How the FLSA “tip credit” is applied has been pushed and pulled numerous times over the last two decades. In the latest volley, the Fifth Circuit entered an order on August 23, 2024, vacating the Department of Labor’s 2021 Final Rule on how employers pay wages for workers that receive tips. The court’s initial ruling may be fallout from the U.S. Supreme Court’s recent overturning of Chevron deference to federal administrative agencies. However, some of the discussion reflects movement toward focusing on the exact text of federal laws in the employment context.

Making That Minimum Wage

Under the FLSA, a business can use a “tip credit” when paying an hourly employee who regularly receives tips. The law provides that an employer can pay a tipped employee $2.13/hour and allow the tips that the employee receives to make up the difference to the $7.25/hour minimum wage. This means that if employees, say servers at a restaurant, do not receive enough tips to bring their hourly pay up the minimum wage, the employer is on the hook to make up the difference.

Over the years, the Department of Labor has issued numerous regulations to address the fact that many tipped employees also regularly do work that does not generate tips. For example, a bartender may also be required to restock the bar, or a server may have to roll silverware or bus tables. The DOL feared that employers may take advantage of the tip rule to sneak more non-tipped tasks into the workday of a tipped employee. In the late 1980s, the DOL came up with the 80/20 Rule – an employer could use the tip credit and pay a lower hourly rate only if the employee did non-tipped work for 20% or less of the work time. For example, a server could only roll silverware or bus tables for 20% or less of their shift. The rest of the shift had to be tip-generating work.

The tipping rules tend to go back and forth with changes between Democrat and Republican administrations. In 2021, the DOL issued a Final Rule that put the 80/20 split in place and went on to dictate that the tip credit did not apply to any continuous amount of non-tipped work over 30 minutes in a daily shift. For any work done over that split for the week, the employer had to pay the full minimum hourly wage.

Ruling on the Final Rule

Not long after the Final Rule was issued, the Restaurant Law Center and the Texas Restaurant Association filed suit to enjoin the rule, claiming it was in violation of the direct text of the FLSA and was arbitrary and capricious under the Administrative Procedure Act. The lower court upheld the Final Rule, following the Supreme Court’s direction in the 1984 Chevron case that courts were to defer to federal agencies when interpreting certain aspects of federal law. The plaintiffs appealed to the Fifth Circuit.

In between the time that the lower court ruled and the Fifth Circuit took up this issue, the Supreme Court issued an opinion in Loper Bright Enterprises v. Raimondo. In that case, the Supreme Court specifically held that courts “may not defer to an agency interpretation of the law simply because the statute is ambiguous.”

The Fifth Circuit recounted the history of the flip-flopping between various versions of the tip rule under differing administrations. They also noted how other circuit courts had evaluated DOL regulations similar to this Final Rule. Ultimately, the court said that they were now required to “independently interpret the statute and effectuate the will of Congress.” In looking at the text of the FLSA, the court turned to the definition of a tipped employee: “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” The court held that this text means that you look at the job as a whole to determine whether it is an occupation where you receive tips – not at individual tasks under that occupation, as the Final Rule does. 

The court notes that the plaintiffs were not challenging the “dual jobs” part of the regulation. If an employee has to do two unrelated and separate occupations while at work – for example “maintenance work and waitressing” — those are two different occupations that have to be considered separately for hourly compensation. The court rejected the Final Rule’s “functional” test. As such, if an employee receives more than $30 amonth in tips in an occupation, the employer can take the tip credit for the time the employee is in that occupation.

The court went on to find that the Final Rule was arbitrary and capricious because it improperly tied the tip credit to whether an employee was performing specific tasks under the tipped occupation. Drawing that line, according to the Fifth Circuit, was not connected to the purpose of the statute. As an example, the court noted that under the Final Rule, a bartender who went into the cooler to get a specific type of beer for a requesting customer would fit under the tip credit, but the same bartender later going into the cooler to get an entire case of beer to stock the bar would not. Both jobs, however, were part of the bartender occupation, which met the “tipped employee” definition under the statute. Therefore, the court found the DOL’s Final Rule arbitrary and capricious.

Tips on Tipped Employees

The Fifth Circuit entered an injunction vacating the DOL Final Rule, so it no longer applies. According to the ruling, if a business has an employee engaged in a specific occupation that customarily and regularly receives more than $30 a month in tips, the employer can take the tip credit and pay an hourly rate of $2.13. It is important to note that if the employee does not make enough tips to get up to the minimum hourly wage of $7.25, the employer has to make up the difference.

The big change here is that an employer no longer has to keep track of a tipped employee’s breakdown of time doing supporting work for the tipped occupation, such as rolling silverware, bussing tables, etc. However, if an employee’s occupation is primarily those non-tipped activities, they do not qualify for the tip credit. In addition, if a tipped employee engages in a completely separate type of activity, like helping to put a new roof on the restaurant, that is not considered doing a tipped employee occupation and does not qualify for the tip credit.