If you own a restaurant or are involved in the hospitality industry, there’s been a recent court decision you should know about. The Fifth Circuit Court of Appeals struck down a controversial rule from the Department of Labor (DOL) known as the “80/20/30 rule.” This ruling provides relief for employers struggling with the complexities it created.

What Is the “Tip Credit”?

To understand this ruling, it’s important to understand what a “tip credit” is. Under the Fair Labor Standards Act (FLSA), employers can pay tipped employees (like servers and bartenders) a lower direct wage—often as low as $2.13 an hour—as long as the employee’s tips bring their total earnings up to at least the federal minimum wage of $7.25 per hour. This practice allows employers to reduce their payroll expenses while still ensuring that employees earn a fair wage.

What Was the “80/20/30 Rule”?

In December 2021, the DOL reinstated the “80/20/30 rule,” which created strict guidelines about how much time tipped employees could spend on tasks that do not directly generate tips. Here’s what the rule required:

  1. 80% Rule: Tipped employees must spend at least 80% of their time on tasks that directly produce tips, like serving food or drinks.
  2. 20% Rule: They could spend up to 20% of their time on tasks that support tip-producing activities (e.g., preparing silverware or setting tables).
  3. 30-Minute Rule: If an employee spends more than 30 continuous minutes on a task that doesn’t directly produce tips (like cleaning), the employer loses the ability to count that time as part of the tip credit.

This rule meant that employers had to meticulously track how their employees spent their time, which created significant administrative challenges and increased the risk of lawsuits over wage violations.

Why Did the Court Strike Down the Rule?

The Fifth Circuit Court of Appeals found that the DOL overstepped its authority with the 80/20/30 rule. The court’s decision on August 23, 2024, stated that the rule was “arbitrary and capricious” and didn’t align with the FLSA’s intent. The court pointed out several key issues:

  • Misinterpretation of Occupation: The court emphasized that the FLSA allows the tip credit for any employee “engaged in an occupation” where they receive more than $30 per month in tips. The rule’s focus on individual tasks rather than the overall occupation was inconsistent with this definition.
  • Unnecessary Burden: The rule imposed an administrative burden on employers by requiring them to track every minute an employee spent on different types of work.
  • Conflict with Congressional Intent: The court argued that Congress did not intend to have such a detailed breakdown of tasks when it comes to applying the tip credit. Instead, the focus should be on whether the employee’s overall job involves earning tips.

What Does This Mean for Employers?

  1. Relief from Inconvenient Requirements: Employers no longer have to follow the 80/20/30 rule. This means they do not need to keep such detailed records of how their tipped employees spend every minute of their workday.
  2. Back to Previous Practices: Employers can now go back to the simple practice of using the tip credit as long as employees are primarily engaged in a job where they customarily receive tips. This aligns with the original intent of the FLSA.
  3. Reduced Legal Risk: With the rule elimination, there’s a reduced risk of facing legal action over violations related to tip credits. This is especially significant for small businesses that may not have the resources to handle complex wage and hour disputes.
  4. Stay Informed and Updated: Although this ruling is favorable for employers, it’s important to stay updated on any further developments. The DOL might respond to this court decision with new regulations or guidance.
  5. Review Your Practices: Employers should review their current policies and ensure they are in line with this new legal landscape. Always seek legal counsel to ensure compliance and avoid potential pitfalls.

 

What’s Next?

While this decision is a win for hospitality employers, the battle may not be over. The DOL could appeal the ruling or attempt to introduce new rules that align with the court’s decision. In the meantime, employers should continue to monitor developments and adjust their practices accordingly.