On August 23, 2024, the U.S. Court of Appeals for the Fifth Circuit made a significant decision in Restaurant Law Center v. U.S. Department of Labor. The court vacated the Department of Labor’s (DOL) 80/20/30 Rule, which has been a point of contention for employers relying on tip credits under the Fair Labor Standards Act (FLSA). This ruling provides clarity and relief to many employers in the hospitality industry, particularly those within the Fifth Circuit’s jurisdiction, which includes Texas, Louisiana, and Mississippi.
For additional information regarding employment laws and to find out how they could impact your business, please contact our Managing Partner, Richard Liu, at richard.liu@consultils.com.
What Is the 80/20/30 Rule?
Effective since December 2021, the 80/20/30 Rule imposed stringent restrictions on the amount of time tipped employees could spend on tasks that do not directly generate tips, while still allowing employers to pay them using the tip credit rate. The rule classified work into three categories:
Tip-producing work: Tasks that directly serve customers and generate tips, such as taking orders or mixing drinks.
Directly supporting work: Tasks that assist tip-producing activities but do not directly earn tips, like setting tables or rolling silverware.
Non-tipped work: Tasks unrelated to the tipped occupation, such as cleaning the kitchen or restocking supplies.
The rule included the following limitations:
20% Limit: Tipped employees could spend no more than 20% of their workweek on directly supporting tasks.
30-Minute Rule: Employees could not spend more than 30 consecutive minutes on directly supporting tasks without forfeiting the tip credit for that time.
Non-tipped work: Any time spent on tasks unrelated to the tipped occupation required full minimum wage payment, with no tip credit allowed.
Why Did the Fifth Circuit Vacate the Rule?
The Fifth Circuit found that the 80/20/30 Rule conflicted with the FLSA’s text and intent. The court criticized the rule for fragmenting an employee’s occupation into individual tasks rather than considering the occupation as a whole. Under the FLSA, a tipped employee is defined by their occupation—specifically, whether they customarily and regularly earn more than $30 per month in tips—without considering the time spent on specific tasks.
The court also noted that the DOL’s interpretation of the rule had fluctuated over the years, causing confusion and instability for employers. Consequently, the Fifth Circuit deemed the rule arbitrary and capricious and vacated it.
In making its decision, the court also referenced the Supreme Court’s recent ruling in Loper Bright Enterprises v. Raimondo, which limited the extent to which courts defer to agency interpretations. This further supported the court’s decision to invalidate the 80/20/30 Rule.
Implications for Employers
This ruling has significant implications for employers, particularly in the hospitality industry:
Simplified Compliance: Employers are no longer required to meticulously track the time employees spend on non-tipped tasks within their tipped roles. This reduces administrative burdens and the risk of compliance violations.
Focus on Occupations, Not Tasks: The ruling reinforces that employers should focus on whether an employee is engaged in a tipped occupation, rather than breaking down their duties into individual tasks. As long as the employee is working within a tipped occupation, they can be paid using the tip credit.
State Law Considerations: Employers should remain aware that state laws may impose different or additional requirements. It is essential to ensure compliance with both federal and state regulations, especially in states with stricter rules for tipped employees.
Potential Nationwide Impact: While the ruling directly affects employers in the Fifth Circuit (Texas, Louisiana, and Mississippi), it could influence other courts and prompt challenges to the 80/20/30 Rule in other jurisdictions. Employers nationwide should monitor any developments closely.
Conclusion
The Fifth Circuit’s decision to vacate the 80/20/30 Rule is a positive development for many employers, particularly in the hospitality industry. By shifting the focus from individual tasks to the overall occupation, this ruling simplifies compliance and reduces administrative complexities. However, employers must stay vigilant regarding state laws and potential future changes.
For additional information regarding employment laws and to find out how they could impact your business, please contact our Managing Partner, Richard Liu, at richard.liu@consultils.com.
Richard Liu, Esq. is the Managing Counsel of ILS. He serves clients as a management-side defense lawyer specializing in employment and business litigation. Richard is also an expert on litigation prevention and compliance. He regularly advises Fortune 500 companies and startups on employment, labor, and commercial matters.
Email: richard.liu@consultils.com | Phone: 626-344-8949
*Disclaimer: This article does not constitute legal opinion and does not create any attorney-client relationship.
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