The Fifth Circuit Court of Appeals’ decision in Restaurant Law Center v. US Department of Labor has invalidated tip credit regulations that went into effect on November 23, 2021, that allowed the US Department of Labor (DOL) to assess civil money penalties against employers that among other things allowed managers and supervisors to keep tips they receive directly from customers only when those tips are based on the service that they directly and solely provide.
For background, the Fair Labor Standards Act (FLSA) allows employers to use a minimum wage tip credit for some non-tip-producing tasks performed by tipped employees, such as waitstaff cleaning tables or making coffee. Historically, the Department of Labor (DOL) enforced an “80/20 rule,” limiting ancillary tasks to 20 percent of a workweek. However, in 2018, the DOL removed this limit to allow more ancillary tasks if done alongside or shortly before or after customer service. In 2020, the DOL aimed to formalize this change, but in 2021 under the Biden Administration, the rule was postponed and replaced with a modified version of the 80/20 rule that stated that ancillary tasks must not exceed 20 percent of the workweek or be performed for more than 30 continuous minutes at a time.
Next Steps
Now that the current standard has been vacated, it is unclear which standard applies (i.e., the pre-2018 standard or the 2018 standard). As a result, employers may need to consult with their legal counsel about how to proceed with establishing a valid tip credit arrangement.
In addition, employers must also be mindful of applicable state laws. While the FLSA allows employers with tipped workers to pay as little as $2.13 per hour and take a credit against the tips earned by the employee to make up the balance of the federal minimum wage of $7.25 per hour, many states have higher minimum wage rates and/or laws regarding tipped workers which may differ from the FLSA. Where federal and state laws differ, employers should adhere to the law that is most beneficial to the employee.
The DOL may appeal this decision. HR Works will continue to monitor this topic and provide updates as more information becomes available.
