On August 23, 2024, the U.S. Court of Appeals for the Fifth Circuit vacated the U.S. Department of Labor (DOL)’s “80/20/30” rule. This regulation was formally reintroduced by the DOL in 2021 and concerned tipped wages under the Fair Labor Standards Act (FLSA), which allows employers to take a tip credit and pay tipped employees $2.13 per hour, assuming tips make up the difference to meet the minimum wage requirements.
 
The now-vacated 80/20 rule allowed employers to claim a tip credit only if an employee did not spend more than 20% of their time on non-tipped activities.

Specifically, the rule defined three categories of work:
1.    Directly Tip-Producing Work: Tasks like a server providing table service.
2.    Directly Supporting Work: Tasks such as a server setting and bussing tables.
3.    Work Not Part of the Tipped Occupation: Tasks like a server preparing food.
 
Why Was the 80/20 Rule Vacated?
In the case of Restaurant Law Center v. U.S. Department of Labor, the court found that the 80/20 rule created an arbitrary and impermissible distinction between tip-producing and tip-supporting work, which conflicted with the statutory language and intent of the FLSA. The FLSA defines a “tipped employee” as someone who “customarily and regularly receives more than $30 a month in tips.” The court argued that the DOL's interpretation imposed an unnecessary burden on employers to monitor and categorize employees' tasks into separate buckets, leading to confusion and potential misclassification.

For example, a server performing side work, such as rolling silverware or bussing tables, could fall into a gray area under the DOL’s rule. The court decided that rather than stripping an employee’s “tipped employee” status when they aren’t engaged in direct tip-generating work, they would only lose that status if they performed duties unrelated to their tipped occupation—like a waiter also handling maintenance work.
 
The Fifth Circuit’s decision sets aside the 80/20 rule and clarifies that employees engaged in a tipped occupation will be considered to be spending their time on tipped activities, regardless of whether those activities directly generate tips.
 
What Does This Mean for Your Business?
•    Simplified Tip Credit Application: With the vacatur of the 80/20 rule, employers no longer need to distinguish between tip-producing and tip-supporting work or closely monitor the time employees spend on these tasks to apply the tip credit under federal law.
•    State and Local Laws Still Apply: Despite this federal change, states like Pennsylvania have their own tipping regulations that remain in effect. For example, Pennsylvania has a slightly higher minimum wage for tipped employees ($2.83 per hour versus the federal $2.13) and its own version of the 80/20 rule. While the Pennsylvania rule was not expressly vacated by the Fifth Circuit’s decision, its enforcement could change following this ruling. Employers must comply with both federal and state regulations, adhering to whichever is more beneficial to employees.
•    Tip Credit Exclusions Remain: As was the case previously, employers cannot take a tip credit when an employee performs tasks unrelated to their tipped occupation. For example, a bartender doing maintenance work would need to be paid at least the full minimum wage for those hours.
 
Stay Compliant and Informed
It’s crucial for hospitality employers to stay on top of these changes to ensure compliance. The federal landscape has shifted, but state and local laws may still impose additional requirements. Employers should carefully review their policies and practices to make sure they align with current regulations.
 
How Can CTR Payroll | HR Help?
Navigating these updates can be challenging, especially with varying rules across states. CTR Payroll | HR is here to support you with compliance and payroll management. Reach out to us if you need help updating your processes or understanding how these changes impact your business.
 

 ✴️Need help keeping your organization compliant? Contact us!