Fifth Circuit Strikes Down Department of Labor’s Final Rule on Tip Credits

In a major victory for restaurant owners across the nation, the United States Court of Appeals for the Fifth Circuit recently ruled against the Department of Labor's (DOL) controversial tip credit regulations. This decision, in Restaurant Law Center v. U.S. Department of Labor, holds that the DOL's 2021 Final Rule, which restricted the use of tip credits, was both "arbitrary" and "contrary to law" under the Administrative Procedure Act.

Understanding the Tip Credit

Under the Fair Labor Standards Act (FLSA), employers in industries like restaurants are allowed to pay tipped employees a reduced hourly wage, as long as tips make up the difference to reach the federal minimum wage. This is known as the "tip credit." For decades, the regulations surrounding the tip credit were stable, allowing restaurant owners to structure payroll effectively.

However, in 2021, the Department of Labor issued a new rule that severely restricted when and how restaurant owners could apply the tip credit. The rule imposed limits on how much time employees could spend on duties not directly producing tips, such as setting tables or preparing food, while still receiving the lower tipped wage. If an employee spent more than 20% of their time on these “non-tipped” activities, or worked more than 30 minutes consecutively on them, the employer could no longer claim the tip credit.

The Fifth Circuit’s Ruling

In its ruling, the Fifth Circuit found that the Department of Labor’s rule was not only arbitrary but also inconsistent with the language of the FLSA. The court emphasized that the tip credit applies to employees engaged in a “tipped occupation,” not based on individual tasks performed throughout the day. The court also noted that the DOL's additional 30-minute limit had no legal basis in the FLSA, further deeming it arbitrary.

The court explained that under the FLSA, the focus should be on whether the employee is engaged in an occupation that customarily receives tips, not on micromanaging specific duties that may or may not directly result in tips. The opinion pointed out the absurdity of the DOL's approach, where a server setting tables for 31 minutes would lose their “tipped” status, despite still being engaged in the core duties of their occupation.

Implications for Restaurant Owners

For restaurant owners, this ruling is a game changer. The decision restores the traditional understanding of the tip credit, allowing more flexibility in how tipped employees can divide their time between tipped and non-tipped duties without risking the loss of the tip credit. Restaurant owners no longer need to track their employees' activities down to the minute, providing much-needed relief from the administrative burdens imposed by the 2021 rule.

This case is also significant for businesses beyond the restaurant industry, as the Fifth Circuit's decision highlights the limits of federal agency power. The court’s ruling reaffirms that agencies like the DOL cannot create new rules that overstep statutory boundaries or impose unreasonable burdens on employers.

Looking Ahead

With this ruling, the Department of Labor's 2021 Final Rule has been vacated, meaning it is no longer enforceable. While the DOL could attempt to draft a new rule that complies with the court's guidance, for now, employers can breathe easier knowing that they can continue to utilize the tip credit as it was originally intended under the FLSA.

At Massey & Duffy, we focus in labor law and are here to help businesses navigate these and other regulatory challenges. If you have questions about tip credits, wage laws, or how this ruling might impact your business, contact us today for a consultation.