Legal Battles Cloud Tipped Wage Limits After Fifth Cir. Ruling

The Fifth Circuit’s decision to vacate a US Department of Labor rule limiting when employers can use the tip credit means they will have fewer restrictions on the types of activities tip-earning workers can perform while still being paid less than the minimum wage.

But whether the decades-old guidance that informed the bulk of the proposal is still intact is an open question, some attorneys say.

The Ninth and Eighth Circuits have found that the DOL’s past 80/20 guidance—which refers to the limits on how workers spend their time on the clock—was reasonable prior to the Fifth Circuit’s ruling.

“So it’s not totally clear what the state of the law is at the moment, outside of the Fifth Circuit,” said Michael Steinberg, an associate at Seyfarth Shaw LLP.

When asked about the current status of the 80/20 guidance, a DOL spokesperson said that the agency “continues to review the decision.”

However, that won’t stop employers from using the ruling to argue that the 80/20 rule no longer exists, Steinberg said.

Last week, the appeals court invalidated a 2021 Biden administration rule that required employers to pay tip-earning workers the full minimum wage when doing non-tipped duties, citing the high court’s Loper Bright Enterprises decision.

Guided by the high court’s direction for courts to use their own independent judgment to determine the lawfulness of an agency action, as opposed to deferring to an agency’s reasonable interpretation of a statute, the three member appeals panel found that the tip rule violated administrative law twice, by going beyond Congress’ intent with the law and being inconsistent with the Fair Labor Standards Act.

The ruling, which vacated the regulation and enjoined the agency from enforcing it nationwide, is expected to be the first of many to strike down rulemakings at the DOL and other federal agencies, and provides some insight into how the Loper Bright precedent will be applied by the federal courts.

“The Department of Labor’s opinion on the 80/20 rule has oscillated since 1988 based on who happens to be president,” said Eric R. Magnus a principal and office litigation manager at Jackson Lewis’ Atlanta office. For those kind of “new, novel” rules like the 2021 rule, “Loper is going to have a massive impact, because not only is the DOL’s opinion not entitled to deference, the DOL’s opinion hasn’t been consistent,” Magnus said.

80/20 Roots

The “80/20 guidance,” which first appeared in the Wage and Hour Division’s field operations handbook for its enforcement staff in 1988 and later in several guidance documents, stated that employers can’t take a tip credit when workers spend a substantial amount of time “in excess of 20%" doing preparation work or maintenance, as opposed to tip-earning activities.

That guidance underpinned part of the now-defunct tip-credit rule issued by the DOL in 2021, which required employers to pay tipped workers the full $7.25 federal minimum wage when they engaged in tip-supporting work for more than 30 minutes straight, or for more than 20% of their workweek. Under the FLSA, employers can pay tip-earning workers as little as $2.13 an hour, so long as they earn $30 a month in tips.

The rule also outlined “tip producing” and “directly supporting” job duties that would be permitted while an employer took the tip credit. Other work that didn’t fall into this category didn’t qualify for the tip credit and must be paid at the full minimum wage.

The Biden administration rule had been in place for nearly three years before the Fifth Circuit’s decision earlier this month, creating potential whiplash for employers who may have reprogrammed their payroll software or time keeping systems and now have to explain to their staff why they’re earning less on their paycheck.

Businesses had long complained about the feasibility of keeping tabs on when tip-earning employees’ sidework crosses over 20% of their duties in a workweek, and the Biden rule’s new 30 minute limit on that side work, attorneys said.

The rule required employers “to keep track of and count how many minutes somebody might be performing a task that is not tip related,” said David Jordan, who is co-chair of Littler Mendelson’s hospitality industry group. “And you can imagine, within that paradigm, there’s hundreds of sub questions, what is a tip related task? How do you actually track the minutes?”

Employers will no longer have to keep track of the time spent on side work tasks following the ruling, attorneys say.

Carolyn Richmond, chair of the Hospitality Practice Group at Fox Rothschild LLP, said, however, employers shouldn’t toss out their stopwatches just yet because many state laws have their own 80/20 requirements or restrictions on the tip credit.

“It is imperative for operators to confirm whether they are also subject to a comparable state law,” she said. “It is certainly safe to say that this week restaurants were celebrating one less regulatory obstacle to operating a food service business.”

The Fifth Circuit said its decision vacating the 2021 rule doesn’t affect the DOL’s 1967 “dual jobs” regulation, which the court said focuses “on ‘whether the employee performs tasks unrelated to his or her tipped occupation,’ not the ‘amount of time’ spent on untipped tasks.”

But supporters of the rule say that the decision will drive more employers to classify workers as tip-earning, because there’s no longer limits on idle time or side work.

“Tipped workers are already subject to high rates of wage theft. Vacating the tip rule will lead to a higher proportion of workers being incorrectly classified as tipped workers and therefore more likely to suffer wage theft,” said David Weil, the former wage and hour chief during the Obama administration.

“The Fifth Circuit decision in this case is a troubling indicator of the future: Protecting workers under our laws is inherently complicated because of the varied nature of the workplace,” he added. The Loper Bright decision “will lead to more uncertainty for both businesses and workers and lead to even more litigation that will not benefit either party.”

Dead or Alive?

The fight over the 80/20 rule may not be over yet.

The DOL has the option to request en banc review of the case by the full Fifth Circuit, or could appeal the case to the Supreme Court, although the latter option is unlikely given the conservative majority on the high court.

Nevertheless, attorneys predict that the argument will be made to the courts that while the 2021 rule is no longer in place, the 80/20 limit itself still exists.

“The lawyers that represent employees in some of this large litigation almost certainly will try to argue that this rule somehow survives,” Jordan said. “It doesn’t survive in the context of the final 2021 rule, but that somehow the sub regulatory guidance or the interpretations of this 1967 dual jobs regulation means that some version of this 80/20 rule still applicable.”

The 80/20 framework is still “arguably applicable in certain other parts of the country,” added Steinberg. “That will be subject to challenge though, obviously, because employers in the restaurant and hospitality sector, armed with this new Fifth Circuit decision, will certainly argue that that 80/20 guidance is not valid.”

But Magnus disagreed, suggesting that the Biden administration wouldn’t have promulgated a formal rule if they thought that the prior 80/20 guidance was sufficient for their enforcement efforts.

“I don’t think the Department of Labor, if you gave them truth serum, believes that lesser forms of guidance are enough to make this effectively something the courts are going to defer to,” Magnus said.