On August 23, 2024, in Restaurant Law Center v. U.S. Department of Labor, the U.S. Court of Appeals for the Fifth Circuit vacated the U.S. Department of Labor’s so-called “80/20/30 Rule” that governed how tipped employees must be paid under the Fair Labor Standards Act (FLSA). The Fifth Circuit found the Rule was inconsistent with the text of the FLSA, and was arbitrary and capricious. 

The Fifth Circuit noted that the original 80/20 guidance had grown over the years through DOL non-regulatory guidance documents, and was formalized in 1988 in the DOL’s Field Operations Handbook, in which the DOL took the position that the FLSA tip credit was not available when tipped employees devoted more than 20% of their time to non-tip-producing activities. That guidance remained intact until 2009, when the DOL’s interpretation “began to oscillate with every change in presidential administration.”

This oscillation culminated in the DOL’s most recent iteration, the 80/20/30 Rule, which became effective in December 2021. That rule identified three categories of work:

• “tip-producing” – work that “provides service to customers for which tipped employees receive tips”;
• “directly supporting” – work “performed in preparation of or to otherwise assist tip-producing customer service work”; and
• “not part of the tipped occupation” – work that is neither tip-producing nor directly supporting.

Under the 80/20/30 Rule, any time spent in the third category (tasks not part of the tipped occupation) had to be compensated at full minimum wage (i.e., no tip credit could be taken).  Time spent in the second category of “directly supporting” duties could be paid at a tip credit rate, but only if the work was not performed for a “substantial amount of time.”  A “substantial amount of time” was defined as either (1) more than 30 continuous minutes; or (2) more than 20% of the hours in the workweek for which the employer had taken a tip credit. 

The Fifth Circuit strongly criticized the DOL’s 80/20/30 framework because it impermissibly “disaggregate[d] the component tasks of a single occupation.” Relying in part on the recent Loper Bright Supreme Court case that changed the extent to which courts may defer to agency pronouncements, the Fifth Circuit concluded that the Rule was invalid because it strayed too far from “the FLSA’s focus on employees’ occupations rather than on their discrete pursuit of tips.”

In contrast, the Fifth Circuit noted that the DOL’s 1967 “dual jobs” regulation, which drew a distinction between an employee’s work as a waiter and as a maintenance man for the same employer, was a permissible interpretation of the FLSA because it focused on whether the employee performed tasks for a separate occupation unrelated to that of a waiter, not on the amount of time spent on untipped tasks.

In short, the Fifth Circuit found that tipped employees cease to be tipped employees if and when they engage in unrelated occupations, not because of the amount of time they spend within their tipped occupations performing tasks that may not generate tips. 

This ruling signals the end of the 80/20/30 Rule that became effective in December 2021. Although employee-side lawyers may take the position that the 1988 version of the 80/20 guidance remains in place in states other than those in the Fifth Circuit (Texas, Louisiana and Mississippi), the Fifth Circuit’s decision may well serve as a basis for challenging those court rulings that were decided before Loper Bright and relied heavily on deference to DOL guidance.

Finally, many states have tipped employee pay provisions that do not allow for a tip credit at all, or otherwise differ from the FLSA in important respects. In fact, some states have adopted their own versions of 80/20 guidance. Employers must continue to be mindful that the FLSA does not preempt more protective state or local laws.