The final rule also includes a new requirement that an employer cannot utilize the tip credit when an employee performs more than 30 consecutive minutes performing “directly supporting work.”

In Restaurant Law Center, et al. v. United States Department of Labor, et al., No. 22-50145 (Apr. 28, 2023), a decision of significant importance to all employers in general and the service and hospitality industry in particular, the U.S. Court of Appeals for the Fifth Circuit reversed a Texas federal district court’s order denying a preliminary injunction against enforcement of the new tip credit rule of the U.S. Department of Labor (DOL) and remanded it for further proceedings. In Restaurant Law Center, the plaintiffs seek a nationwide preliminary injunction prohibiting enforcement of the DOL final rule regarding tip credit and dual jobs. Importantly, the final rule reinstated the “80/20 rule” by providing that employers can utilize the tip credit so long as 80 percent or more of the work is tip-generating, and not more than 20 percent is directly supporting work. However, the final rule also provides that employers cannot utilize the tip credit when an employee performs nontipped work for more than 30 consecutive minutes. Plaintiffs claim that the DOL impermissibly created a new definition of “tipped occupation” that lacks support in the Fair Labor Standards Act (FLSA), and that enforcement of the final rule will impose substantial, ongoing costs on businesses. The district court had denied the plaintiff’s preliminary injunction solely because they failed to establish irreparable harm from complying with the final rule. The Fifth Circuit found that plaintiffs submitted sufficient evidence that the final rule necessarily imposes a recordkeeping requirement and that employers who want to continue claiming the tip credit will “incur ongoing management costs” to ensure compliance. This is an important decision, as the Fifth Circuit indicates that the final rule may be on shaky ground.

Case Background

In late 2021, the DOL revived and revised the 80/20 rule by providing that employers can utilize the tip credit only so long as 80 percent or more of the work is tip-producing, and not more than 20 percent is “directly supporting work.” See 29 C.F.R. § 531.56. Under the final rule, no tip credit can be taken for any nontipped work. “Tip-producing work” is defined as work the employee performs directly providing services to customers for which the employee receives tips (i.e., taking orders and serving food). “Directly supporting work” is defined as work that is performed by a tipped employee in preparation of or to otherwise assist tip-producing customer service work (i.e., rolling silverware and setting tables). Nontipped work includes preparing food or cleaning the kitchen, dining room or bathrooms.

The final rule also includes a new requirement that an employer cannot utilize the tip credit when an employee performs more than 30 consecutive minutes performing “directly supporting work.” Directly supporting work done in intervals of less than 30 minutes scattered throughout the workday would not invalidate the tip credit, subject to the 80/20 rule. However, employers must pay minimum wages for “directly supporting work” performed after the lapse of the first 30 continuous minutes.

In December 2021, the plaintiffs challenged the final rule in federal district court in Texas on the grounds that, among other things, it violated the FLSA. Restaurant Law Center, No. 22-50145 at 3. The plaintiffs moved for a preliminary injunction and, after holding an evidentiary hearing, the district court denied the preliminary injunction. Id. The district court did not reach the merits of the plaintiffs’ claims. Id. Rather, the district court assumed the plaintiffs were likely to succeed on the merits, but concluded they had failed to show they were irreparably harmed by the costs of complying with the new rule. Id. at 3-4. The district court noted that the compliance costs had already been incurred since the final rule was in place for more than one month, and any other costs were speculative at best. Id. at 4. Further, the district court found that the new final rule, which is similar to the 80/20 rule, does not require employers to monitor their employees’ time. Id.

The Fifth Circuit’s Ruling Reversing the Denial of the Preliminary Injunction

The Fifth Circuit reversed the district court’s denial of the preliminary injunction and remanded the case for further proceedings with the expectation that the district court “will proceed expeditiously” to reconsider the preliminary injunction motion with the benefit of the Fifth Circuit’s ruling. Id. at 11.

In reversing the district court, the Fifth Circuit found that employers who want to continue claiming the tip credit will “incur ongoing management costs” to ensure employees do not spend more than 30 minutes continuously performing directly supporting work. Id. at 9. Significantly, the Fifth Circuit commented that compliance with the final rule requires employers to record their employees’ time. The Fifth Circuit explained that it “cannot fathom how an employer could honor these specific constraints without recording employee time. What if an employer is investigated by the Department or sued by an employee for wrongly claiming the tip credit? Without time records, how could an employer defend itself?” Id. at 7.

The Fifth Circuit also disagreed with the DOL’s assertion that “employers need not engage in ‘minute to minute’ tracking of an employee’s time in order to ensure that they qualify for the tip credit.” Id. The Fifth Circuit opined that “[n]o explanation is given (nor can we imagine one) why an employer would not have to track employee minutes to comply with a rule premised on the exact number of consecutive minutes an employee works” and that an employer will need to account for blocks of employee time, “especially if an employer is accused of violating the rule.” Id. (Emphasis in original.)

Circuit Judge Higginbotham dissented from the majority opinion. He explained that “the majority yields to the temptation to insert its own logic to fill the void,” insinuating that the majority substituted its own reasoning (and potentially desire for a particular outcome) for the plaintiffs’ lack of a “clear showing they were harmed.” Id. at 17.

The Texas district court now has two important rulings to make. First, according to the Fifth Circuit, it will need to analyze the other preliminary injunction factors and issue another ruling on the motion for preliminary injunction. Second, the district court will need to analyze and issue its opinion on the parties’ fully briefed motion for summary judgment. It is likely that the district court will issue one ruling tackling both motions. Regardless of the outcome, this case will likely be heavily litigated in the Fifth Circuit.

Implications for the Service and Hospitality Industry

The Fifth Circuit’s decision indicates that a nationwide preliminary injunction preventing enforcement of the final rule may be on the horizon. The Fifth Circuit’s decision showcases the unreasonable and costly task of complying with the final rule. The service and hospitality industry should stay tuned for the Texas federal district court’s imminent rulings on Restaurant Law Center’s motion for preliminary injunction and motion for summary judgment.

For More Information

If you have any questions about this Alert, please contact Gerald L. Maatman, Jr., Jennifer A. Riley, Shaina Wolfe, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.