A federal appeals court has struck down limits on restaurant operators’ use of the tip credit, calling the U.S. Department of Labor's so-called 80/20 rule “arbitrary.”
The ruling is a win for restaurant operators who balked at the rule’s strict guidelines over how tipped workers, notably servers, can be paid a lower rate of pay for work that doesn’t yield gratuities.
Restaurants in states that use the federal minimum wage of $7.25 an hour are allowed to pay workers who receive tips, typically servers and bartenders, a lower rate of pay, $2.13 per hour, so long as their tips make up the difference. Employers are able to count part of the workers’ tips toward meeting those minimum wage requirements.
Under the 80/20 rule, however, employers were required to pay a full minimum wage to servers and bartenders for side work that doesn’t directly relate to their tip-earning functions, if that work exceeds 20% of their weekly hours or lasts 30 minutes or longer.
The rule first appeared in 1988. The U.S. Department of Labor rescinded the rule in 2018 under the Trump Administration but reinstated it in 2021 under President Biden.
That prompted a lawsuit from the Restaurant Law Center, the legal arm of the National Restaurant Association, and the Texas Restaurant Association.
A lower court had agreed with the administration and affirmed the rule. But last week, an appeals court reversed that decision, effectively saying that the rule was too "granular" in dividing up tasks between tipped and non-tipped work.
“The final rule is so granular in divvying up component tasks, a single occupation could quickly break apart, implausibly, into many,” the appeals court wrote. The court in particular cites “idle time,” in which a server is idle during a slow shift, which is defined as “supporting work” subject to the limits under the rule.
“If the server is idly standing by to serve customers for 21% of his work week, or for 31 continuous minutes, he is no longer engaged in his occupation and is no longer a tipped employee for the duration of that excess time,” the judges wrote. “What occupation, then, would he be engaged in? The final rule creates a paradox that is not obviously capable of resolution.”
The decision voided the rule, meaning employers will no longer be required to comply with distinctions between tip-producing and tip-supporting work. The Biden Administration could take the matter to the Supreme Court, but that court has proven to be even tougher on regulators.
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