For decades, the issue of the “tip credit” has been the subject of discussion and guidance from the U.S. Department of Labor (DOL). In 1988, the DOL published what is known as the “80/20” guidance in its Field Operations Handbook. The “80/20 Rule” essentially stated that no more than 20% of an employee’s time could be spent on activities that are not directly tip-generating (e.g. bussing tables after the patrons are gone). That guidance remained in place for more than twenty (20) years, until a 2009 DOL opinion rescinded it.

That 2009 opinion was quickly withdrawn, but then reinstated again some nine years later. Then, in 2020, the DOL issued an employer-leaning Final Rule anticipated to take effect in March 2021 which would have further revised the tip credit rules. In light of the change in presidential administrations though, that Rule never went into effect. Instead, in December 2021, the DOL issued a new Rule, this time with more limitations on when an employer could claim the tip credit.

Under the December 2021 Rule, employers would only be permitted to take a tip credit for work that was being performed by a “tipped employee” which was part of that employee’s “tipped occupation.” The phrase “tipped occupation” does not appear in the statutory language. The Rule created three types of work: directly engaging in tip-producing work (such as waiting on customers); (2) directly supporting work (bussing tables); and (3) work which is not part of the tipped occupation (preparing food). The Rule allowed the employer to take the tip credit for tip-producing work, but if more than 20% of the employee’s workweek was spent on directly supporting work, the employer was prohibited from taking a tip credit for that excess, or for any time spent on work that is not part of the tipped occupation. Further, the Rule prohibited employees from performing supporting work for more than thirty (30) minutes at a time. Understandably, this Rule created deep concerns for business owners in the hospitality industry.

In response to the new Rule, the Restaurant Law Center and the Texas Restaurant Association filed a lawsuit in the Western District of Texas seeking a permanent injunction blocking enforcement of the December 2021 Rule. After several years of litigation, the parties found themselves before the 5th U.S. Circuit Court of Appeals (headquartered in New Orleans and covering appeals from federal courts sitting in Texas, Mississippi, and Louisiana) after the district court denied the application for an injunction and ruled in favor of the DOL. The 5th Circuit ultimately struck down the December 2021 Rule, finding it was “not in accordance with law.” While the 5th Circuit covers only three (3) states, the ruling is intended to have a nationwide effect. The Court also determined the Rule was “arbitrary and capricious,” and that when drafting it, the DOL considered matters beyond what Congress intended the DOL to consider.

The December 2021 Rule undoubtedly created a lot of unanswerable questions, or in the words of the 5th Circuit, “creates a paradox that is not obviously capable of resolution.” The December 2021 Rule was poised to lead to “strange scenarios,” where a single employee performing a particular job duty may or may not be engaged in tip-producing work depending on the circumstances. The 5th Circuit’s ruling represents a victory for those employers who deal with the tip credit, and those employers can, for now at least, dispense with the frustration of attempting to differentiate between “tip-producing” and “tip-supporting” work.

Katie Campbell is an attorney with Crowe & Dunlevy, and a member of the Labor & Employment Practice Group.