A federal appellate court struck the DOL’s “arbitrary and capricious” tip credit rule for tipped employees

While monkeying around over the past week or so, I took a break from writing. By now, most of you have heard last week’s news about a Texas federal judge setting aside the FTC’s Noncompete Rule. But on Friday, the Fifth Circuit followed up with a decision vacating a U.S. Department of Labor final rule limiting the time tipped employees can spend in non-tipped activities when the employer receives a tip credit.

Under the DOL rule, which took effect in December 2021, an employer can take a tip credit only when the tipped employee is performing tip-producing work (think: a server taking orders from customers) or when the tipped employee is performing work that directly supports tip-producing work (think: setting/bussing tables) as long as the tipped worker does not spend “a substantial amount of time” doing tip-supporting work. The rule defines a substantial amount of time as more than 20 percent of the hours worked during the employee’s workweek or a continuous period that exceeds 30 minutes.

On Friday, the Fifth Circuit concluded that the DOL’s rule was “contrary to the Fair Labor Standards Act’s clear statutory text.” The FLSA defines a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” “Engaged in an occupation” is synonymous with “employed in a job.” Consider a server who takes orders, sets and clears tables, and maybe even performs light kitchen duties (e.g., toasting bread). It’s all part of the server job.

The Fifth Circuit queried, “[I]f the server is idly standing by to serve customers for 21 percent of his workweek, or for 31 continuous minutes, he is no longer engaged in his occupation and is no longer a tipped employee for the duration of that excess time. What occupation, then, would he be engaged in?”

According to the court, the unworkable answer is that “the Final Rule creates a paradox that is not obviously capable of resolution.”

It’s too complicated. Indeed, the court further underscored that “the FLSA does not ask whether duties composing that given occupation are themselves each individually tipproducing.”

Put simply, the tip credit applies to occupations. However, an employer does not always get a tip credit for an employee performing dual jobs, i.e., two unrelated and separate occupations like server and maintenance worker.

The court also determined that the DOL’s Final Rule was “arbitrary and capricious” because “it imposes a line-drawing regime that Congress did not countenance.”

Consequently, the court vacated the DOL’s final rule, further cementing Texas’ reputation as the state where federal administrative rules go to die.

Employers following the rule can pivot away from it but should consider whether similar state or local laws/rules may apply.