On Friday, April 28, 2023, the Fifth Circuit in Rest. Law Center v. United States Department of Labor, No. 22-50145, 2023 WL 3139900 (5th Cir. Apr. 28, 2023), reversed a decision from the Northern District of Texas (the “District Court”) that refused to enjoin the Department of Labor’s tip credit regulations amendment in effect since December 28, 2021. The amendment requires employers to pay tipped employees the full minimum wage for nontipped work directly supporting tipped work if it: 1) amounts to more than 20% of the employee’s total weekly time paid at the tipped minimum wage rate, or 2) exceeds 30 continuous minutes. The Fifth Circuit concluded in a 2-1 panel decision that the plaintiffs demonstrated that the ongoing management costs imposed on employers by the new “continuous 30-minute rule” in the form of additional timekeeping requirements results in irreparable harm.

By way of background, the Fair Labor Standards Act provides an exception to the federal minimum wage, currently $7.25 per hour, for workers engaged in occupations that customarily receive more than $30 per month in tips. Such tipped employees can be paid an hourly rate as low as $2.13 thereunder as long as they receive tips that cover the difference between that amount and the standard $7.25 minimum wage. This differential is known as the “tip credit.”

Employers can claim a tip credit both: 1) for the hours when an employee is performing work that is tip producing and 2) for time spent on tasks that directly support tip-producing work, also known as “tip-supporting work” or “side work.” The latest regulatory amendment codifies previous Department of Labor guidance providing that no tip credit may be taken when an employee performs tip-supporting work for “a substantial amount of time,” specifically, for any time spent on tip-supporting work that exceeds 20% of a worker’s weekly tip-credit work time. The amendment also adds a “brand-new . . . independent constraint on an employer’s taking the tip credit,” namely, that side work in excess of 30 continuous minutes is ineligible for the tip credit. Any time beyond 30 continuous minutes, which is not eligible for the tip credit, does not count towards the 20% weekly time calculation.

The Fifth Circuit determined that the new requirement triggered by more than 30 continuous minutes of tip-supporting work creates a de facto time keeping requirement and that the District Court erred by not determining that the burden on management constituted irreparable harm. The Fifth Circuit disagreed with the Department of Labor’s assertion in its amended regulations that additional management costs resulting from the amendment would only amount to 10 minutes per week, or $177 million per year across all U.S. businesses. The Fifth Circuit found that this estimate was low. It concluded that the District Court “did not acknowledge the Department’s concession that some businesses will incur ongoing costs to ensure they can continue to claim a tip credit,” and ignored prior Fifth Circuit precedent “teaching that nonrecoverable compliance costs are usually irreparable harm.”

The majority remanded the case to the District Court with instructions to address the other elements of the preliminary injunction standard: likelihood of success on the merits, the balance of equities, and whether the injunction is in the public interest. This time, a different district judge will address these issues. For the time being, the amended tip credit rule remains in effect as it has been since late 2021. Employers utilizing the tip credit should monitor further developments in the case in the event the District Court grants injunctive relief on remand, which could alleviate some of the rule’s de facto time keeping requirements.