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Fifth Circuit Court of Appeals Vacates the Department of Labor’s Rule for Tipped Employees – What It Means for Hospitality Businesses

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The Fifth Circuit Court of Appeals has overturned an important law that will significantly impact employees seeking to challenge their tips. In a recent decision in Restaurant Law Center and Texas Restaurant Association v. U.S. Department of Labor, the court overturned the U.S. Department of Labor’s (DOL) rule regarding tipped employees. This means that employers can once again take a tip credit without adhering to the strict time restrictions imposed by the previous rule.

Background of Restaurant Law Center and Texas Restaurant Association v. U.S. Department of Labor Case

The DOL’s rule, which went into effect in December 2021, required employers to limit non-tipped work for tipped employees to no more than 20% of their weekly work hours or 30 minutes per shift. This rule aimed to ensure that tipped employees were not exploited by employers who required them to perform excessive amounts of non-tipped work.

On August 23, 2024, a three-judge panel of the U.S. Fifth Circuit Court of Appeals found that the DOL’s rule violated the Administrative Procedures Act (APA), which governs how federal agencies can establish rules and regulations. They found two violations of the APA in two aspects:

  • Inconsistent with the Fair Labor Standards Act (FLSA): The court judged that the DOL’s rule conflicted with the clear language of the FLSA, making it invalid. The FLSA creates the right to a minimum wage, overtime pay, and other important employer standards for the protection of employees.
  • Arbitrary and Capricious: The court also found that the rule was not based on sound reasoning or evidence.

This decision could be good for employers who have faced legal challenges related to the tip credit. It effectively eliminates the previous rule and allows employers more flexibility in managing their tipped employees’ work hours. This means that courts can now decide on these matters without relying on the Department of Labor’s interpretation.

Implications for Employers

The Fifth Circuit Court of Appeals’ decision overturning the DOL’s tipped employee rule has significant implications for employers and employees alike. Here’s a breakdown of the key points, including both the immediate impact and long-term implications:

  • Reduced Legal Risk: Employers can now operate with less fear of legal challenges related to the tip credit, reducing their exposure to potential lawsuits and fines.
  • Increased Operational Flexibility: The decision provides employers with more flexibility in scheduling and assigning tasks to tipped employees, allowing for better management of their workforce.
  • Potential Cost Savings: Eliminating the strict requirements of the previous rule may allow employers to reduce labor costs and improve their bottom line.
  • Shift in Industry Practices: The overturn of the rule may lead to changes in industry practices as employers adjust to new regulations.
  • Impact on Employee Wages: While the decision may provide some short-term benefits for employers, it remains to be seen how it will ultimately affect the wages of tipped employees.
  • Potential for Future Regulatory Changes: The DOL may attempt to reinstate the rule or implement new regulations related to tipped employees in the future.

It is important to note that while the DOL’s rule has been overturned, the underlying principle of ensuring fair treatment of tipped employees remains in place. Employers should still strive to maintain fair working conditions and avoid exploiting their employees.

Dual Job Regulations

It is important to note that the Fifth Circuit Court of Appeals’ decision did not directly address the dual-jobs regulation under the Fair Labor Standards Act. This regulation pertains to employees who work in both tipped and non-tipped positions for the same employer.

For example, a waiter or server who also works as a dishwasher for the same restaurant would be considered in a dual job situation. In such cases, the employer can only claim a tip credit (where the employee’s tips can count towards their minimum wage) for the work performed in the tipped position. The employer cannot claim a tip credit for non-tipped work, like dishwashing tasks that do not involve direct customer service.

While the Fifth Circuit’s decision did not address dual job regulations specifically, it is essential for employers to remain aware of this existing regulation and ensure compliance with its requirements. If you have questions regarding how any of these labor laws may pertain to your business, contact the experienced labor and employment attorneys at MehaffyWeber. We can also help you understand regional rules for Texas employers.

Conclusion

The Fifth Circuit’s decision overturning the DOL’s tipped employee rule is a significant development with far-reaching implications for employers and employees in the United States. While the decision provides immediate benefits for employers, its long-term impact remains to be seen. Employers need to stay informed about any future developments and consult with legal counsel to ensure compliance with applicable labor laws.

The DOL has the option to appeal the Fifth Circuit’s decision to the U.S. Supreme Court. However, this process is time-consuming and uncertain. In the meantime, employers can benefit from the current ruling and operate under the previous, less restrictive guidelines regarding tipped employees. The Department could also ask the U.S. Supreme Court to review the case.

Contact the Labor and Employment Lawyers at MehaffyWeber for Help

At MehaffyWeber, we follow precedent-setting cases and vacated laws like this one to help you stay on top of the latest happenings in labor and employment laws. Our experienced labor and employment attorneys provide practical strategies for all sizes of businesses and industries. We also represent both individuals and businesses in a variety of labor and employment disputes, ensuring you stay protected under current employment laws.

Whether you need help drafting policies or resolving a legal issue with your employees, our team is here to assist you. We are experienced in current local and state regulations in Texas as well as nationwide employment laws and precedents like this case. Contact our employment lawyers today to get your questions answered and mitigate risk.

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