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Fifth Circuit Strikes 80/20 Rule’s “Arbitrary and Capricious” Limits on Sidework

August 26, 2024 Posted in Legal Updates Share

On Friday, August 23, the Fifth Circuit Court of Appeals provided long-awaited relief to restaurant employers by striking the Department of Labor’s so-called 80/20 rule.

For those who aren’t familiar with it, the 80/20 rule attempted to restrict the amount of time that tipped employees can spend on certain portions of their occupations. Under the DOL’s view, when so-called “non-tip-producing duties” exceeded 20% of an employee’s workweek, employers could not pay the employee at the sub-minimum tip-credit rate. Although DOL had struggled to define what “non-tip-producing duties” were, employees (and their lawyers) understood that phrase to mean sidework.

The appellate court held that DOL’s rule violated the Administrative Procedure Act because it was contrary to the plain text of the Fair Labor Standards Act and also arbitrary and capricious.

This decision represents one of the final stages of a lengthy battle between DOL and the restaurant industry. That battle began when the FLSA was amended to provide for a tip credit in 1966. The next year, DOL issued its original “dual jobs” regulation, which stood for the non-controversial proposition that an employer couldn’t pay an employee using the subminimum tip-credit rate when the employee was working in a job different than their normal tipped occupation (e.g., if a server worked a shift as a cook).

Somehow, someone in the DOL later misread an example used in that regulation as suggesting that there needed to be a limit on the amount of time that tipped employees would spend on certain duties within their own occupation – duties that the DOL perceived to be “non-tip-producing.” That misreading occurred first in a series of opinion letters between 1979 and 1985.

In 1988, the DOL issued guidance to its own investigators that such duties had to be limited to no more than 20% of the workweek. That guidance was contained in a Field Operations Handbook, which did not carry the force of law. 

In years of court battles, appellate courts gave this non-regulatory guidance what amounted to the force of law, by according first Chevron deference and then Auer deference to DOL’s position.

The Trump administration attempted to reverse this pattern by issuing a regulation in 2020, but its rule was largely rejected by courts. In December 2021, the Biden DOL attempted to replace that regulation with its new Final Rule, which added a new subparagraph to the existing dual jobs regulation.

That subparagraph laid out a distinction between what the DOL called “tipped duties” and what it called “related duties” within the same occupation. It provided examples of each. It then established two prohibitions on the use of the tip credit:

• The tip credit rate could not be applied to any time spent on “related duties” that exceeded 20% of the employee’s workweek.
• The tip credit rate could not be applied to any time spent on “related duties” that exceeded 30 continuous minutes.

The latter prohibition was brand new. It had no counterpart in the statutory text. And DOL had never previously announced any limit that applied on a scale of less than a single workweek.

The Restaurant Law Center and the Texas Restaurant Association filed a challenge to the new Final Rule in the United States District Cout for the Western District of Texas.  After the district court upheld the rule, the plaintiffs appealed to the U.S. Circuit Court of Appeals for the Fifth Circuit.

After the parties finished oral argument, the Supreme Court issued its decision in the Loper Bright case. That decision overruled the holding that provided the foundation of courts’ deference to administrative agencies (so-called “Chevron deference”). This meant that courts were now free to examine whether an agency’s decision was the correct reading of the statute, as opposed to merely being a “permissible” reading.

Against this backdrop, Judge Jennifer Walker Elrod authored an opinion for the court that surgically dissected the DOL’ s rationale for its new Final Rule.

Under the FLSA, employers are authorized to pay the sub-minimum tip-credit rate to “tipped employees.” The text of the FLSA defines a tipped employee as “any employee engaged in an occupation in which he customarily and regularly received more than $30 a month in tips.”

The dispute turned on the meaning of the phrase “engaged in an occupation.”  Using dictionary definitions, the court held that the phrase was analogous to “employed in a job.” 

The DOL argued that “engaged in” must mean something more than just “employed in.” The court  rejected that argument because it would lead to implausible results. For example, why would a server no longer be engaged in the occupation of server just because the amount of time that she spent bussing tables ticked over from 30 minutes to 31 minutes?  And what occupation would she be deemed to be engaged in at that point? 

As the Fifth Circuit observed, the FLSA “does not ask whether the duties composing that given occupation are themselves individually tip-producing.”

Thus, the natural reading of the “engaged in” language was simply to address the problem of an employee who works in two or more different occupations for the same employer and to limit the use of the tip credit rate to time spent in the tipped occupation(s).

The Court also found that the DOL’s rationale for the Final Rule was “arbitrary and capricious,” which provided an independent basis for striking it down. Even if the DOL were authorized to engage in some line-drawing to identify which duties made up a given occupation,
“the ‘line’ that DOL has drawn discounts many core duties of an occupation when those duties do not themselves produce tips.” 

The court was particularly troubled by DOL’s focus on the length of time spent on various duties. “In short, as to supporting work, the Final Rule replaces the Congressionally chosen touchstone of the tip-credit analysis—the occupation—with one of DOL’s making—the timesheet.”

Because the DOL’s Final Rule violated the Administrative Procedure Act, the Fifth Circuit reversed the lower court’s decision and entered summary judgment on behalf of the Restaurant Law Center and the Texas Restaurant Association. Its order “vacated” the Final Rule, meaning the rule has no further force or effect.

DOL is likely to appeal this opinion to the Supreme Court, so it would be premature to declare this the end of the story. But if this opinion is upheld, it will eliminate a rule that has provided the foundation for decades of improper intrusion by plaintiffs and courts into the management of restaurants and other hospitality providers. That intrusion has caused the hospitality industry as a whole to spend countless millions of dollars litigating these claims.

The Fifth Circuit’s opinion is a decisive repudiation of DOL’s misguided approach.  If upheld, it will mark the end to DOL’s hyperregulation of the work of hospitality employees.