuit Strikes Down the DOL’s 80/20 Rule
In Restaurant Law Center v. U.S. Department of Labor, the Fifth Circuit found the tip rule was arbitrary and capricious, holding that the rule does not follow the FLSA. The court reasoned that the 80/20 rule is “attempting to answer a question that DOL itself, not the FLSA, has posed.” Thus, the Fifth Circuit vacated the rule. The court advised, however, that its decision does not impact the dual-job regulation, which requires payment of work unrelated to the employee’s tipped occupation. For example, if a server also works as a maintenance technician, then the employee is only a tipped employee with respect to their employment as a server.
Takeaways
While the Fifth Circuit vacated the 80/20 rule, employers should still be aware of applicable local and state laws. For example, there are several states that have completely done away with the tip credit and require payment of the full minimum in cash wages. These states include Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. Michigan will also phase out the tip credit by 2029 along with Washington D.C. by 2027, and Chicago by 2028.
Honigman will continue to monitor and report any further notable updates.
Associate|Haba Yono is an associate in the firm’s Labor and Employment department. She focuses her practice on employment counseling, litigation, and strategic workforce planning.