5th Circuit Court Overturns Tip Credit Rule: What Businesses Need to Know

In a landmark decision, the 5th Circuit Court of Appeals overturned the U.S. Department of Labor's Tip Credit Final Rule on August 23, 2024. This ruling represents a significant shift for businesses that depend on tipped employees, particularly within the restaurant, hospitality, and service industries.

What is the Tip Credit Final Rule?

Implemented in 2021, the Tip Credit Final Rule imposed stricter limits on employers using tip credits, particularly concerning non-tipped duties. Key provisions included:

• Stricter Limits on Non-Tipped Duties: Employers were required to differentiate between tipped and non-tipped work, adhering to the 80/20 rule and a 30-minute threshold for non-tipped tasks.

• Regulatory Overreach: The 5th Circuit Court determined that the Department of Labor (DOL) overstepped its authority with these regulations, finding them inconsistent with the Fair Labor Standards Act (FLSA).

Why This Matters

For HR, finance, payroll, and compliance leaders in small to mid-sized businesses, this ruling has immediate and far-reaching implications:

• Operational Impact: Industries that rely on tipped employees, such as restaurants and hospitality, may experience reduced compliance burdens. This ruling could offer managers more flexibility in assigning tasks.

• Payroll Adjustments: Payroll teams must revisit their practices, as the ruling may affect how tip credits are calculated and reported.

• Compliance Considerations: This case underscores the importance of staying vigilant in an ever-changing regulatory environment. Staying up to date with the latest legal developments is essential to avoid potential legal challenges.

Next Steps

To adapt to this ruling, HR and compliance teams should:

• Reassess Tip Credit Policies: Ensure that your policies align with the latest legal guidelines and adjust as necessary.

• Engage Legal Advisors: Stay in close communication with legal counsel to navigate potential appeals or any forthcoming regulations.

The Takeaway

The legal landscape is constantly evolving. Staying ahead of these changes is crucial for protecting your business and supporting your team effectively. By keeping yourself informed and adapting quickly, you can ensure your operations remain compliant and efficient.