The Fifth Circuit Court of Appeals, Acting under Loper Bright, Invalidates DOL Tip Rule

Background

Under the FLSA, employers are permitted to pay employees $2.13 per hour if employees receive enough in tips to make up the $5.12 per hour difference between the $2.13 hourly rate and the federal minimum wage of $7.25. Rest. Law Ctr. v. United States DOL, 115 F.4th 396, 400 (5th Cir. 2024). Based on this rationale, employers of “tipped employees,” under the FLSA, have counted a portion of an employee’s tips as part of their wages which has been referred to as the “tip credit.”

Going back to 1988, DOL slowly formalized the “80/20” rule in which DOL took the position that the “tip credit” was not available to employers when tipped employees devoted more than 20% of their time to non-tip producing activities. Starting in 2009, the “80/20” rule began to come and go in concert with the changing presidential administrations.

In December 2021, DOL issued their final rule which clarified what it meant to be “engaged in a tipped occupation” under 29 U.S.C. § 203(t) as “tipped occupation” is not a term defined within the FLSA. Rest. Law Ctr. v. United States DOL, 115 F.4th 396, 400 (5th Cir. 2024). The rule provided that an employee is “engaged in a tipped occupation when the employee performs work that is part of the tipped occupation.” 29 C.F.R. § 531.56(f) (2021). Therefore, “[a]n employer may only take a tip credit for work performed by a tipped employee that is part of the employee’s tipped occupation.” Id.

Further, DOL’s final rule created three categories of work: tip-producing work, work supporting the tip-producing work, and work that is not part of the tip-producing work. These categories determined when, and at what rate, an employer had to compensate an employee. Under DOL’s 2021 interpretation of the 80/20 rule, if more than 20% of an employee’s work week is spent on “directly supporting” work, then the employer cannot claim the tip credit for that excess. Moreover, if an employee spends more than 30 minutes on “directly supporting” work, the employer may not claim the tip credit for that excess either.

Restaurant Law Center v. U.S. Department of Labor

Shortly after DOL published the final rule, but prior to the rule taking effect, the Plaintiffs, the Restaurant Law Center and the Texas Restaurant Association, filed a lawsuit in the Western District of Texas seeking to enjoin DOL’s enforcement. Both Plaintiffs are advocacy groups which represent the interests of restaurant owners. In their argument against the rule, the Plaintiffs alleged that smaller restaurants would be unable to comply with such a complicated rule, as it would be nearly impossible to track a worker’s time with that level of specificity to determine when they are engaging in which category of “work.” Plaintiffs also argued procedural defects in the promulgation of the rule such as a failure to comply with the APA. At the district court level, the Plaintiffs were denied their request for injunctive relief and appealed to the Fifth Circuit.

Analyzing DOL’s Final Rule after Loper Bright

The Fifth Circuit first had to consider the impact of the U.S. Supreme Court’s decision in Loper Bright Enters. v. Raimondo before analyzing the case on the merits. 144 S. Ct. 2244 (2024). Under the APA, courts are given authority to set aside agency decisions that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). Before Loper Bright, the Supreme Court applied the Chevron Deference doctrine which required courts to defer to a federal agency’s interpretations, if those interpretations were “permissible,” even when the court would have reached a different interpretation. Rest. Law Ctr, 115 F.4th at 403. As a result of Loper Bright, agencies are no longer owed deference for their interpretations and the judiciary can exercise their own “independent judgment” in interpreting law. Loper Bright, 144 S. Ct. at 2273 (2024) (“Chevron is overruled.”) Therefore, the Fifth Circuit analyzed the final rule under the FLSA without giving deference to DOL’s interpretation.

The Fifth Circuit found the FLSA text to be clear. Although the meaning of “engaged in tipped occupation” was often reinterpreted, the term was not defined within the law, so the Court looked to the “ordinary, contemporary, common meaning,” which the Court found left no room for ambiguity. The Fifth Circuit determined that “engaged in a tipped occupation,” simply meant “employed in a job.” Rest. Law Ctr., 115 F.4th at 405. By applying this ordinary meaning, the Fifth Circuit found that DOL’s rule drew an impermissible and arbitrary line between tip-producing and tip-supporting work that was not supported by the text of the FLSA as it “disaggregated the component tasks of a single occupation.”

Practical Implications

As a result of the Fifth Circuit’s decision, employers no longer need to track what specific work their employees are engaged in throughout the day. After this ruling, an employee is engaged in a tipped occupation if their job includes tips of at least $30 per month, based on the FLSA language. Employers may now simply take a tip credit for any tipped employee.