Seyfarth Synopsis: After a remand from the Fifth Circuit, a trial court has upheld the validity of the Department of Labor’s 2021 regulation codifying the 80/20 rule, raising the possibility of another appeal.

Welcome to the inaugural edition of Tips from Seyfarth, where we discuss developments in the world of wage and hour law of particular importance to the restaurant and hospitality sectors.  We hope you find the content useful; if you do, and would like to receive our regular updates, we invite you to subscribe to Seyfarth’s Wage and Hour Litigation Blog.

For our kickoff of Tips, we write with an update in the latest challenge to the federal Department of Labor’s “dual jobs” regulation codifying the job duties requirements for employers who seek to use the tip credit to satisfy their minimum wage and overtime obligations for tipped workers.

By way of background, under federal law (and many states’ wage and hour laws), employers may take a tip credit to satisfy their minimum wage and overtime obligations for tipped employees. The tip credit is a longstanding and common component of compensation for service workers in the restaurant and lodging sectors. One thorny question that often arises: who counts as a tipped employee? The Fair Labor Standards Act (FLSA) defines a tipped employee as an “employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” Simple enough in theory, but the concept can be hard to apply in practice, because service workers often engage in both tip-generating work and non-tip-producing work. For example, a server performs non-tip-producing work when he or she cleans the restroom, or rolls silverware at the end of a shift. How the law deals with these scenarios matters a great deal, because a restaurant or hotel can only take a tip credit if an employee is considered to be engaged in a tipped “occupation.”

Beginning in 1988, the federal DOL sought to address this situation by updating the enforcement guidance in its Field Operations Handbook (FOH) to include the so-called “80/20 rule”:  DOL field investigators were advised that the tip credit is not available when tipped employees spend more than 20% of their hours worked on non-tip-producing activities.  In November of 2018, the Department issued an opinion letter walking back the 80/20 rule approach, stating that there was no ceiling on the amount of non-tip-producing work an employee could perform so long as the tasks were performed at the same time as the employee’s direct tip-producing work (or for a reasonable amount of time immediately before or after). In December of 2020, DOL issued a final rule adopting largely the same approach, but that rule never went into effect—DOL withdrew the regulation in 2021.

Then, on October 29, 2021, DOL issued a new regulation that codified the 80/20 rule that had been featured in the FOH since 1988.  It also added a new requirement of great concern to the restaurant and lodging industries: in addition to the requirement that non-tipped work be no more than 20% of work performed in the workweek, non-tipped work could not be performed for continuous periods in excess of thirty minutes.

In February of 2022, organizations representing the national and local restaurant industries sought a preliminary injunction against the DOL’s new 80/20 regulation. The District Court denied the preliminary injunction after concluding that the plaintiffs’ members would not suffer irreparable harm from being forced to comply with the new rule. On appeal, the Fifth Circuit reversed in a decision issued on April 28, 2023, concluding that plaintiffs showed irreparable harm in the form of unrecoverable compliance costs. So, the case went back the District Court to consider the merits of the plaintiffs’ challenge to the 80/20 regulation.

Despite the Fifth Circuit’s evident skepticism of the new 80/20 rule’s validity, the District Court worked promptly on remand, and on July 6, 2023, it issued a decision upholding the regulation’s validity. In short, the court concluded that the statutory text— “engaged in an occupation”—is ambiguous.  Accordingly, under the Supreme Court’s Chevron doctrine of agency deference, the court upheld the DOL’s 80/20 rule because it was based on what the court determined to be a “permissible construction of the FLSA.” We expect that the plaintiffs will appeal once again to the Fifth Circuit, this time placing the validity of the regulation squarely before a federal appellate court. In the meantime, though, restaurant and hospitality employers should carefully review their current practices for monitoring compliance with then new 80/20 rule – especially the new 30-minute limitation on continuous performance of non-tip-producing work.