Loper Bright strikes again! In Restaurant Law Center v. DOL, decided August 23, 2024, the U.S. Court of Appeals for the Fifth Circuit set aside regulations crafted by the Wage and Hour Division of the U.S. Department of Labor (DOL) that were intended to transform the way tipped employees are paid. The court found that DOL’s Final Rule was contrary to the clear statutory text of the Fair Labor Standards Act (FLSA) because it imposed a line-drawing regime that Congress did not contemplate, and thus was due to be set aside. As in the recent Texas case, Ryan LLC v. FTC, that invalidated the Federal Trade Commission’s attempt to ban non-compete agreements between employers and employees, the federal judiciary is snapping the agencies’ chain, reminding them that only Congress can delineate their regulatory authority.

Section 203(m) of the FLSA permits an employer to take what is commonly called a “tip credit” when paying the wages of any “tipped employee.” This enables the employer to pay tipped employees only $2.13 per hour in cash wages—significantly below the current federal minimum wage of $7.25 per hour—under the theory that they will earn at least $5.12 per hour in tips. The FLSA defines a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.”

This rule has generated no small amount of controversy, and various administrations have tinkered with it since at least 1967, attempting to parse out “tipped work,” like table service, from related but not directly tipped work, like rolling silverware in napkins. Notably, DOL has issued various forms of guidance over the years suggesting that an employee would only qualify as a “tipped employee” if they spent at least 80% of their time doing work for which they received tips and no more than 20% of their time engaged in “non-tipped occupations,” such as rolling silverware.

In December 2021, DOL issued a Final Rule that effectively codified its longstanding 80/20 guidance. The Final Rule added a new subsection (f) to 29 C.F.R. § 531.56, explaining what it means to be “engaged in a tipped occupation.” Notably, “tipped occupation” is not a term that appears in the statute. The Final Rule declared that an employer may take the tip credit for tip-producing work, but that if more than 20 percent of an employee’s workweek is spent on directly supporting work, the employer cannot claim the tip credit for the excess. Nor can directly supporting work be performed for more than 30 minutes at any given time. The Final Rule also prohibited an employer from taking the tip credit for any time spent on work not part of the “tipped occupation.”

The Restaurant Law Center challenged the Final Rule and moved for a preliminary injunction, which the district court denied. The court eventually granted DOL’s motion for summary judgment, deferring to DOL pursuant to the Chevron doctrine. The Restaurant Law Center appealed. Shortly after oral argument, the Supreme Court overruled Chevron in Loper Bright Enterprises v. Raimondo, holding that courts “may not defer to an agency interpretation of the law simply because a statute is ambiguous.” 

The Fifth Circuit began its analysis by observing that the Administrative Procedure Act (APA) directs courts to hold unlawful and set aside agency actions that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Loper Bright overruled Chevron, and directed courts to return to the APA’s basic textual command to “independently interpret the statute and effectuate the will of Congress.” It’s not a case of undermining agency expertise, as many critics of Loper Bright have suggested: courts are constantly faced with statutory ambiguities and genuinely hard cases. But the APA instructs courts to use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity instead of simply declaring an agency’s reading “permissible” and washing their hands of the dispute.

Turning to the task at hand, the court naturally began with the words of the statute, which define a “tipped employee” as “any employee engaged in an occupation in which he customarily and regularly receives more than $30 a month in tips.” DOL took a wrong turn when it began to think in terms of “tipped occupations,” because the statute defines “tipped employees.” To draw an analogy to another feature of the FLSA, every employee is either “exempt,” and thus not entitled to overtime pay, or “nonexempt,” and thus due to be paid time-and-a-half for every hour worked over 40 in any week. One or the other, but not both. It’s kind of like being pregnant: either you are, or you aren’t. There’s no hybrid status, no middle ground. DOL’s interpretation threatened to turn the statute’s $30-in-tips-per-month threshold requirement into a nullity by focusing instead on individual tasks, which would betray the court’s obligation to give meaning to every word in the statute.

The 80/20 standard is indeed of some vintage, having been applied (off and on) since at least 1988. But the court found that “while longstanding agency practice might have the ‘power to persuade,’ it has never had the ‘power to control.’” Nor can an agency achieve by adverse possession a result that the statutory language cannot support.

Loper Bright held that even without Chevron, courts still must conduct an arbitrary-and-capricious analysis to fix the boundaries of delegated authority and ensure that the agency has engaged in reasoned decisionmaking within those boundaries. The Fifth Circuit found that DOL’s line-drawing exercise that focused on duties could not be squared with the statute’s focus on “tipped employees.” Congress asked only whether an employee is engaged in an occupation in which they receive tips:

Inevitably, employees in any occupation receiving tips will regularly be tasked with duties that merely support tip-producing work. Servers will set and buss tables. Bartenders will prepare drink mixes. A parking attendant will move patrons’ cars around the valet parking garage. The Final Rule ties the tip credit not to the character of these various duties as integral to their respective occupations, but to the amount of time that these duties take. Like the tipping nexus, this temporality requirement can be found nowhere in the statute.

This disconnect from the statutory language renders the rule arbitrary and capricious. The focus is on the tipped employee, not their job’s component activities.

This decision, of course, is good news for employers. They won’t have to follow their employees around with stopwatches or monitor the minutiae of activities that are included within tipped occupations. And it’s not bad news for tipped employees, who likely would have gained little from implementation of DOL’s Final Rule.

The full citation for the case is Rest. L. Ctr. v. United States DOL, No. 23-50562, 2024 U.S. App. LEXIS 21449 -3 (5th Cir. Aug. 23, 2024).

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