Employers Should Prepare for DOL Policy on Tipped Workers to Stay in Effect for Now
The tug of war on the so-called 80/20 rule being waged in the federal courts continues, with the controversial rule remaining intact, at least for now.
In the most recent volley between the two sides, the U.S. District Court for the Western District of Texas concluded that the DOL’s 80/20 rule, which refines how the federal minimum wage applies to tipped employees, was a “permissible construction of the FLSA and is not arbitrary and capricious,” dismissing a challenge to the rule brought by the Restaurant Law Center and the Texas Restaurant Association (RLC).
This latest development may be short-lived, as the RLC will likely make its second trip up to the Fifth Circuit to challenge the ruling. But until the Fifth Circuit renders a decision, the Final Rule remains in force.
After being in continuous effect since 1988, the 80/20 rule’s legal saga began in 2018, when then-President Trump issued an opinion letter withdrawing the rule in favor of the “reasonable time” standard. In 2020, the DOL finalized a rule codifying the rescission, but that rule never took effect following several legal challenges. Meanwhile, in June 2021, the DOL under the Biden administration sought to reinstate the 80/20 rule. The Final Rule, issued on Oct. 29, 2021, seemingly sounded the death knell for the “reasonable time” standard implemented in the 2018 letter. The Final Rule took formal effect on Dec. 28, 2021.
The ink on the Final Rule had hardly dried before the RLC filed suit against the DOL, seeking to prevent the Final Rule’s enforcement. After concluding the RLC had not shown it would be irreparably harmed by the rule, the district court denied RLC’s motion for preliminary injunction. In the 2-1 opinion, the Fifth Circuit reversed the district court’s denial and remanded the case for further proceedings.
While the preliminary injunction was on appeal, both the RLC and DOL moved for summary judgment. Following the Fifth Circuit’s remand, on July 5, 2023, the district court denied the RLC’s motion for summary judgment, again denied the RLC’s motion for preliminary injunction, and issued a final judgment in favor of the DOL.
As the district court reasoned, because the FLSA’s tip credit provisions were ambiguous, the court was obligated to defer to the DOL’s interpretation so long as it was not arbitrary and capricious. Specifically, the court concluded that the FLSA “fails to clarify when [a tipped-]employee may be considered ‘engaged in’ that work,” and that as a result, “These gaps in the text of the statute leave DOL the task of working out the details for how to determine what it means to be ‘engaged in an occupation’ where one regularly receives tips.”
After noting the ambiguity, the district court determined that “the Rule’s explanation of ‘engaged’ in an ‘occupation’ that regularly receives tips, supports the statutory structure of the FLSA and is consistent with the tip-related modification of the term ‘occupation.’” “This modification includes performance of work that is part of the tipped occupation, including tip-producing work that provides services to customers for which the employee receives tips, as well as work that directly supports tip-producing work, if it does not exceed a certain amount of time.” Based on these conclusions, the court upheld the DOL’s Final Rule.
With the district court’s judgment, the Final Rule continues to be enforceable, at least for now. How the Fifth Circuit will rule on the RLC’s anticipated appeal remains to be seen, but in the meantime, employers should make sure their policies comply with the Final Rule. Please contact Stephanie Poucher or any member of Phelps’ Labor and Employment team if you have questions or need compliance advice and guidance.
