Written by Ariel D. Cudkowicz and Michael E. Steinberg from Seyfarth Shaw LLP on August 26, 2024
Seyfarth Synopsis: In a unanimous decision, a panel of the Fifth Circuit invalidated the DOL’s 2021 rule codifying the 80/20 rule.
As we here at TIPS predicted not too long ago, the Fifth Circuit on Friday issued an opinion striking down the DOL’s December 2021 regulation codifying the Department’s longstanding “80/20 rule.” The Fifth Circuit’s decision roundly rejects the 80/20 rule’s focus on whether employees’ discrete work activities are tip-producing or not, and instead concludes that the plain meaning of the statute is clear: an employer may claim the tip credit for any employee who, when engaged in her job—whatever duties the job entails—customarily and regularly receives more than $30 per month in tips.
To back up for a moment, the 80/20 rule, as we’ve explained, stems from a provision the DOL added to its 1988 Field Operations Handbook (“FOH”)—guidance that itself purported to synthesize enforcement positions taken in opinion letters dating back to 1979. Under the DOL’s guidance, employers could take a tip credit, and therefore pay a service rate of pay (currently $2.13/hour under federal law), for tipped workers—but only for time spent engaged in “tip producing” work and work that “directly supports” the tip producing work. And, only if the time spent on the directly supportive work was not “a substantial amount,” which the DOL said was time in excess of 20% of total hours in a workweek for which the employer sought to take a tip credit. Then, in the 2021 rulemaking, the DOL largely codified the 80/20 Rule, but added a new onerous limitation: employers would also not be able to take a tip credit for any directly supporting work performed for more than 30 continuous minutes.
Organizations representing the national and local restaurant industries promptly sued to enjoin enforcement of the new 80/20 regulation. After an initial battle over whether a preliminary injunction should issue ended up at the Fifth Circuit, the District Court upheld the new rule, concluding that it was a permissible construction of the relevant statutory text under the Supreme Court’s Chevron doctrine of agency deference.
The challengers appealed again. Back at the Fifth Circuit, the panelists seemed more than a little skeptical of the 80/20 rule’s validity. Then, while the appeal was pending, the Supreme Court overruled Chevron, instructing lower federal courts that they need not defer to agency rules construing federal statutes even when those statutes are ambiguous.
In the Fifth Circuit’s view, though, the 80/20 rule would fail under any test, Chevron or not, because the relevant statutory text, 29 U.S.C. § 203(t), is not ambiguous. That provision says that employers may take a tip credit for any employee “engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” The court rejected the DOL’s position, codified in the 80/20 rule, that determining whether an employee is “engaged” in such an occupation for hours worked depends upon how much of that time is spent doing tasks for which the employee receives tips. Instead, the court held, “engaged in an occupation” means something much more straightforward: employed in a job. As the court put it, the statutory definition “indicates a focus ‘on the field of work and the job as a whole,’ rather than on specific tasks.”
Additionally, the Fifth Circuit was unmoved by the fact that the 80/20 rule has reflected the DOL’s interpretation of § 203(t) for most of the period since at least 1988. Although courts should pay attention to longstanding agency interpretations of the law, the Fifth Circuit explained, the court in this case was “not persuaded that the 80/20 standard, however longstanding, can defeat the FLSA’s plain text.”
After finding the 80/20 rule to be contrary to the FLSA and therefore invalid, the court vacated the rule and set it aside. Simply put, the 80/20 rule—for now—is dead, at least in the Fifth Circuit (which encompasses the federal district courts in Texas, Louisiana, and Mississippi). Although we don’t pretend to know the future, we think it is a pretty safe bet that this case is now on a fast track to the Supreme Court.
In an upcoming TIPS post, we will discuss how restaurant and hospitality employers should respond in the wake of the Fifth Circuit’s decision. Stay tuned.
