Fifth Circuit Vacates DOL Tip Credit Rule

On August 23, 2024, the Fifth Circuit Court of Appeals unanimously struck down a 2021 U.S. Department of Labor (DOL) regulation that restricted employers' ability to pay tipped employees a subminimum wage unless they spent less than 20% of their workweek on non-tipped tasks. This ruling, stemming from the case Restaurant Law Center v. U.S. Dept. of Labor, concluded that the DOL's 80-20 rule was both contrary to the Fair Labor Standards Act (FLSA) and arbitrarily adopted, violating the Administrative Procedure Act. The court emphasized that the DOL had overstepped its authority by creating overly granular definitions of tipped and non-tipped work, which conflicted with the FLSA's clear text. As a result, employers can now more freely utilize the tip credit without the stringent requirements previously enforced. The ruling has significant implications for wage and hour claims against employers with tipped employees, potentially reducing litigation risks. The DOL retains the option to appeal the decision to the U.S. Supreme Court or seek a rehearing from the Fifth Circuit.