In a landmark decision of 23 August in the case Restaurant Law Center; Texas Restaurant Association v. U.S. Department of LaborIn 2014, the United States Court of Appeals for the Fifth Circuit overturned decades of Department of Labor (“DOL”) decisions regarding the compensation of waiters who perform incidental work related to the job of a tipped employee. Citing the Administrative Procedure Act, the Court held that the DOL’s 2021 final rule at issue contradicts the clear text of the Fair Labor Standards Act (“FLSA”) and was arbitrarily issued outside the bounds of applicable law.

The FLSA allows employers to use what is known as a “tip credit” when paying wages to “tip earners.” In Texas, employers can pay these employees with a tip credit $2.13 per hour as long as their total earnings from tips and $2.13 in wages equal or exceed the applicable federal minimum wage of $7.25 per hour. In 1967, the DOL, which has the authority to issue interpretive and explanatory rules under the FLSA, issued its “Dual Job” regulation, which differentiated a waiter’s compensation if that person worked a “dual job,” that is, if the person worked both as a waiter and as a maintenance employee. A waiter who performed maintenance work had to receive the full guaranteed minimum wage for that work because that work was “unrelated” to the waiter’s job. On the other hand, the performance of tasks by a waiter that were related to the job of waitress, such as cleaning and setting tables, toasting bread, preparing coffee, or occasionally washing dishes or glasses, was classified as performing tasks that were “related to” the tipped occupation, even though no tips were paid for that work.

The Fifth Circuit’s recent ruling focused on the Department of Labor’s actions in interpreting and regulating the scope of “related” outside work. Specifically, the court noted that after several years of issuing opinions interpreting the limitations on non-tipped work, the Department of Labor finally adopted what it called the “80/20” policy. This policy stated that an employer could only require a waiter to spend a maximum of 20 percent of his or her time on non-tipped work related to the tipped work in order for the employer to claim full tips and not be required to pay the waiter the full minimum wage.

The court noted that the DOL interpreted this rule differently with each change of administration, and that the DOL had most recently issued a rule defining when a waiter is “engaged in an activity for which tips are paid.” This most recent version of the rule not only required a waiter to be compensated at the mandatory minimum wage for performing related (or “direct support”) secondary activities for more than 20% of his or her workweek, but also introduced a new requirement prohibiting an employer from requiring a waiter to perform direct support secondary activities for more than 30 minutes at any given time (the “final rule”). The final rule, adopted in December 2021, effectively codified the DOL’s longstanding 80/20 policy along with the new 30-minute requirement.

After analysing the background and the underlying reasons for these statements and pointing out that the Chevron doctrine—which previously required a court to defer to the agency’s “permissible” interpretation of a statute—was overturned, the court ultimately ruled that the DOL had exceeded its authority in interpreting and applying the letter of the FLSA. The court specifically pointed to the anomaly in the DOL’s guidelines regarding what does and does not constitute “related” or “directly supportive” secondary work that accounts for more than 20% of a waiter’s workweek, exacerbated by the 30-minute requirement recently adopted in the final rule, and explained that the problem with such guidelines “is made particularly clear” by the way the final rule handles a waiter’s idle time. If a waiter spends 21% of his workweek, or 31 consecutive minutes, standing idle waiting to serve customers, that waiter is no longer performing his job and is no longer a tipped employee for the remainder of that excess time. In the Court’s view, the nearly forty-year existence of the 80/20 rule did not justify the DOL’s interpretation of that rule as a core feature of the FLSA because it could not rebut the plain language of the FLSA.

The Court thus struck down all aspects of the DOL’s final rule, including the 80/20 rule and the 30-minute rule, as well as its attempts to regulate the compensation of tipped employees based on a structure that triggered the obligation of additional compensation based on how much time a server spends on matters related to the occupation for which tips are paid. The Court notes that its ruling in no way affects the validity of the DOL’s dual-job rule, since the focus of that rule is “whether the employee performs tasks not related to his or her typed profession”, not to the “Time span” spent on tasks for which no tips were given.

In light of the Fifth Circuit’s landmark decision, employers in that circuit should reconsider their policies and procedures that impact servers.

Jackson Walker has been advising and representing restaurants on compliance with the Fair Labor Standards Act for over 20 years. If you would like an assessment of how the court’s opinion might affect your restaurant’s policies or practices, please contact Lionel Schooler at [email protected] or Jamila Brinson at [email protected].

The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or their respective affiliates. This article is for informational purposes only and does not constitute legal advice. For more information on the Fifth Circuit’s new wage and hour decision, visit Lionel M. Schooler and Jamila M. Brinson or a member of the labor and employment practice.

Meet Lonnie

Lionel M. Schooler is an employment attorney specializing in corporate governance and a recognized expert in labor law, federal appellate law, and arbitration. Mr. Schooler has over 45 years of experience handling workplace matters. He previously served as chair of the Labor and Employment Section of the Houston Bar Association and was a frequent speaker and author on labor-related topics. In recognition of his practice, Mr. Schooler was named The best lawyers in America List and Thomson Reuters’ Super Lawyers List since 2013.

Meet Jamila

Jamila Brinson is certified in labor and employment law by the Texas Board of Legal Specialization and is a dedicated advocate for her clients. She works with clients to help them understand the intricacies of Texas state and federal labor law, defends management and employers in employment litigation, conducts workplace investigations, drafts and advises on employment policies, and provides customized training for employees and supervisors. Jamila founded and leads Jackson Walker’s Diversity and Inclusion Consulting Practice, which serves clients seeking to promote inclusion in their organizational culture by implementing and maintaining effective and legally compliant diversity, equity, inclusion, and belonging strategies, policies, and procedures. Jamila is certified in diversity, equity, and inclusion leadership through Northwestern University’s Weinberg College of Arts and Sciences and is often called upon by clients to conduct workplace culture assessments and propose action plans to address legal concerns and reduce risk. In recognition of her practice, Jamila was included in the list of best consultants. The best lawyers in America List for Employment Law – Management, Thomson Reuters’ Super Lawyers List and Lawdragons List of the top 500 U.S. corporate employment lawyers.