Employers beware: The tip credit is back

Hospitality employers take note: The Department of Labor’s (DOL) tip rule has been struck down. The tip credit is a provision of the Fair Labor Standards Act (FLSA) that allows employers to pay tipped employees a lower direct wage as long as their tips make up the difference to reach the minimum wage. However, the tip credit has been a source of confusion and litigation for many hospitality employers, which have faced conflicting and changing rules from the DOL on how to apply it. 

Background

In 2021, the DOL issued a final rule that set strict limits on the amount of time tipped employees could spend performing work that didn’t directly generate tips, such as cleaning tables or preparing food. The rule, which was based on earlier DOL guidance known as the "80/20" or "20%" rule, prohibited employers from taking a tip credit if employees spent more than 20% of their hours in a workweek or more than 30 minutes in a shift on such tasks.

The rule was challenged by restaurant industry groups, which argued it was contrary to the FLSA and arbitrary and capricious. The case went through several rounds of litigation until the U.S. Court of Appeals for the 5th Circuit issued a long-awaited decision on August 23, 2024, striking down the rule and voiding it nationwide.