In a win for restaurant employers using “tip credit” to pay
employees, the U.S. Court of Appeals for the Fifth Circuit ruled
that a Texas District Court erroneously denied a preliminary injunction against
enforcement of a rule that causes “irreparable harm” to employers. In the 2-1 opinion, the Fifth Circuit panel
reversed the decision against the Restaurant Law Center and Texas Restaurant
Association in the groups’ action against the U.S. Department of Labor (DOL),
and sent the matter back to the lower court for further proceedings consistent
with its ruling.
Generally, employers are required
to pay nonexempt workers at least the minimum wage of $7.25 per hour. However,
the Fair Labor Standards Act (FLSA) allows an employer to satisfy a portion of
its minimum wage obligation to a “tipped employee” by allocating a partial
credit, known as a “tip credit,” toward the minimum wage based on the amount of
tips an employee receives. This allows the employer to pay a direct cash wage
as low as $2.13 per hour, provided they make up the difference with tips earned
by and paid to the employee. Tip credit is used extensively in the restaurant
and hospitality industries to manage high up-front labor costs. However, proper
compliance with tip credit can be complex and mistakes are common.
In 2021, the Biden Administration’s
DOL introduced a new rule that further complicated the use of the tip credit method
for employers. Under the “80/20” and “continuous 30-minute” provisions, if an
employee spends more than 20% of their time or 30 continuous minutes doing
non-tip-producing work, the employer cannot utilize tip credit and is required
to pay at least the full minimum wage. DOL makes clear its hostility to the tip
credit method of payment and its intent to discourage its use and vigorously
investigate any allegations of noncompliance.
In February 2022, the U.S. District Court for the Western District of Texas denied
a motion for a preliminary injunction filed by the Restaurant Law Center and
Texas Restaurant Association. In its ruling, the District Court did not reach
the merits of their claims against the rule, but instead held that Plaintiffs
“had failed to show they were irreparably harmed by the costs of complying with
the new rule” and found the additional costs of time monitoring and
recordkeeping were “purely speculative.” “overstated,” and “unspecific.”
The Fifth Circuit panel majority
held that the District Court ignored well-established precedent that
“non-recoverable compliance costs for ongoing managements costs to ensure
compliance with the 80/20 and continuous 30-minute provisions are usually irreparable
harm.” The opinion noted that Plaintiffs’ witnesses testified that managers
must incur an additional 8-10 hours of time a week to comply with the rule, and
the DOL conceded that compliance costs nationwide would be $177 million
annually.
The majority strongly described the
DOL’s arguments that the new rule did not impose new recordkeeping requirements
on employers as “meritless.” The court stated:
To claim the tip credit, employers must “ensure that tipped
employees are not spending more than 20 percent of their time on directly
supporting work, or more than 30 minutes continuously performing such duties.”
We cannot fathom how an employer could honor these specific constraints without
recording employee time. What if an employer is investigated by the Department
or sued by an employee for wrongly claiming the tip credit? Without time
records, how could an employer defend itself?
***
In the same vein, the Department
also claims that “employers need not engage in ‘minute to minute’ tracking of
an employee’s time in order to ensure that they qualify for the tip credit.” No
explanation is given (nor can we imagine one) why an employer would not have to
track employee minutes to comply with a rule premised on the exact
number of consecutive minutes an employee works. The Department also assures us that a
“30-minute uninterrupted block of time . . . can be readily distinguished from
the work that surrounds it. Maybe so, but that does not remove an employer’s
need to account for blocks of employee time,
especially if an employer is accused of violating the rule.
Finding that the restaurant
Plaintiffs met their burden of showing irreparable harm, the case will return
to the the District Court to determine if the Plaintiffs can meet the remaining
tests for a preliminary injunction and succeed on the merits of the case.
In October 2022 while the appeal
was pending, the case was reassigned from Judge Robert Pitman to Judge David
Ezra. Prior to the Fifth Circuit ruling, both the DOL and the restaurant
Plaintiffs filed motions for summary judgment which have yet to be ruled upon.
Please contact Mark Fijman or any member of
Phelps’ Labor and Employment team if you
have questions or need compliance advice or guidance on labor and employment
issues in the restaurant or hospitality industry.
