The regulations governing tipped employees and the employer’s ability to claim a “tip credit” under the Fair Labor Standards Act (FLSA) have undergone significant changes over the years, with the 80/20 rule at the center of these developments. A recent decision by the Fifth Circuit Court of Appeals has further upended this regulatory landscape, offering a reprieve to employers by invalidating the U.S. Department of Labor’s (DOL) 2021 Final Rule. Here’s an overview of these changes and their implications.
Tip Credit and the 80/20 Rule: Background
Under the FLSA, employers can pay tipped employees less than the federal minimum wage of $7.25 per hour, as long as their cash wage (a minimum of $2.13 per hour) plus tips equals or exceeds the minimum wage. This mechanism is known as the “tip credit.” For decades, disputes have arisen over how much time tipped employees can spend on non-tip-producing tasks while still qualifying for this credit.
The 80/20 rule, first introduced in 1988, mandated that employers could not claim a tip credit if an employee spent more than 20% of their work time on non-tipped activities, such as rolling silverware, stocking supplies, or making coffee. Employers had to pay full minimum wage for such tasks. Over the years, the rule has been rescinded and reinstated depending on the political administration.
Shifting Administrative Policies
⚫️ 1988 to 2009: The 80/20 rule was part of the DOL’s Field Operations Handbook, guiding employers on tip credit eligibility.
⚫️ 2009 to 2018: The Obama Administration reinstated the rule after a brief withdrawal by the Bush Administration.
⚫️ 2018: The Trump Administration removed the rule entirely, aligning with business interests and easing employer compliance burdens.
⚫️ 2021: The Biden Administration codified the rule in a new Final Rule, incorporating stricter guidelines. This rule classified tipped employees’ duties into three categories:
1️⃣ Directly Tip-Producing Work: Tasks like serving or bartending that directly generate tips.
2️⃣ Directly Supporting Work: Non-tipped tasks essential to the job, such as setting tables. Employers could claim a tip credit for this work, provided it did not exceed 20% of the workweek or 30 consecutive minutes.
3️⃣ Non-Tipped Work: Tasks unrelated to tip-producing activities, such as food preparation. Employers had to pay full minimum wage for this category.
Fifth Circuit Court’s Decision in 2024
On August 23, 2024, the Fifth Circuit Court of Appeals invalidated the 2021 Final Rule in a case called Restaurant Law Center v. U.S. Department of Labor. The court ruled that the DOL overstepped its authority by imposing arbitrary restrictions not supported by the FLSA’s text.
The court’s main points:
1️⃣ Occupation, Not Tasks: The FLSA defines a tipped employee based on their overall occupation and receipt of tips, not the specific tasks performed or time spent on each.
2️⃣No Basis for 80/20 or 30-Minute Rules: The court rejected the segmentation of tipped duties into time-based categories, stating it lacked statutory grounding.
3️⃣ Dual-Jobs Regulation Remains: Employers still cannot claim a tip credit for work unrelated to the employee’s tipped occupation. For example, a server working as a dishwasher during certain shifts does not qualify for tip credit during those hours.
Employer Implications
The Fifth Circuit’s decision eliminates the burdensome requirements of tracking how tipped employees divide their time between tasks, a change seen as favorable to employers. While nothing is certain, it is unlikely that the incoming Trump administration will reintroduce the now dead rule.
Employers will benefit by not having to monitor the precise time employees spend on non-tipped but job-related tasks. Keep in mind, employers must still ensure that tip credit is not claimed for hours worked in unrelated, non-tipped roles.