Takeaway: The U.S. Department of Labor’s final rule governing when an employer may take the tip credit remains in effect for now, so employers of tipped employees employed in dual jobs should exercise care in complying with its requirements.
The U.S. Department of Labor’s (DOL’s) final rule on when an employer may take a tip credit for tipped workers who are employed in dual jobs under the Fair Labor Standards Act (FLSA)—commonly known as the “dual jobs” final rule—is a rational exercise of the department’s authority, a federal district court in Texas has ruled.
The court denied the motion for summary judgment filed by the plaintiffs—a restaurant association and a restaurant industry legal group — and granted the DOL’s corresponding motion for summary judgment. The plaintiff’s motion for a temporary injunction staying the final rule was also denied.
Background
In October 2021, the DOL revised and added to a Trump administration regulation about when an employee works in a tipped occupation under 29 United States Code Section 203(t). Under the FLSA, a tipped employee is an “employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” An employer can take a tip credit that allows it to offset such an employee’s wages by the amount of tips, down to $2.13 per hour, so long as the employee’s total earnings—wages plus tips—add up to the federal minimum wage of $7.25 per hour.
The final rule codified a long-standing informal rule, referred to as the “80/20” rule. To claim the tip credit under the final rule, employers must ensure that tipped employees are not assigned to spend more than 20 percent of their time on work that supports tip-producing activity but does not itself generate tips. Further, an additional new provision imposes a 30-minute limit on continuous time spent on assigned duties that directly support tipped work, but that are not directly tip-producing.
The plaintiffs requested a preliminary and permanent injunction in December 2021 and sought to have the final rule invalidated before it went into effect on Dec. 28, 2021. The U.S. District Court for the Western District of Texas denied the request for injunctive relief, and the plaintiffs then appealed. In May 2023, the 5th U.S. Circuit Court of Appeals reversed and remanded the matter for further consideration.
Dual Jobs Rule
On remand, the district court addressed both the request for injunctive relief and the merits of the suit as agreed by the parties.
Analyzing the final rule under the framework established by the U.S. Supreme Court in Chevron USA, Inc. v. Natural Resources Defense Council, Inc., the court first considered “whether Congress has directly spoken to the precise question at issue.” If Congress has directly spoken on an issue, that would settle the matter, the court noted, since a court may only proceed to step two of the Chevron analysis—determining whether the agency’s construction of the statute is “permissible” —if the statutory text is ambiguous.
The plaintiffs asserted that Congress directly spoke to the issue of tip credit application by defining “tipped employee” using the unambiguous term “engaged in an occupation.” The DOL argued that the ambiguity in the term “engaged in an occupation” requires deference to the agency’s regulations setting boundaries on when an employee is engaged in the requisite type of “occupation.”
The court agreed with the DOL’s contention that the statute refers to an occupation as one in which an employee customarily and regularly receives tips as part of their income. The court also noted that the statute specifies that an employee is not a tipped employee for whom an employer can take a tip credit unless the employee is engaged in a tipped occupation, but the statute fails to specify the particular work associated with such an occupation or when an employee may be considered engaged in that work. “These gaps in the text of the statute leave DOL the task of working out the details for how to determine what it means to be engaged in an occupation where one regularly receives tips,” the court said, finding that the text of the FLSA is ambiguous and does not expressly speak to the issue at hand.
The plaintiffs further argued that the rule improperly focuses on “engaged in an occupation” without considering the whole statutory definition of “tipped employee”—a person employed in an occupation who customarily and regularly receives more than $30 a month in tips—”effectively writing the rest of the text out of the statutory definition.”
In consideration of the FLSA’s remedial purpose, the court rejected this argument. “Plaintiffs’ binary interpretation could undermine the purpose of the statute by allowing employers to use the tips an employee earns while performing tip-producing work to subsidize direct cash wages paid to that employee when he or she performs non-tip producing work,” or work that does not directly support tip-producing work. “This interpretation does not support the FLSA’s purpose of ensuring that workers who perform non-tipped work receive minimum wage for their duties.” Further, the plain language and legislative history of the statute do not support the plaintiffs’ argument that the statute is unambiguous, leaving the court to “defer to the agency’s regulation so long as it is not arbitrary, capricious, or manifestly contrary to the statute.”
Applying Chevron step two, the court found the rule was “neither arbitrary nor capricious,” but is a permissible construction of the FLSA that protects tipped employees while also providing clarity and flexibility to address the variable situations that arise in tipped occupations. “The rule’s explanation of ‘engaged’ in an ‘occupation’ that regularly receives tips supports the statutory structure of the FLSA and is consistent with the tip-related modification of the term ‘occupation,’ ” the court concluded. “This modification includes performance of work that is part of the tipped occupation, including tip-producing work that provides services to customers for which the employee receives tips, as well as work that directly supports tip-producing work, if it does not exceed a certain amount of time.”
Turning to the plaintiffs’ argument in a supplemental briefing that the rule violated the “major questions” doctrine relied upon by the Supreme Court in West Virginia v. Environmental Protection Agency, the court determined that this case does not trigger the doctrine. The doctrine applies where an agency claims the power to make decisions of vast “economic and political significance,” the court noted. In such situations, a court should hesitate before concluding that Congress meant to confer such authority. However, cases that have triggered the doctrine generally have involved billions of dollars, the court said, while the present case involves roughly $183.6 million. Further, “the rule cannot be said to ‘substantially restructure’ the market or invoke any ‘newfound power’; nor does it rely on a ‘rarely used’ or ‘ancillary provision’ of the law.” Rather, the rule restores previous guidance on the limitations of nontipped work as well as work supporting tipped work, relying on the same authority that has governed the industry for decades, the court stated.
Restaurant Law Center et al. v. US Department of Labor et al., W.D. Tex., No. 1:21-CV-1106 (July 6, 2023).
Rosemarie Lally, J.D., is a freelance legal writer based in Washington, D.C.