In Restaurant Law Center et al. vs. US Department of Labor, Case 1:21-cv-01106-RP (W.D. Tex. July 6, 2023), the Texas Federal District Court granted summary judgment in favor of the DOL, upholding the DOL’s December 2021 regulations on the “80/20 Rule,” denying the plaintiffs’ summary judgment motion, and refusing to enter the requested preliminary injunction against the regulation. The key takeaway is that, unless the Fifth Circuit reverses the District Court, the 80/20 Rule will remain in effect. Restaurant owners and other employers of tipped employees must continue to ensure compliance with the 80/20 Rule through careful record keeping and supervision of employee duties.

Background of the 80/20 Rule

Under the Fair Labor Standards Act, an employer may pay an employee “engaged in a tipped occupation” cash wages at a special subminimum wage of $2.13/hour and take a “tip credit” using tips received by the employee to make up the difference between this wage and the regular $7.25 minimum wage. For purposes of when an employer may use the “tip credit”, the US Department of Labor revised the regulations in December 2021 to use a “functional” test based on an employee’s job duties. Under the Rule, the employer may use the tip credit for “tip-producing work” and “directly supporting work,” so long as 80 percent or more of the employee’s work is tip-producing, and no more than 20 percent is directly supporting work during the seven-day workweek. The Rule also requires employers to stop using the tip credit once an employee engages in “supporting work” for a period exceeding 30 continuous minutes, until such time as the employee begins engaging in tip-producing work again.

Litigation over the 80/20 Rule

The Restaurant Law Center and the Texas Restaurant Association challenged the 80/20 Rule and sought a preliminary injunction. They prevailed at the Fifth Circuit in April 2023, winning a reversal of the denial of a preliminary injunction. Following the remand, the parties filed cross motions for summary judgment. The Texas District Court addressed the motions as well as the preliminary injunction motion in its decision on July 6, 2023.

According to the District Court, the DOL promulgated the Rule based on its explicit authority granted by Congress to make rules that have the force of law. After reviewing the statutory text and legislative history of the FLSA, the District Court held that the statutory phrase “employees engaged in a tipped occupation” was ambiguous. Thus, the DOL may issue regulations seeking to clarify the ambiguity.

The District Court next concluded that the Rule was a permissible construction of the FLSA and was not arbitrary, capricious, or manifestly contrary to the statute. The District Court upheld the DOL’s decision to create a “functional test” to define what it means to be an “employee engaged in a tipped occupation.” The District Court ruled it was reasonable to treat work involving direct service to customers differently from work involving preparing to serve customers, providing this example:

[W]hen a bartender retrieves a requested beer from the back storeroom at the request of a customer sitting at the bar, or when a server wipes down a spill on a customer’s table, the employee is thus performing a task directly for a customer for which he or she will receive a tip. This work may be classified according to the Rule as “tip-producing.” In contrast, when an employee performs work that does not produce tips, but directly supports customer service, such as retrieving beer from the stockroom to stock the bar or when a server cleans a table between customers, these tasks are properly categorized as “direct supporting” according to the Rule.

According to the District Court, the distinction between the tasks is not arbitrary and meets the “minimal standards of rationality” necessary for preserving a regulation against challenge.

The District Court finally addressed issues relating to the request for a preliminary injunction. Previously in April 2023, the Fifth Circuit had reversed the District Court’s denial of a preliminary injunction. The District Court held that, since the Rule was a reasonable interpretation of an ambiguous statute issued by an agency with full authority, the plaintiffs had failed to show likelihood of success on the merits. This alone was grounds for denial of the preliminary injunction.

The District Court went further and addressed the two other components of the preliminary injunction analysis, that is, whether the “balance of equities” and “public interest” weigh in favor of or against granting the injunction. The District Court noted that the Fifth Circuit found that plaintiffs would suffer “irreparable harm” because their costs to comply with the Rule are non-recoverable. But according to the District Court, those compliance costs do not automatically outweigh the harm granting an injunction would create for the government and the public.

The District Court noted that it was not clear that complying with the Rule – e.g., costs of monitoring employee work time - would impose any greater costs than complying with the FLSA as a whole under existing guidance prior to the Rule. The District Court also noted that the majority of costs identified by the plaintiffs were for familiarization and adjustment, which have already been incurred over the last 18 months. Granting an injunction now would not recoup those costs, and probably would force employers to incur more costs to adapt to any new rule.

Finally, the District Court held that the compliance costs “do not outweigh the substantial harm that DOL may endure from essentially starting from scratch on a rule that serves to codify long-standing guidance.” The District Court particularly noted that the Rule essentially codified DOL guidance that had been in place since 1988 and that had been cited favorably by circuit courts of appeal over the last 35 years.

Takeaways

The consequences of violating the 80/20 Rule – loss of the ability to use the “tip credit” – are particularly grave for employers of tipped employees. For employees otherwise subject to the regular $7.25 minimum wage, this means the liable employer must pay the tipped employee $5.12 per hour as backpay plus an equal amount of liquidated damages.

To best comply with the 80/20 Rule, employers should implement several management practices.

• Employers should make every effort to schedule tipped employees’ “directly supporting work” in segments of 30 continuous minutes or less and for less than 20% of the expected work for a workweek.
• Employers should implement time recording systems that can keep track of when a tipped employee is engaged in “directly supporting work.” The timekeeping systems should assist employers with determining whether the employee has exceeded the 20% threshold for the workweek or worked in excess of 30 continuous minutes.
• Managers and supervisors should take steps to correct or discipline employees who disobey instructions against working over 30 continuous minutes on “directly supporting work.”
• Employers must take care to pay employees the applicable regular minimum wage when required by the 80/20 Rule, even if the employee violated employer instructions or policies concerning the amount of allowable "supporting work."