On August 23, 2024, the Fifth Circuit Court of Appeals vacated the U.S. Department of Labor’s (DOL) much maligned 80/20 rule, which has largely been in flux in the decades since it was first introduced in a Field Operations Handbook in 1988.
Under the 80/20 rule, up to 20 percent of a tipped employee’s time could be spent on non-tipped activities without the employer losing the ability to claim the full tip credit. Essentially, an employer could pay an employee the sub-minimum wage for an entire workweek, even if the employee spent up to 20 percent of that workweek doing non-tipped work, such as cleaning tables, rolling silverware, or prepping bar supplies. This could be a significant difference, considering the federal subminimum wage is $2.13 per hour—compared to the full federal minimum wage of $7.25 per hour.
Since 2009, the DOL has withdrawn, reinstated, and amended the 80/20 guidance multiple times, consistent with the changing of the various presidential administrations. In December 2021, the DOL issued a Final Rule that codified the 80/20 rule and set out three categories of work: (1) tip-producing work, (2) directly supporting work (ie, bussing tables), and (3) work not part of a tipped occupation (ie, cooking food). Under the Final Rule, an employer could only claim the tip credit for tip-producing work, as well as directly supporting work that did not exceed 30 minutes at a time. But if more than 20 percent of an employee's workweek was spent on directly supporting work, the employer could not claim the tip credit for that excess amount of time. Likewise, an employer could not take the tip credit for any time spent on work not part of the tipped occupation.
Shortly after the Final Rule was issued, the Restaurant Law Center and the Texas Restaurant Association filed suit in the Western District of Texas seeking an injunction. Relying on Chevron USA Inc. v. Natural Resources Defense Council, Inc., the longstanding Supreme Court precedent that granted deference to administrative agencies, the court originally entered judgment in favor of the DOL.
Thereafter, the two restaurant associations appealed the decision to the Fifth Circuit. Significantly, after they filed their appeal, in a highly publicized decision, the Supreme Court overturned Chevron in Loper Bright Enters. v. Raimondo, doing away with the concept of administrative deference. You can read about the Loper Bright decision here.
Thus, without the ability to rely on the DOL’s interpretation, the Fifth Circuit set out to interpret the text of the FLSA – specifically, what it means to be a “tipped employee” and how that relates to the division of tipped versus non-tipped work.
The FLSA states that a “tipped employee” is “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” The court read “engaged in an occupation” to focus on the field of work and the job as a whole, rather than on specific tasks. The court reasoned that under the Final Rule, if an employee is not engaged in her occupation at a given moment, then she is not a “tipped employee” at that moment, which would lead to the illogical conclusion that when an employee is not engaged in her “tipped occupation,” she is engaged in some other occupation. “Because the Final Rule is so granular in divvying up component tasks, a single occupation could quickly break apart, implausibly, into many.”
Ultimately, the Fifth Circuit held that the DOL’s 80/20 Final Rule incorrectly interpreted the intent of the legislature when it drafted the FLSA. “The Final Rule is attempting to answer a question that DOL itself, not the FLSA, has posed…The FLSA does not ask whether duties composing that given occupation are themselves each individually tip-producing.”
The Fifth Circuit also held that the rule was arbitrary and capricious because it discounted many “core duties” of an occupation simply because those tasks do not produce tips. In other words, the rule focused too heavily on whether individual tasks were tip-generating or not, even though the FLSA does not contain such specific directives. Based on this analysis, the Fifth Circuit vacated the DOL’s Final Rule.
Although the DOL may appeal the decision to the Supreme Court, at least for the time being, the 80/20 rule is off the menu. This means employers may require their tipped employees to perform non-tipped work (often thought of as prep or side work) without having to jump through the hoops of tracking the non-tipped time. So long as the employees still customarily and regularly receive more than $30 a month in tips, they will be considered tipped employees and the employer can take the full tip credit.
If you have any questions about how the elimination of the 80/20 rule effects your business or your tip credit practices in general, please reach out to the author or your regular Saul Ewing attorney.
