Department of Labor Overtime Tip Rule Overturned

At A Glance

• On August 23, 2024, the Fifth Circuit of the U.S. Court of Appeals vacated the Department of Labor (DOL) 80/20/30 Rule based on the Supreme Court’s decision overturning the Chevron deference doctrine.
• The 80/20/30 Rule determined when and how employers were permitted to take the tip credit for tipped employees performing non-tip-earning work.
• The Court of Appeals did not vacate the “Dual-Jobs” standard.
• Independent state and local requirements remain in place.

Overview

The Fifth Circuit of the U.S. Court of Appeals vacated the Department of Labor (DOL) 80/20/30 rule on August 23, 2024, in Restaurant Law Center v. U.S. Department of Labor. The ruling relied on the U.S. Supreme Court’s decision to overturn the Chevron deference doctrine in Loper Bright Enters. V. Raimondo and stated that, “…shortly following oral arguments in this case, the Supreme Court overruled Chevron, instructing that courts ‘may not defer to an agency interpretation of the law simply because a statute is ambiguous.’” 

As a result the DOL may no longer determine how to define “engaged in occupation.” The ruling states, “being ‘engaged in an occupation in which [the employee] customarily and regularly receives more than $30 a month in tips’ cannot be twisted to mean being ‘engaged in duties that directly produce tips, or in duties that directly support such tip-producing duties (but only if those supporting duties have not already made up 20 percent of the work week and have not been occurring for 30 consecutive minutes) and not engaged in duties that do not produce tips.’’’

Finally, the Fifth Circuit Court found that tipped employees cease to be tipped employees when they engage in unrelated occupations, known as the “Dual-Jobs regulation,” not because of how long they spend within their tipped occupations performing tasks that may not generate tips.

History of 80/20/30

From 1988 until 2009, the widely accepted 80/20 rule allowed employers to claim tip credits if an employee performed non-tipped activities related to their tipped occupation for no more than 20% of the time. This rule waivered back and forth with each new administration from 2009 through 2018.

An introduced but never implemented rule in 2020 would have permitted employers to take a tip credit for all non-tipped duties that tipped employees performed, as long as they were related to the tipped occupation and performed reasonably around the same time with the tipped duties.

In December 2021, the DOL issued the now vacated 80/20/30 Rule, which identified three categories of work:

• tip-producing – work that provides service to customers for which tipped employees receive tips
• directly supporting – work performed in preparation of or to otherwise assist tip-producing customer service work
• not part of the tipped occupation – work that is neither tip-producing nor directly supporting tip-producing work

Under the 80/20/30 Rule, any time spent on tasks not part of the tipped occupation had to be compensated at full minimum wage. Moreover, employers were permitted to take a tip credit for performed work that directly supported tip-producing work if it wasn’t considered to take a “substantial amount of time.” (i.e., more than 30 continuous minutes or more than 20% of the hours in the workweek for which the employer took a tip credit).

State Requirements

State and local tip credit requirements vary and may have their own specific duties tests. Conversely, the following states either limit or don’t permit when employers may take a tip credit at all:

• Alaska
• California
• Minnesota
• Montana
• Nevada
• Oregon 
• Washington

Some jurisdictions have also begun eliminating tipped minimum wages and tip credits. Washington D.C., for example, has been slowly eliminating the tip credit since 2022, and the Washington D.C. Office of Human Rights (DC OHR) released Updated FAQ regarding the minimum wage and the Tipped Wage Workers Fairness Amendment Act (TWWFAA).  The Chicago City Council also voted to eliminate the employer allowance for gratuities (tip credit) in a phased rollout beginning July 1, 2024, through July 1, 2028.

Next Steps

Employers should review and make any necessary updates to their compensation practices and employees’ duties to comply with the Dual-Jobs Requirements.

Employers can review state and federal minimum wage requirements on the DOL Website, and should also consider reviewing local laws.

Thank you for choosing Paylocity as your payroll tax and HCM partner. This information is provided as a courtesy, may change, and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney, or Advisor.