Federal appeals court overturns controversial tip credit rule

A federal appeals court has overturned the Biden administration’s 80/20 rules. | Photo: Shutterstock.

A federal appeals court has struck down restrictions on restaurant operators’ use of tip credits, calling the U.S. Department of Labor’s so-called 80/20 rule “arbitrary.”

The ruling is a victory for restaurant operators who had resisted the law’s strict rules governing how tipped workers, particularly waiters, can be paid less for non-tipped work.

Restaurants in states that have the federal minimum wage of $7.25 per hour are allowed to pay their tipped employees – typically servers and bartenders – a lower hourly wage of $2.13 as long as their tips make up the difference. Employers can count a portion of their employees’ tips toward meeting these minimum wage requirements.

However, under the 80/20 rule, employers were required to pay waiters and bartenders the full minimum wage for outside work not directly related to their tip-earning role if the work exceeded 20 percent of their weekly working hours or lasted 30 minutes or longer.

The rule was first introduced in 1988. The U.S. Department of Labor repealed it in 2018 under the Trump administration, but reinstated it in 2021 under President Biden.

This led to a lawsuit by the Restaurant Law Center, the legal division of the National Restaurant Association, and the Texas Restaurant Association.

A lower court had agreed with the government and upheld the rule, but last week an appeals court overturned that decision, saying the rule was too “granular” in allocating duties between tipped and non-tipped workers.

“The final rule is so detailed in its allocation of subtasks that a single task could quickly and unimaginably break down into many,” the appeals court wrote. The court specifically points to “idle periods” when a server is idle during a quiet shift, which is defined as “support work” and subject to the rule’s restrictions.

“If the waiter spends 21% of his work week, or 31 minutes at a time, idle waiting to serve customers, he is no longer performing his job and no longer a tipped employee for the duration of that overtime,” the judges wrote. “What job would he then be performing? The final rule creates a paradox that is clearly irresolvable.”

The decision struck down the rule, meaning employers are no longer required to distinguish between work that generates tips and work that supports tips. The Biden administration could take the issue to the Supreme Court, but it has proven even tougher on regulators.

Members make our journalism possible. Become a Restaurant Business member today and receive exclusive benefits, including unlimited access to all of our content. Sign up here.