A Win for Employers – Department of Labor Issues Technical Amendment to Tip Credit Regulations

The Fair Labor Standards Act (“FLSA”) permits employers to take a “tip credit” when paying the wages of a tipped employee. Under federal law, the tip credit enables the employer to pay tipped employees $2.13 per hour ($6.75 per hour in MA) — significantly below the current federal minimum wage of $7.25 per hour ($15 per hour in MA) — under the theory that the difference will be covered by tips. If the difference is not made up by tips, then the employer must pay the difference to make sure the tipped employee makes at least the minimum wage per hour.

The FLSA defines a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. § 203(t). The tip credit has gone through years of varying interpretation by the Department of Labor (“DOL”), which is authorized to promulgate rules interpreting and clarifying the FLSA. In 1967, the DOL issued what is known as the “dual jobs” regulation stating that where an employee engages in two distinct occupations for the same employer (i.e., a maintenance man at a hotel who also serves as a waiter in the hotel’s restaurant), the tip credit can only be taken with respect to time spent serving as a waiter, because he is employed in two occupations with the same employer. This is contrasted with a waitress who spends part of her time cleaning and setting tables, toasting bread or doing other “side work” which are related duties to her tipped occupation of serving and waiting on customers, despite the side work itself not being tip producing. In 1988, the DOL published guidance commonly known as the “80/20 Rule” in its sub-regulatory Field Operations Handbook stating that a maximum of 20 percent of an employee’s time could be spent on non-tipped activities related to the tipped occupation. Since 2009, the DOL’s guidance on the 80/20 Rule has changed with each presidential administration.

On December 28, 2021, under the Biden Administration, the DOL issued a final rule codifying the 80/20 Rule as a federal regulation (the “2021 Final Rule”). Consistent with the 80/20 Rule, the 2021 Final Rule limited the amount of time a tipped employee could spend on work that was not tip producing, but directly supported tip-producing work, to not more than 20 percent of the hours in a workweek for which the employer has taken a tip credit. In addition, the 2021 Final Rule also imposed a new 30-minute restriction, limiting the amount of time that could be spent on directly supporting work eligible for the tip credit to not more than 30 minutes of continuous time during a shift. The tip credit could not be taken for time in excess of the 20 percent or 30-minute benchmarks. This became known as the “80/20/30 Rule.”

In December 2021, the Restaurant Law Center (“RLC”) and the Texas Restaurant Association (“TRA”) filed a lawsuit captioned as Restaurant Law Center, et. al. v. United States Department of Labor, et. al. seeking to permanently enjoin the DOL’s enforcement of the 2021 Final Rule as arbitrary and capricious and contrary to the statutory scheme enacted by Congress. The District Court denied the injunction. The RLC and TRA appealed. On August 23, 2024, the United States Court of Appeals for the Fifth Circuit issued an order reversing the District Court and vacating the 2021 Final Rule.

On December 12, 2024, the DOL issued a technical amendment to 29 CFR § 531 removing from the Code of Federal Regulations the corresponding regulatory text that the DOL promulgated through the 2021 Final Rule, which was vacated by the Fifth Circuit’s decision in Restaurant Law Center, stating the amendment “…accounts for the effects of the Fifth Circuit’s order in RLC, which already changed the operative regulatory provisions by vacating regulatory text codified at 29 CFR 531.56(e)–(f) from the Department’s 2021 Dual Jobs Rule.” Effective as of December 17, 2024, the federal regulations on the “tip credit”, 29 CFR § 531.56, have been revised, including the removal of paragraph (f) which codified the 80/20/30 Rule. This puts an end to the question of the enforceability of the Restaurant Law Center decision nationwide.

As a result, 29 CFR § 531 has reverted back to the dual jobs regulation that was in effect on December 27, 2021. The issuance of this technical amendment may indicate that the DOL does not intend to petition for any further review of the 2021 Final Rule seeking enforcement of the 80/20/30 Rule. Even if it did, the second Trump Administration is unlikely to pursue it, and may even propose a new regulation.