Tips from Seyfarth is a blog series for employers, and their in-house lawyers and HR, payroll, and compensation professionals, in the food, beverage, and hospitality sector. We curate wage and hour compliance “tips” to keep this busy industry informed.

By: Ariel Cudkowicz and Michael Steinberg

Seyfarth Synopsis: During oral argument on April 29, 2024, a panel of the Fifth Circuit appeared poised to vacate the DOL’s 2021 80/20 Rule.

Here at TIPS, we’ve been closely following the ongoing litigation in the Fifth Circuit surrounding the U.S. Department of Labor’s December 2021 codification of the “80/20 Rule.”  That rule, as we’ve explained, stems from a provision the DOL added to its 1988 Field Operations Handbook (“FOH”)—guidance that itself purported to synthesize enforcement positions taken in opinion letters dating back to 1979. 

What is the 80/20 Rule, you ask? In essence, it addresses whether an employer can take the tip credit for time a service employee spends performing tasks that support her tip-producing work, even if such supportive tasks do not themselves directly produce tips. For most of the period since 1988, under the 80/20 approach, the DOL’s answer has been: Yes, but only if the time spent on the directly supportive work is not “a substantial amount,” which the DOL says is time in excess of 20% of total hours in a workweek for which the employer sought to take a tip credit.  In 2009 and 2018, the Eighth and Ninth Circuits granted deference to this administrative guidance and thus blessed the 80/20 Rule.  More recently, in 2021, the Eleventh Circuit also adopted the 80/20 principle as a reasonable construction of the FLSA.

Then, in a regulation promulgated in 2021, the DOL largely codified the 80/20 Rule, but added a new onerous limitation: employers would also not be able to take a tip credit for any directly supporting work performed for more than 30 continuous minutes. 

Organizations representing the national and local restaurant industries promptly sued to enjoin enforcement of the new 80/20 regulation.  After an initial battle over whether a preliminary injunction should issue ended up at the Fifth Circuit, the District Court upheld the new rule, concluding that it was a permissible construction of the relevant statutory text, 29 U.S.C. § 203(t)—which does not define what it means to be an employee “engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips”— under the Supreme Court’s Chevron doctrine of agency deference.

Yesterday, a panel of the Fifth Circuit heard arguments on appeal. The panelists, consisting of Judges Jennifer Walker Elrod, James E. Graves Jr., and Judge Barry W. Ashe of the Eastern District of Louisiana (sitting by designation), appeared to be skeptical of the validity of the DOL’s newest iteration if the 80/20 Rule. 

During the argument, lawyers for both the appellants and appellees seemed to agree that the FLSA leaves some room for the DOL to elaborate on what it means to be a tipped employee.  The problem, according to appellants, is that the line the DOL has drawn is not consistent with the statutory text, because its rule conflates the pursuit of tips with a tipped occupation.  In questions directed to the government’s lawyer, Judge Ashe asked what other meaning the FLSA’s reference to being “engaged in an occupation” could have, if not to define the occupations to which the tip credit applies. Judge Elrod echoed this, pressing counsel for the DOL how the FLSA’s text could have any other meaning.  Judge Elrod also pointed out that the new rule’s continuous 30-minute requirement, unlike any prior iteration of the 80/20 Rule, would represent “a new imposition” on restaurant and hospitality employers “to track to the minute the work of every wait person.”

Judge Graves, meanwhile, appeared doubtful that the rule’s 20% threshold is even rational under traditional principles of review of agency rulemaking.  He asked the DOL’s counsel about a hypothetical service worker for whom the equivalent of 5% of each workweek per shift is idle time.  Over the course of a five-day workweek, Judge Graves questioned, wouldn’t that relatively modest amount of daily idle time trigger the 20% threshold? Can it be, Judge Graves asked, that such an employee is “not a tipped employee anymore?”  The other panelists also focused on the issue of idle time, and they seemed unsatisfied with the DOL’s position that substantial amounts of such time—such as during a lull when a restaurant has no diners—could transform a tipped employee into a non-tipped worker.

The judges also struggled throughout the argument with a series of swirling legal questions they’ll need to confront should they decide that the new rule is invalid.  Would such a decision from the Fifth Circuit create a circuit split with the Eighth, Ninth, and Eleventh Circuits? Lawyers for both sides seemed to acknowledge it would.  What impact would it have on the validity of decades of DOL enforcement guidance embodying the 80/20 Rule? Should the case be decided under principles of Chevron (deference to agencies’ reasonable interpretations of ambiguous statutes they administer), Auer (deference to agencies’ interpretations of their own ambiguous regulations), review under the Administrative Procedure Act, or some other framework?

Though the answers to those questions are uncertain, one prospect seems increasingly likely in the wake of yesterday’s arguments before the Fifth Circuit: Supreme Court review of the 80/20 Rule.

Stay tuned.