The U.S. Court of Appeals for the Fifth Circuit struck down the U.S. Department of Labor (DOL) rule regarding tip credits. The decision likely voids the DOL regulation nationwide.
DOL Tip Credit Rule
Under the FLSA, employers can take a tip credit and pay workers $2.13 an hour. This is below the federal minimum wage of $7.25 an hour, provided workers receive sufficient tips to bridge the gap. Under the FLSA, tipped employees are engaged in occupations in which they regularly receive more than $30/ month in tips.
The DOL rule bars employers from using the tip credit if employees spend too much time performing non-tip related duties. Specifically, a worker must spend no more than 20% of time on nontipped activities for the tip credit to apply.
The Court held that the DOL Rule is contrary to the FLSA’s clear statutory text and is arbitrary and capricious:
“The Final Rule is attempting to answer a question that DOL itself, not the FLSA, has posed. The FLSA is clear: an employer may claim the tip credit for any employee who, when ‘engaged in’ her given ‘occupation . . . customarily and regularly receives more than $30 a month in tips.’ The FLSA does not ask whether duties composing that given occupation are themselves each individually tip producing.”
As a result, the court held that the rule violated Administrative Procedure Act (APA).
Significance to Employers
The Court’s decision is a big win for hospitality and restaurant industry employers. For these employers, the DOL rule was vague and difficult to manage. The decision may also have larger significance for employers in all industries. It shows the impact of the U.S. Supreme Court’s recent decision to no longer give deference to an Agency regulation.
As explained in a prior blog, the U.S. Supreme Court recently overruled its 1984 Chevron decision. In this decision, it held that courts should defer to federal agencies’ reasonable interpretations of ambiguous Congressional laws. In Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al, the Supreme Court held that the courts should no longer give deference to federal agencies in interpreting laws; rather they are required to exercise independent judgment in determining the meaning of statutory provisions.
The Fifth Circuit’s decision to vacate the DOL Tip Credit Rule indicates that agency rules are more susceptible to court challenges following the Loper decision.
A federal court, for example, vacated the FTC’s non-compete rule, finding that the FTC exceeded its authority and the rule is arbitrary and capricious. Employers are now on a more equal playing field in cases where the meaning of a statute or law is in question.
This is not so say, however, that courts will affirm Agency rules going forward. Since vacating the tip credit rule, the Fifth Circuit upheld the DOL’s authority to set salary levels to determine overtime pay eligibility.
It will be interesting to see the impact of the Loper decision, and whether other regulations by agencies such as the DOL and EEOC are challenged and invalidated.
Stay tuned for more developments.
As always, please let me know if I can help.
Kenneth Winkler, a shareholder at Berman Fink Van Horn, helps employers navigate the employment laws and regulations that govern the workplace.
