Federal Court to Reexamine Merits of a Nationwide Injunction to Tip Credit Rule

On April 28, 2023, the U.S. Court of Appeals for the Fifth Circuit found that enforcing the Department of Labor’s (DOL) tip credit rule could cause irreparable harm to restaurants and other employers with tipped employees. Now, a federal district court in Texas will have a second opportunity to consider if a nationwide preliminary injunction should be entered, halting enforcement while the regulation is litigated.

In October 2021, the DOL issued its final 80/20 tip credit rule. See CFR § 531.56. As business owners with tipped workers know, the tip credit allows employers to pay a smaller base wage ($2.13) and account for tips the employees earn toward the minimum wage rate ($7.25). The tip credit rule provides that an employer cannot take the tip credit if an employee spends more than 20% of their time weekly or 30 minutes continuously engaged in non-tip-producing work.

For instance, a server cannot spend a substantial amount of their time on tasks that only indirectly support the tip-producing work of table service. Thus, under the regulation, an employer would lose the tip credit if a server spent more than 20% or 30 continuous minutes on “dining room prep work, such as refilling salt and pepper shakers and ketchup bottles, rolling silverware, folding napkins, sweeping or vacuuming under tables in the dining area, and setting and bussing tables.” § 531.56(f)(3)(ii). What’s more, a tipped employee must be paid the full minimum wage for any time spent on tasks that are not part of the tipped occupation — i.e., a server cannot clean bathrooms or prepare food.

The Restaurant Law Center sued the DOL in December 2021, seeking to invalidate the tip credit rule and to have its enforcement enjoined while the matter was litigated. The district court denied the Restaurant Law Center’s motion for a preliminary injunction, finding that it did not provide sufficient evidence of irreparable harm from the tip credit rule’s implementation. The Fifth Circuit disagreed, noting that the tip credit rule imposes significant costs on employers and additional monitoring and recordkeeping requirements. The plaintiffs provided evidence that compliance with the tip credit rule would require an additional eight to ten hours weekly for management and nationwide would cost approximately $177 million annually.

Because the Fifth Circuit found sufficient evidence of substantial harm, it remanded the case to determine if the remaining preliminary injunction factors could be met, including the plaintiff’s likelihood of success on the merits.