The FLSA permits an employer to take a tip credit toward its minimum wage and overtime obligation(s) for tipped employees per Section 3(m)(2)(A). An employer that claims a tip credit must ensure that the employee receives enough tips from customers, and direct (or cash) wages per workweek to equal at least the minimum wage and overtime compensation required under the FLSA.
Legal debate has persisted over how to treat a tipped employee’s time spent on non-tipped activities related to the tipped occupation. In 2021, the Department of Labor codified the “80/20” rule, which required employers to pay employees the full minimum wage, rather than the lower tipped wage, whenever an employee spent more than 20 percent of their time in a week performing non-tipped duties. The rule identified three distinct categories: 1) direct tip producing work, for which an employer could apply the tip credit, 2) work that is not part of the tipped occupation, for which an employer could not apply the tip credit, and 3) direct supporting work, for which an employer could not apply the tip credit if the work was for a “substantial amount of time.”
The Fifth Circuit has now struck down this rule, finding that it is contrary to the text of the FLSA. Going forward, there will be no distinction regarding so-called non-tipped activities and tipped activities. That is, employers may use the tip credit rule as provided under the FLSA.
Note that some states have more employee-friendly laws regarding tips. Such state laws are unaffected by the Fifth Circuit’s decision.
