[US] Court invalidates years-old tipped worker pay rule

The U.S. Fifth Circuit Court of Appeals rescinded a 2021 U.S. Labor Department rule that required employers to pay tipped service workers the full minimum wage during certain work times when the employees are not able to earn tips, halting its effect nationwide (Restaurant Law Center v. U.S. Department of Labor, No. 23-50562, August 23, 2024).  

The court, which is one of 13 appellate courts that sit below the U.S. Supreme Court, determined that the rule “is contrary to the Fair Labor Standards Act’s clear statutory text,” and “because it imposes a line-drawing regime that Congress did not countenance, it is arbitrary and capricious.” 

Tipped Workers in the U.S. 

On the federal level, restaurant and hospitality employers are allowed to pay workers who are normally paid tips by customers for their services a subminimum hourly wage.  

That hourly amount is $2.13, compared to the general minimum wage of $7.25 an hour, under the Fair Labor Standards Act. This is because it is understood in the U.S. that a significant amount of the tipped employees’ overall earnings come from those they service, and employers provide these workers the opportunity to earn tips. 

To qualify to take advantage of what is known as the “tip credit” and pay tipped workers the lower amount, certain work activity criteria need to be met. The law says the worker must customarily and regularly receive more than $30 a month in tips. 

“Oscillating” Rulemaking 

But the tip credit has “long been a subject of interpretation” by the Labor Department, the court said in its decision. Beginning in the 1960s, the agency began to issue regulatory and nonregulatory guidance for employers, recognizing that many of these workers spent measurable amounts of time doing work that was not generating tips.  

This developed in the 1970s into agency opinions and a rule, since rescinded, that outlined the degree of “dual-job” non-tipped activities in order to qualify for the tip credit.  

In the 1980s, the court noted a general 80/20 sub-regulatory requirement was promulgated. This guidance generally allowed the tip credit when tipped workers performed non-tipped work 20 per cent or less of the total work time.  

Beginning in 2009, the court said the Labor Department’s “interpretation of the dual-jobs regulation began to oscillate with every change in presidential administration.” 

When a Democrat was president, the Labor Department’s concern for exploitation of the tip credit by employers became the driver for new restrictions on the use of the tip credit. Under Republican administrations, such restrictions were rescinded or reduced, the court said. 

Rule Required More Monitoring of Non-Tipped Work  

The 2021 rule refined the types of work that would be considered non-tipped by defining the concept of “directly supporting work,” under which the worker would have to, for example, set and bus tables no more than 30 minutes at any given time to meet the tip credit criteria.  

This is in addition to other non-tipped activities such as preparing food, which, all totalled, still must not exceed 20 per cent of the total work time, according to the court’s assessment of the requirement.   

Under new standards of judicial review recently set by the Supreme Court in Loper Bright, the appeals court justified its decision to rescind the rule, saying they do not support the contention that the Labor Department has the authority to determine “whether an employee is in any given moment pursuing tips.” 

The rule is “so granular in divvying up component tasks, a single occupation could quickly break apart.” 

Estimates by nongovernmental organizations generally find that around that more than four million people, or 2.5% of workers, rely on tips. Many states require higher tipped employee wages than the federal standard of $2.13 an hour, and some states have outlawed employers from using a tip credit altogether. 

Author: Michael Baer

Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. Contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page. 

The U.S. Fifth Circuit Court of Appeals rescinded a 2021 U.S. Labor Department rule that required employers to pay tipped service workers the full minimum wage during certain work times when the employees are not able to earn tips, halting its effect nationwide (Restaurant Law Center v. U.S. Department of Labor, No. 23-50562, August 23, 2024).  

The court, which is one of 13 appellate courts that sit below the U.S. Supreme Court, determined that the rule “is contrary to the Fair Labor Standards Act’s clear statutory text,” and “because it imposes a line-drawing regime that Congress did not countenance, it is arbitrary and capricious.” 

Tipped Workers in the U.S. 

On the federal level, restaurant and hospitality employers are allowed to pay workers who are normally paid tips by customers for their services a subminimum hourly wage.  

That hourly amount is $2.13, compared to the general minimum wage of $7.25 an hour, under the Fair Labor Standards Act. This is because it is understood in the U.S. that a significant amount of the tipped employees’ overall earnings come from those they service, and employers provide these workers the opportunity to earn tips. 

To qualify to take advantage of what is known as the “tip credit” and pay tipped workers the lower amount, certain work activity criteria need to be met. The law says the worker must customarily and regularly receive more than $30 a month in tips. 

“Oscillating” Rulemaking 

But the tip credit has “long been a subject of interpretation” by the Labor Department, the court said in its decision. Beginning in the 1960s, the agency began to issue regulatory and nonregulatory guidance for employers, recognizing that many of these workers spent measurable amounts of time doing work that was not generating tips.  

This developed in the 1970s into agency opinions and a rule, since rescinded, that outlined the degree of “dual-job” non-tipped activities in order to qualify for the tip credit.  

In the 1980s, the court noted a general 80/20 sub-regulatory requirement was promulgated. This guidance generally allowed the tip credit when tipped workers performed non-tipped work 20 per cent or less of the total work time.  

Beginning in 2009, the court said the Labor Department’s “interpretation of the dual-jobs regulation began to oscillate with every change in presidential administration.” 

When a Democrat was president, the Labor Department’s concern for exploitation of the tip credit by employers became the driver for new restrictions on the use of the tip credit. Under Republican administrations, such restrictions were rescinded or reduced, the court said. 

Rule Required More Monitoring of Non-Tipped Work  

The 2021 rule refined the types of work that would be considered non-tipped by defining the concept of “directly supporting work,” under which the worker would have to, for example, set and bus tables no more than 30 minutes at any given time to meet the tip credit criteria.  

This is in addition to other non-tipped activities such as preparing food, which, all totalled, still must not exceed 20 per cent of the total work time, according to the court’s assessment of the requirement.   

Under new standards of judicial review recently set by the Supreme Court in Loper Bright, the appeals court justified its decision to rescind the rule, saying they do not support the contention that the Labor Department has the authority to determine “whether an employee is in any given moment pursuing tips.” 

The rule is “so granular in divvying up component tasks, a single occupation could quickly break apart.” 

Estimates by nongovernmental organizations generally find that around that more than four million people, or 2.5% of workers, rely on tips. Many states require higher tipped employee wages than the federal standard of $2.13 an hour, and some states have outlawed employers from using a tip credit altogether. 

Author: Michael Baer

Michael Baer is president of Baer Unlimited, an independent research, analysis, and communications provider that helps Payroll modernize operations, stay compliant, and improve the use and security of their data. Contact him directly at mike.baer@baerunlimited.com, or book Michael as a mentor through the GPA Mentor page.