Fifth Circuit Vacates The U.S. Department Of Labor’s Tip Credit “Final Rule”

By Gerald L. Maatman, Jr., Jennifer A. Riley, Emilee N. Crowther, and Derrick Fong-Stempel

Duane Morris Takeaways: In Restaurant Law Center et al v. U.S. Department of Labor, No. 23-50562, 2024 WL 3911308 (5th Cir. Aug. 23, 2024), the Fifth Circuit reversed a decision of Judge Robert L. Pitman of the U.S. District Court for the Western District of Texas that had upheld the U.S. Department of Labor’s final rule that stated that an employer could only take a “tip credit” against the federal minimum wage for work performed by a tipped employee that was part of the employee’s tipped occupation. The Fifth Circuit held that, pursuant to the U.S. Supreme Court’s holding in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244, 2273 (2024) (which the Fifth Circuit expressly noted was rendered after Judge Pitman’s trial court decision), it was not required to defer to the DOL’s interpretation of the Federal Labor Standards Act. Accordingly, it found the Final Rule contrary to the express language of the FLSA, and that it should be vacated because it was arbitrary and capricious.

This case previews the likely new federal circuit court regime regarding agency interpretations of ambiguous statutes post-Loper Bright. The ruling is also a required read for all hospitality industry organizations.

Case Background

The Fair Labor Standards Act (“FLSA”) permits employers to take a “tip credit” when paying the wages of any “tipped employee,” such that employers may pay tipped employees $2.13 per hour “under the theory that a large portion of such employees’ total earnings comes from tips.” Id. at *2. If the difference between the $2.13 wage and the general minimum wage of $7.25 per hour is not paid by tips, the FLSA requires the employer to pay the remainder to ensure that the tipped employee makes at least $7.25 an hour. Id.

The DOL is permitted to promulgate rules interpreting and clarifying the FLSA, and issued an 80/20 guidance concerning the tip credit in its sub-regulatory Field Operations Handbook in 1988. Id. at *3. The 80/20 guidance provided that an employer was permitted to take a full tip credit for employees that provided both tipped and non-tipped work, so long as the employee’s non-tipped work did not constitute more than 20% of that employee’s work. Id.

In 2021, the DOL issued a “Final Rule” concerning the 80/20 guidance, which mandated that “[a]n employer may only take a tip credit for work performed by a tipped employee that is part of the employee’s tipped occupation.” Id. at *4 (citing 29 C.F.R. §531.56(f) (2021)). Notably, the term “tipped occupation” is not defined in the FLSA. Id. However, the Final Rule demarcated three categories of work, including: (a) directly tip-producing work (e.g., a server); (b) directly supporting work (e.g., bussing tables); and (c) work not part of the tipped occupation (e.g., preparing food). Id. The Final Rule stated that an employer could take the tip credit for “tip-producing work,” but that if more than 20 percent of an employee’s workweek is spent on “directly supporting work,” then the employer cannot claim the tip credit for the excess. Id. Moreover, the Tip Credit stated that any “directly supporting work” could not be performed for more than 30 minutes at a time. Id.

Thereafter, in December 2021, the Restaurant Law Center and the Texas Restaurant Association (collectively, the “Associations”) filed suit against the DOL, seeking to permanently enjoin the DOL’s enforcement of the Final Rule, and moved for a preliminary injunction. Id. at 5. The district court denied the preliminary injunction, and the Associations appealed to the Fifth Circuit. Id.

The Fifth Circuit’s Decision

The Fifth Circuit held that the DOL’s 2021 Final Rule was contrary to the FLSA’s text, was arbitrary and capricious, and should be vacated. Id. at *2.

In so holding, the Fifth Circuit first focused on the impact of the U.S. Supreme Court’s recent holding in Loper Bright. Prior to Loper Bright, “[u]nder Chevron, a court reviewing agency action for compliance with [a] relevant statute had to defer to ‘permissible’ agency interpretations, ‘even if not the reading the court would have reached if the question initially had arisen in a judicial proceeding.’” Id. (citing Loper Bright, 144 S. C.t at 2264).

However, post-Loper Bright, the Fifth Circuit noted that it was required “to return to the APA’s basic textual command: independently interpret [an ambiguous] statute and effectuate the will of Congress” and “use every tool at [its] disposal to determine the best reading of the statute and resolve the ambiguity.”” Id. (citing Loper Bright, 144 S. Ct. at 2263, 2266). And, since the Supreme Court’s holding in Loper Bright came out after the district court’s holding, the Fifth Circuit reasoned that it was required “to depart from the district court’s analysis at the very start.”  Id. at *10.

As such, the Fifth Circuit’s analysis started with the express text of the FLSA, which states that a “tipped employee” means “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” Id. at *11 (citing 29 U.S.C. § 203(t)). Importantly, the FLSA does not define the terms “engaged in” or “occupation.” Id. Since the terms were not expressly defined, the “ordinary meaning of these terms in 1966, when the tip credit was added to the FLSA, controls.” Id.

After reviewing the “contemporary dictionary definitions” of the words “engaged” and “occupation,” the Fifth Circuit found that the phrase “‘engaged in an occupation’ most naturally indicate[d] a focus ‘on the field of work and the job as a whole,’ rather than specific tasks.” Id. at *11-13. Importantly, the Fifth Circuit noted that “[t]he FLSA does not ask whether duties composing [a] given occupation are themselves each individually tip-producing.” Id. at *14. Accordingly, the Fifth Circuit held that “the Final Rule applies the tip credit in a manner inconsistent with the FLSA’s text.” Id.

Finally, the Fifth Circuit noted that the plain language of the FLSA “asked only whether the employee is engaged in an occupation in which he receives tips.” Id. at *20. As such, the Fifth Circuit determined that the Final Rule “replace[d] the Congressionally chosen touchstone of the tip-credit analysis — the occupation — with one of the DOL’s making — the timesheet.” Id. For these reasons, the Fifth Circuit concluded that the Final Rule was arbitrary and capricious. Id. at 821.

Implications For Employers

This decision has wide-ranging implications. The Fifth Circuit’s ruling in Restaurant Law Center sets aside 36 years of precedent upholding the 80/20 standard contained in the Final Rule. It arms employers with additional ammunition to fight wage & hour class and collective actions brought by private plaintiffs who have relied on the DOL’s Final Rule to position their lawsuits. It also previews what could be the new federal circuit court regime regarding agency interpretations of ambiguous statutes post-Loper Bright. As the Fifth Circuit stated, Congressional intent controls, and “while longstanding agency practice might have the power to persuade, it has never had the power to control.” Id. at *16 (citing Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)).

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