The Labor Department’s Tipped Wage Rule, Chevron, and the Future of Tipping Policy

This piece is responding to breaking news and may be updated. Please contact pr@rstreet.org to speak with the author.

This past Friday, a unanimous panel of the United States 5th Circuit Court of Appeals struck down the U.S. Department of Labor’s so-called 80/20 tipped wage rule as inconsistent with the Fair Labor Standards Act. The court’s decision is significant both for how we interpret the early impact of Chevron’s overturn and how the future of the tipped wage debate might evolve as we speed toward the 2024 election.

DOL’s 80/20 rule relates to what is often known as the “tipped wage credit,” which is the legal mechanism by which employers can pay tipped employees a sub-minimum wage so long as the employees tips make up the difference. The agency sought to limit the breadth of the tipped wage credit, declaring that the credit only applied when “tipped employees perform work that is part of the employee’s tipped occupation.” The rule prohibited employers from “taking a tip credit for a substantial amount of directly supporting work, defined as 20 percent of the tipped employee’s workweek or a continuous period of more than 30 minutes.”

The purported rationale behind the rule was to prevent businesses like restaurants from using the tipped wage credit for work duties that do not generate tips, such as a bartender engaging in bar prep, glass washing, and liquor restocking before the dining room opens for the day, or a server folding napkins during a lull in the lunch rush. 

The unanimous 5th Circuit panel–which included an Obama appointee–struck down the 80/20 on the grounds that DOL created a restriction that Congress did not contemplate when it passed the FLSA. “The final rule is attempting to answer a question that DOL itself, not the FLSA, has posed,” the court held, before going on to say: “The final [DOL] rule replaces the congressionally chosen touchstone of the tip-credit analysis — the occupation — with one of DOL’s making — the timesheet.” In other words, Congress intended for the tipped wage credit to apply at the occupational level, not to engage in accounting-style audits regarding the amount of time an employee spends on each task they perform within that occupation. 

Importantly, the 5th Circuit’s holding shines an early light on how the recent decision by the U.S. Supreme Court in Loper Bright to overturn Chevron-deference could impact regulatory law going forward. The 80/20 rule had been upheld at the district court level prior to Chevron’s overturn, and the Loper Bright decision appeared to weigh heavily on the 5th Circuit’s decision: “Our task was once different under the now-ancien régime that Chevron imposed,” writes the court. “While the district court was of course correct to apply the Chevron framework at the time of its decision, the Supreme Court’s intervening opinion in Loper Bright requires us to depart from the district court’s analysis at the very start.”

Beyond the significant administrative law implications, the decision could also impact the trajectory of the current escalating debate over tipping policy in the United States. Former President Trump made headlines with his recent no-taxes-on-tips pledge, and Vice President Kamala Harris followed suit in endorsing the concept. At the same time, the political left has increasingly pushed to eliminate the tipped wage credit altogether, as exemplified by Washington, D.C.’s 2022 decision to phase out the credit. States like New York, Connecticut, Maryland, and Illinois have all considered legislation to eliminate the credit in recent years, and President Joe Biden called for ending the tipped minimum wage as far back as the 2020 presidential campaign.

This rapidly coalescing policy consensus on the political left attempts to import a one-size-fits-all policy like the statutory minimum wage to industries that have operated under the tipped wage system for decades. Barring DOL attempting to appeal the 5th Circuit’s decision to the U.S. Supreme Court–always a long-shot bid–it is likely that the debate will migrate to focusing on federal, state, and even local legislation to ban the tipped wage credit entirely, rather than trim it around the edges via DOL rulemakings. 

Ultimately, these efforts run contrary to what many restaurant workers themselves prefer, as evidenced by the way in which the D.C. tipped wage debate triggered significant backlash from many District restaurant workers. One broader recent survey found that 9 out of 10 servers are opposed to eliminating the tip credit.

Also overlooked in the debate is the recent rise of restaurant service fees, which have increasingly been popping up on restaurant bills inside the District and elsewhere. These fees, which usually are around 10-20% of the total bill, increase the cost of dining and aggravate diners. But given that D.C.’s elimination of the tipped wage credit will nearly triple the cost of labor for District restaurants, these costs have to go somewhere in the notoriously low-margin restaurant business. The result: service fees.

However, in their effort to absorb and stay afloat in response to one progressive policy–elimination of the tipped wage credit–restaurants are now finding themselves the targets of another–the war on so-called “junk fees.” Given the ambiguity around what, exactly, constitutes a “junk fee,” restaurateurs are right to be concerned they could end up becoming one of the targets of this growing campaign. 

In the end, there are better ideas for protecting workers that will reap less chaos for the American dining scene. Exploring the use of portable benefit models for restaurant workers–as is catching on in the gig economy context–or establishing collaborative committees to experiment with rewriting non-Civil Rights labor law for the restaurant sector could benefit both workers and restaurant owners alike. 

Either way, this appears to be a debate that isn’t going away anytime soon.