Executive Summary: On July 6, 2023, a federal district court upheld the U.S. Department of Labor’s (DOL’s) regulations on the type and amount of work that tipped employees may perform while being paid the reduced minimum wage under the tip credit provisions of the federal Fair Labor Standards Act (FLSA). The tip credit provisions in the FLSA permit an employer to apply a tip credit and pay a subminimum wage of $2.13 if the tips to the employee are sufficient to result in the employee earning the minimum wage of $7.25 per hour. Judge Robert Pitman in the Western District of Texas granted the defendant DOL’s motion for summary judgment in the case brought by the Restaurant Law Center and Texas Restaurant Association and denied the plaintiffs’ motion for a preliminary injunction and motion for summary judgment seeking to invalidate the regulations limiting the type and amount of work that can be performed in a tipped occupation for which the lower minimum wage is paid. See Restaurant Law Center v. United States Department of Labor, Case 1:21-cv-01106-RP (July 6, 2023).

The FLSA Tip Credit Amendment and Subsequent Regulations and Rules

In 1966, Congress amended the FLSA to provide that under certain circumstances an employer could pay a reduced tip credit minimum wage to “tipped employees” (defined as those employees engaged in an occupation in which the employee customarily and regularly receives more than $30 a month in tips) where the tips and the tip credit minimum wage (now $2.13) equal or exceed the full minimum wage under 29 U.S.C. § 203(m)(2)(a).

In 1988, the DOL issued guidance to address its concern that restaurants could use the tip credit and the dual jobs regulation to subsidize non-tipped work and pay employees less “across the board.” This guidance (that was not included in a regulation but came from prior opinion letters) became known as the “80/20 Rule” and permitted a tip credit for the time spent on duties related to the tipped occupation even if not directly related to tip generating activities if such tasks did not exceed 20 percent of the employee’s work time.

In 2018 the 80/20 Rule Guidance was rescinded to be replaced by new guidance that never went into effect because, in 2021, the DOL withdrew that proposed new guidance and replaced it with what is now 29 C.F.R. 531.56(e) (modifying the dual jobs regulation) and 531.56(f), restricting what work is included in a tipped occupation and what work is not included in a tipped occupation (and therefore a dual job). The regulation subparts at issue in the case, 29 C.F.R. 531.56(e) and 29 C.F.R. 531.56(f), provide both quantitative and qualitative limitations on the tasks of a “tipped employee” under the FLSA.

The Court Case Challenging Regulations

The Regulations went into effect on December 28, 2021, and the plaintiffs filed suit, seeking a nationwide injunction barring the regulations. The court denied that motion for a failure to establish irreparable harm, and the plaintiffs appealed to the Fifth Circuit Court of Appeals, which reversed and remanded the decision, holding that the plaintiffs had made a showing of irreparable harm by showing unrecoverable compliance costs. When the case returned to the district court, both sides presented summary judgment motions seeking a final decision in their favor, and the plaintiffs continued their pursuit of the injunction.

At issue in the Texas case were subsections (e) and (f) of the DOL’s revisions to 29 C.F.R. 531.56 titled “More than $30 a month in tips.” The revised regulation modified the dual jobs subpart (e) and added a new subpart (f) that provides that the reduced tip credit rate can only be paid for tip-producing work and for amounts of “directly supporting work” limited to no more than 20 percent of the tipped employee’s work week and no more than 30 continuous minutes. Any work that falls outside of the tip-producing work definition and outside of the limits of directly supporting work is a dual job under 531.35(e), for which the full minimum wage must be paid. The regulation provides illustrative examples of activities that are considered “directly supporting work” in certain tipped occupations including, in the restaurant context: refilling salt and pepper shakers and condiment containers, rolling napkins and silverware, stocking the busser station, wiping down equipment in the service alley and vacuuming under dining tables. 29 C.F.R. 531.56 (f)(3)(ii). The regulation also provides illustrative examples of “work that is not part of the tipped occupation,” stating, for example, that preparing food including salads is not part of the tipped occupation of a server and cleaning the kitchen or bathroom is not part of the tipped occupation of a server or a busser. 29 C.F.R. 531.56(f)(5)(ii).

The plaintiffs argued that the DOL’s rules in 29 C.F.R. 531.56(e) and (f) violated the Administrative Procedure Act as arbitrary and capricious and not in accordance with the law. While this is a deferential standard for a party to challenge, the plaintiffs argued that the rule was arbitrary, capricious, and inconsistent with the plain language of the FLSA because its application of the tip credit depends upon whether the specific job duties “directly and immediately produce tips” rather than considering “the job as a whole.”

In upholding the regulations, the court disagreed with the plaintiff’s arguments and followed the DOL’s arguments under Chevron, USA v. National Resources Defense Council, Inc., 407 U.S. 837 (1984) holding that: (a) the DOL’s interpretation at issue was made in the exercise of its authority to make formalized pronouncements of broad application such as official rulemaking in accordance with the 1966 FLSA Amendments on the tip credit and its rulemaking authority; and (b) that the FLSA is ambiguous in failing to specify the particular work associated with a tipped occupation and in failing to clarify when such an employee may be considered to be engaged in that work based on the text, structure and purpose, and legislative history of the FLSA and tip credit amendments. Thus, it agreed with the DOL that the DOL was tasked by Congress with working out the details as to what it means to be engaged in an occupation where one regularly received tips.

In performing this task, the court stated that, “This task includes looking at the specific work that employees are occupied with and whether that work can be considered part of the tipped occupation.” The court agreed with the DOL that the purposes of the FLSA and its amendments include (i) ensuring that employees who are paid a reduced wage receive the value of the tips they earn from tip-producing work and (ii) forbidding employers from appropriating for themselves tips received by the tipped employees. Having found the FLSA ambiguous or silent on the treatment of employees who are paid more than $30 per month in tips but who also participate in non-tipped duties or multiple occupations, the court found that the DOL’s Rule set forth in the regulation was based on a permissible construction of the FLSA. Applying the deferential standard, the court concluded the agency’s action was not arbitrary and capricious and it conformed to “minimal standards of rationality.” Here, the court held that the rule’s purposes include ensuring that the workers do not receive a reduced cash wage when they are not engaged in a “tipped occupation” and addressing the practical concerns of employer in complying with the Rules requirements.

Finally, the court rejected plaintiffs’ argument that the major questions doctrine was implicated to limit the department’s regulatory power in part because the cost of compliance to the industry was estimated by the DOL to be $183 million annually, where cases finding a major question involved billions.

Careful and Costly Compliance and Monitoring Continues

Until and unless the decision is reversed or otherwise controlling authority changes the current regulatory landscape, restaurants, bars, and other employers paying employees with the tip credit minimum wage should continue to monitor their work practices and policies and train their managers to provide limits on the type and duration of work duties. This includes ensuring that employees being paid the tip credit wage do not engage in the types of work that the DOL describes as directly supporting work such as rolling napkins and silverware, wiping down service areas, refilling condiments and similar work that supports tipped work for more than 30 consecutive minutes or for more than 20 percent of the tipped employee’s workweek in the tipped occupation. Such employers should also continue to ensure that their policies, practices, and training do not permit work that the DOL defines as not providing service to customers for which tipped employees receive tips and is not directly supporting tip-producing work (or that exceeds the 30 minute/20 percent limits) unless the employee is paid the full minimum wage for that work. These tasks include preparing food, cleaning the kitchen or bathroom, or similar duties. Depending on the individual circumstances of the workplace and the extent of directly supporting work and work that does not directly support tip-producing work, employers may find it more efficient and risk averse to employ workers that only perform these functions and are paid at least the full minimum wage.