On April 28, 2023, the U.S. Court of Appeals for the Fifth Circuit ordered a Texas court to further consider a legal challenge to the United States Department of Labor’s 80/20 Rule, which applies to employers that take a tip credit toward their minimum wage obligation under the Fair Labor Standards Act (FLSA).  This ruling is an interim step in the path toward an ultimate determination of the validity of the 80/20 Rule.

On October 20, 2021, the U.S. DOL published a final rule that reversed course from a December 2020 rule and resurrected the so-called 80/20 Rule – i.e., that a tip credit is not available when tipped employees devote more than 20% of their time to non-tip-producing activities.

In December 2021, the Restaurant Law Center (RLC) and the Texas Restaurant Association (TRA) brought suit in Texas federal court challenging the validity of the 80/20 Rule. The RLC and TRA filed a motion for preliminary injunction asking the court to preclude the DOL from enforcing the rule. On February 22, 2022, Judge Robert Pitman denied the motion for preliminary injunction. Judge Pitman expressed skepticism as to the merits of the RLC/TRA’s legal challenge, but denied the motion for preliminary injunction solely on the basis that the RLC/TRA had not shown there would be irreparable harm flowing from implementation of the 80/20 Rule.  

RLC and TRA appealed to the Fifth Circuit. Critics of the rule asserted that the final rule exceeds DOL’s rulemaking authority and creates a panoply of additional, unintended consequences and insurmountable compliance burdens.¹ In addition, those opposed to the rule argued the regulatory requirements in the final rule are ill-suited to the realities of the industries the DOL seeks to regulate, as well as the associated costs that will continue to negatively impact employees and businesses alike.

On April 28, 2023, the Fifth Circuit ruled that Judge Pitman incorrectly disregarded evidence of irreparable harm. The Fifth Circuit noted in particular that the addition of a 30 continuous-minute limitation to the prior 80/20 framework almost certainly creates minute-by-minute recordkeeping obligations, and imposes significant costs ignored by the DOL. The Fifth Circuit sent the case back to the Texas court to consider the merits of the challenge to the 80/20 Rule.

So what’s next? First, the Fifth Circuit may be asked to reconsider the decision before the case returns to the Texas court. In addition, while the appeal was pending, the parties each filed a motion for summary judgment in the Texas court asking the court to rule on the merits of the legal challenge. And in October 2022, the case was reassigned from Judge Pitman to Judge David A. Ezra.

Assuming there is no delay in the case returning to the Texas court, the case will be ripe for Judge Ezra to reconsider the motion for preliminary injunction, and to rule on the summary judgment motions. Those rulings will be just the next step in determining the ultimate question of the validity of the 80/20 Rule. The rulings will likely be appealed, sending the case back to the Fifth Circuit. For now, the 80/20 Rule remains in effect.