Federal appeals court deals mortal blow to tipped employee regulations

Hospitality employers with tipped employees received welcome news in late August when a federal appeals court overturned the Department of Labor’s (DOL) so-called 80/20/30 rule—the highlight of a new set of regulations that would have dished out a huge serving of timekeeping and compliance headaches. The August 23 ruling by the U.S. 5th Circuit Court of Appeals vacated the DOL regulations, holding them to be contrary to the statutory text of the Fair Labor Standards Act (FLSA) and “arbitrary and capricious.”

Background

Under the FLSA (the primary federal law that regulates wage and hour issues), employers can count certain tips received by a “tipped employee”—one who regularly receives more than $30 a month in tips—toward their federal minimum wage obligation. The employer can pay the tipped employee a much lower hourly wage of $2.13 as long as the employee earns enough in tips to make up the difference.

If the employee’s tips don’t cover the difference between the regular minimum wage of $7.25 and the tipped minimum wage of $2.13, the employer must pay the remainder. Employees who don’t earn tips get the full federal minimum wage.

The FLSA has provided for a reduced wage to tipped employees since 1966. But the details of the DOL’s enforcement policy have switched back and forth over the years, often depending on which political party held the White House.