The Appeals Court’s latest ruling could dramatically reshape the service industry by overturning a federal regulation on tipped wages.
At a Glance
- The 5th Circuit Court overturned the Department of Labor’s 80/20/30 Rule on tipped wages.
- This ruling impacts millions of service industry workers who rely on tip-based income.
- The decision prompts a reconsideration of wage distribution and employer obligations.
- Legal challenges and policy adjustments are expected to follow this ruling.
Federal Appeals Court Strikes Down Tipped Wage Rule
The United States Court of Appeals for the Fifth Circuit has nullified a federal regulation concerning tipped wages, citing legal inconsistencies and arbitrary enforcement. This Houston-based Restaurant Law Center v. United States Department of Labor decision emphasizes that the 2021 Final Rule known as the “80/20/30 Rule” contradicts Congress’s statutory design. The ruling invalidates the controversial rule, which has been a subject of policy reversals across multiple administrations.
This judgment overturns regulations mandating employers to monitor the amount of time tipped employees spend on non-tip-producing tasks. The 2021 rule required detailed time tracking, limiting employers from claiming tip credits if non-tipped work exceeded 30 continuous minutes. With this decision, businesses are relieved from the burdensome task of maintaining intricate records and facing potential lawsuits.
In essence, the Fair Labor Standards Act (FLSA) allows employers to count a portion of the tips towards meeting federal minimum wage obligations. The now-vacated 80/20/30 rule extended a longstanding 1988 regulation’s concept of dual roles—allowing employees to be compensated through a blend of tipped and non-tipped work. This rule morphed into a convoluted regulation, categorizing activities into tip-producing, related, and unrelated work, inevitably causing legal and operational dilemmas for businesses.
The Legal Tug of War Over Tipped Wages
Under the Biden Administration, the 2021 rule aimed to safeguard tipped employees, but it faced fierce opposition from industry groups like the Restaurant Law Center and the Texas Restaurant Association. They argued that the rule was arbitrary, capricious, and exceeded the authority granted by the FLSA. The Fifth Circuit Court sided with these challenges, ruling that the regulation drew unnecessary and unlawful distinctions in pay structures for tipped workers.
“Because the Final Rule is contrary to the Fair Labor Standards Act’s clear statutory text, it is not in accordance with law. And because it imposes a line-drawing regime that Congress did not countenance, it is arbitrary and capricious,” the 5th Circuit concluded.
This controversy is just the latest salvo in a long-standing battle over tipped wages. The 80/20 rule itself emerged from Department of Labor opinion letters in the ’80s and has been a political football passed around across different administrations — each tweaking it in ways that often left employers and workers in confusion. The Biden Administration’s extension appeared to bring stability but added more restrictions, only to be reversed once again.
U.S. Appeals Court strikes down Biden-era 80/20 labor rule. The 2021 U.S. Department of Labor rule only allowed employers to pay staff the federal tip credit for tip-supporting tasks that comprise less than 20% of their work https://t.co/IL3aBD5Z17 pic.twitter.com/5kP5WQpjDO
— Restaurant News (@NRNonline) August 26, 2024
What Lies Ahead?
Businesses with tipped employees can now breathe a sigh of relief as the compliance burden imposed by the 80/20/30 rule is lifted. However, the legal landscape remains dynamic. Advocates for worker rights may push for fresh lawsuits, and similar rule interpretations might resurface in different circuit courts. Furthermore, municipalities like Chicago and Washington, D.C., are phasing out tip credits altogether, showing a continuous trend of regulatory scrutiny on how tipped wages are managed.
The overturning of the tipped wage regulation by the Fifth Circuit Court serves as an essential precedent. It illustrates how businesses can legally challenge federal agency overreach. Service industry workers and their employers now face a new reality, one where tipping policies will be under meticulous scrutiny, and court battles overpay structures are far from over.
