DOL Beats Restaurant Associations’ Lawsuit to Block Tip Credit Rule

On July 6, 2023, a Texas federal judge ruled that the U.S. Department of Labor’s (“DOL”) Final Rule limiting subminimum-wage payments to tipped employees is permissible under federal labor law. The Restaurant Law Center (“RLC”)[1] and the Texas Restaurant Association (“TRA”) challenged the DOL’s Final Rule in December 2021 in the U.S. District Court in the Western District of Texas because, among other things, it violated the Fair Labor Standards Act (“FLSA”). Attorneys for the RLC and TRA announced they will appeal the district court’s ruling.

For now, the Final Rule continues to be in effect. Below is a breakdown of how the Final Rule applies to the restaurant and bar industry.

The FLSA, tipped employees, and the tip credit.

Under the FLSA, a tipped employee is “engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” For those employees, an employer can take a tip credit to offset the employee’s wages by the amount of tips, down to $2.13 per hour, so long as the employee’s total earnings—wages plus tips—add up to minimum wage ($7.25/hr).

Jurisdiction	Basic Combined Cash & Tip Minimum Wage Rate	​Maximum Tip Credit Against Minimum Wage	Minimum Cash Wage
Federal: FLSA	$7.25	$5.12	$2.13
Texas	$7.25	$5.12	$2.13

The FLSA does not preempt more protective state or local laws. Many states have tipped employee pay provisions that do not allow for a tip credit or otherwise differ from the FLSA in essential respects. Since Texas’ minimum cash wage payment is the same as required under the FLSA ($2.13/hr), the Final Rule applies in all aspects for tipped employees in Texas.

The Final Rule.

The DOL issued the Final Rule on October 28, 2021, and the Final Rule went into effect on December 28, 2021. The Final Rule has several provisions. First, it clarifies that the tip credit is only available for hours spent working in the tipped occupation. Second, it revived and revised the 80/20 Rule (described below) and added a thirty-minute limitation on non-tipped work allowable when taking the tip credit. Third, it elaborates on who qualifies for the tip credit, stating that an “employee is engaged in a tipped occupation when the employee performs work that is part of the tipped occupation” and an “employer may only take a tip credit for work performed by a tipped employee that is part of the employee’s tipped occupation.” Lastly, it outlines a three-part framework to classify tipped work: (1) tip-producing work; (2) directly supporting work; and (3) work that is not part of a tipped occupation.

Work that is not part of a tipped occupation.

Work that is not part of the tipped occupation means “any work that does not provide service to customers for which tipped employees receive tips, and does not directly support tip-producing work.” An employer may not take a tip credit for any time a tipped employee performs work that is not part of the tipped occupation. There is no exception for an insignificant amount of time.

In general, food preparation is work that is not part of the tipped occupation of a server. However, a server’s tip-producing work may include some work performed in the kitchen. Examples include toasting bread to accompany prepared eggs, ladling pre-made soup, and scooping ice cream onto pre-made desserts. These tasks are distinguishable from a server assigned to perform general food preparation.

Tip-producing work.

Tip-producing work means “any work performed by a tipped employee that provides service to customers for which the tipped employee receives tips.” An employer may take a tip credit for the time when the tipped employee performs tip-producing work. Tip-producing work is construed broadly to encompass any work a tipped employee performs that provides service to customers for which the tipped employee receives tips. The tip-producing work of a tipped employee who prepares and serves food to customers (e.g., sushi chef) includes all tasks performed to provide the customer service work of preparing and serving the food. Of course, restaurant and bar workers’ tasks are nuanced; thus, additional analysis is often necessary.

Multitasking is one such nuance. An employer may take a tip credit when a worker simultaneously performs tip-producing work and directly supporting work. This may arise when a bartender organizes the bar while talking with customers. However, that contrasts with a tipped employee who performs directly supporting work while there is a lull in service. For example, a server who folds napkins while waiting for her last table to pay their bill is not actively engaged in tip-producing work. Thus the time is correctly categorized as directly supporting work.

Another nuance involves particular directly supporting work raised to the tip-producing category if the work performed is provided to a customer. The determination is whether the tipped employee can receive tips because they perform that task for a customer. For example, a bartender performs tip-producing work when she retrieves a particular beer from the storeroom at a customer’s request; however, she performs directly supporting work when she retrieves a case of beer from the storeroom to stock the bar in preparation for serving customers.

Directly supporting work.

Directly supporting work means “work performed by a tipped employee in preparation of or to otherwise assist tip-producing customer service work.” Employers may take a tip credit for the time when an employee is engaged in directly supporting work, provided it is not performed for a substantial amount of time. An employee has performed directly supporting work for a substantial amount of time if the tipped employee’s directly supporting work either (1) exceeds 20% of the hours worked during the employee’s workweek; or (2) is performed for a continuous period exceeding 30 minutes.

An employer can only take a tip credit for directly supporting work for up to 20% of the hours in an employee’s tipped workweek.[1] Suppose a tipped employee spends more than 20% of those workweek hours on directly supporting work. In that case, the employer cannot take a tip credit for any time that exceeds 20% of the hours. Calculation of 20% is made by subtracting the hours in the workweek that an employer does not take a tip credit, either because the employee is engaged in a non-tipped occupation, the employer decides not to take the tip credit for those hours, or because those hours exceed the 30-minute threshold. Any time that is compensated at the full minimum wage because it exceeds the 20% limit, however, is not excluded from the workweek in calculating the 20% tolerance. The employer must only calculate the 20% tolerance once during the workweek.

Ex. 1. A server is employed for 40 hours a week and performs 5 hours of work that is not part of the tipped occupation, such as cleaning the kitchen, for which the server is paid a direct cash wage at the full minimum wage. The server also performs 18 minutes of non-tipped directly supporting work twice a day, for a total of three hours a week. The employer may take a tip for all of the time the employee spends performing the directly supporting work because this time does not exceed 20% of the workweek. Because this employee has been paid the full minimum wage for a total of 5 hours a week, the employee could perform up to 7 hours of directly supporting work (35 hours x 20% = 7 hours) without exceeding the 20% tolerance.

Ex. 2. A server is employed for 40 hours a week and performs 5 hours of work that is not part of the tipped occupation, such as cleaning the kitchen, for which the server is paid direct cash wage at the full minimum wage. The server also performs 10 hours a week of non-tipped directly supporting work, in increments of time that do not exceed 30 minutes. The 5 hours of work paid at the minimum wage is excluded from the workweek for purposes of the 20% calculation. Thus, the employer may take a tip credit for 7 hours of the directly supporting work (35 hours x 20% = 7 hours), but must pay the server a direct cash wage equal to the minimum wage for the remaining 3 hours.

When an employee performs non-tipped, directly supporting work for up to 30 minutes, the employer can take a tip credit for that time, subject to the 20% workweek limit. Time that an employer does not take a tip credit because the employee has performed non-tipped work for more than 30 minutes is excluded from the workweek used to calculate the 20% tolerance.

Ex. 3. If a tipped employee is required to perform directly supporting work continuously for two hours after the establishment is closed to customers, the employer may take a tip credit for the first 30 minutes, but must pay the full Federal minimum wage for the remaining hour and a half. The first 30 minutes of directly supporting work, for which the employer took a tip credit, would count toward the 20% workweek limit.

Ex. 4. If a tipped employee works five 8-hour shifts (40 hours a week) and is required to perform one continuous hour of directly supporting work at the beginning and end of each, the employer must pay the employee a direct cash wage of the full minimum wage after the first 30 minutes of each hour. A total of 5 hours a week (30 minutes x 2 blocks x 5 shifts) is excluded from the total hours worked for the purposes of calculating 20% because the employee has been paid the full minimum wage for that time. Thus, the employee may perform 7 hours of directly supporting work (35 hours x 20% = 7 hours) without exceeding the 20% tolerance. Because the employee has already performed 5 hours of directly supporting work for which the employer has taken a tip credit (the first 30 minutes of each one-hour block), this employee may perform an additional 2 hours of directly supporting work (in increments of 30 minutes or less) before she exceeds the 20% tolerance.

Ex. 5. Same as Ex. 4, except now the employee performs more than 2 additional hours on directly supporting work(in increments of time that do not exceed 30 minutes), those additional hours are not excluded in calculating the 20% tolerance. Any time that is compensated at the full minimum wage solely because it exceeds the 20% limit is not excluded from the workweek for the purposes of calculating the 20% tolerance.

Examples of the three-part framework.

The chart below summarizes categorical examples relating to servers, bussers, and bartenders. According to the DOL, these examples are illustrative and not exhaustive.

	Server	Busser	Bartender
Tip-producing	Providing table service Taking orders Making recommendations Serving food and drink	Assisting servers with their tip-producing work for customers Filling water glasses Clearing dishes from tables Fetching and delivering items to and from tables Bussing tables Changing linens Setting tables	Making and serving drinks Talking to customers at the bar If the bar includes food service, serving food to customers
Directly Supporting	Dining room prep work Refilling salt and pepper shakers and ketchup bottles Rolling silverware Folding napkins Sweeping or vacuuming under tables in the dining area Setting and bussing tables	Pre- and post-table service prep work Folding napkins Rolling silverware Stocking the busser station Vacuuming the dining room Wiping down soda machines, ice dispensers, food warmers, and other equipment in the service alley	Slicing and pitting fruit for drinks Wiping down the bar or tables in the bar area Cleaning bar glasses Arranging bottles in the bar Fetching liquor and supplies Vacuuming under tables in the bar area Cleaning ice coolers and bar mats Making drink mixes Filling up dispensers with drink mixes
Not Part of Tipped Occupation	Preparing food (including salads) Cleaning the kitchen or bathroom	​Cleaning the kitchen or bathrooms	​Cleaning the dining room and bathrooms

Takeaways.

It’s no surprise that many restaurants and bars have chosen to ignore the Final Rule in hopes that the lawsuit would kill it or alter it meaningfully. But the district court vanquished those hopes. And it will take some time before the RLC and TRA can argue in front of the Fifth Circuit. So the Final Rule continues to be the law of the land.

If you are a Texas employer with tipped employees and you are not already in compliance with the Final Rule, then you should get into compliance ASAP.

If you are a tipped employee in Texas who earns a cash wage under $7.25, then your employer must be in compliance with the Final Rule. In fact, your employer should have been in compliance since December 28, 2021.

For further information on this topic, please get in touch with John B. Reyna at info@texashospitalitylaw.com. This material is provided for informational purposes only. It is not intended to constitute legal advice or create a client-attorney relationship between the Texas Hospitality and Non-profit Law Center, PLLC, and any recipient.

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[1] RLC is an affiliate, and the legal arm, of the National Restaurant Association.

[2] In 1988, the DOL issued the 80/20 Rule (not promulgated as a regulation). The 80/20 Rule remained in place largely undisturbed until 2018. The 80/20 was rescinded only once before 2018, for less than three months. In 2018, the Trump DOL rescinded the rule through new guidance. In 2020, the DOL codified the recission; however, that rule never went into effect. Instead, the DOL withdrew the rule in 2021 and finalized a new rule codifying the 80/20 guidance and adding new protections. This new rule became the Final Rule.