Restaurants’ Challenge to Tip Wage Limits Returns to 5th Circuit

Restaurant groups will get a second chance to present to a federal appeals court their case against a US Labor Department rule limiting when employers can use the tip-credit, or pay tipped-employees less than minimum wage.

Fifth Circuit Judges Jennifer Walker Elrod and James E. Graves Jr., joined by Louisiana federal court Judge Barry W. Ashe, will hear arguments April 29 from the Restaurant Law Center and the Texas Restaurant Association over why the rule change in effect in December 2021 should be tossed out.

The restaurant groups sued over the rule in 2021, warning that businesses face significant new staffing costs, while being forced to navigate onerous record keeping requirements. Their lawsuit argues that the rule conflicts with the Fair Labor Standards Act, and violates the Administrative Procedure Act and separation of powers.

But the Biden administration said the rule was necessary to prevent employers from forcing tip-earning employees to do too much “side work” or non-tip earning tasks during their downtime, while still paying them the lower tipped wage.

The FLSA permits employers to pay workers as little as $2.13 an hour so long as they regularly earn at least $30 in tips a month and the employer ensures that their take home pay after tips is at least the full minimum wage.

The rule at issue would require employers to pay tipped employees the federal minimum wage — which is currently $7.25, but higher in many states — if they spend more than 20% of their workweek doing non-tip earning duties or if they spend more than 30 minutes straight doing sidework, such as rolling silverware or filling salt and pepper shakers.

“The challenged rule properly recognizes—consistent with the Department’s longstanding guidance—that an employee is not ‘engaged in’ a tipped occupation when she performs non-tipped work that is unrelated to tip-producing work or performed for a substantial amount of time,” attorneys for the DOL said in their Dec. 23 brief to the Fifth Circuit defending the measure.

“That longstanding approach falls easily within the Department’s express authority to issue rules, regulations, and orders to implement the tip-credit provision.”

Second Showing

The April 29 arguments mark the second time the tipped wage rule has landed before the New Orleans-based US Court of Appeals for the Fifth Circuit.

Last year, the circuit sided with the restaurant groups in their appeal of a lower court’s denial of a nationwide preliminary injunction request, finding that the lower court erred in finding no evidence the restaurant groups were irreparably harmed by the rule.

But, that April 2023 ruling didn’t speak on the underlying legal questions the groups raised against the rule, which will be addressed in the arguments this week.

When remanded to the US District Court for the Western District of Texas last year, the restaurants were again unable to convince Judge Robert Pitman that the rule was out of line with the FLSA and should be set aside.

“Because the Court concludes DOL’s decision was a permissible construction of the FLSA and is not arbitrary and capricious, the Rule will be upheld by this Court,” Pitman wrote in his July decision denying the groups’ request to block the rule.

The restaurant groups appealed that decision in August, contending that the district court’s “flawed analysis” wouldn’t be able to “withstand appellate scrutiny,” putting the case back before the Fifth Circuit.

Amicus Briefs

Since the appeal, 11 GOP-led states and other hospitality businesses groups, including the American Hotel & Lodging Association, National Retail Federation, and others, filed friend of the court briefs in support of the restaurant groups’ arguments.

The GOP states, which include Ohio, Arkansas, Georgia, and Indiana, also raised the claim that the rule violates the principles of federalism by “removing States’ power to regulate in an area of traditional State concern.”

“This Court should set aside the Rule because the Department has not identified express or implied Congressional authorization for the Rule’s restructuring of traditionally State-regulated employment relationships,” the states’ November brief argued.

In its own brief to the Fifth Circuit, the restaurant groups argue that the Texas district court’s decision should be reversed, because the rule fails under the APA and the Chevron legal doctrine because the FLSA speaks clearly regarding the tip credit and the rule “is contrary to clear congressional intent.”

But without the rule, tipped-wage earners—especially women and people of color—will lose out on an important safety net, The Economic Policy Institute, National Women’s Law Center and Restaurant Opportunities Center United, said in an amicus brief to the Fifth Circuit defending the policy. They argue the DOL reasonably enacted the requirements in response to data and reports from tipped workers about employers “abusing the tip credit” even when workers have no opportunity to earn tips.

“The Department heard, considered, and ultimately acted on the wealth of comments and studies showing what restaurant workers have known for decades: the costs that restaurants save through tip credits are borne by their workers,” they wrote.

The case is Rest. Law Ctr. v. LABR, 5th Cir., No. 23-50562, oral arguments scheduled 4/29/24.