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States Challenge DOL’s Final Rule Regulating Tipped Employee’s Wages

January 27, 2021


Last Tuesday, January 19, 2021, nine state Attorneys General filed suit against the Department of Labor (“DOL”) in the U.S. District Court for the Eastern District of Pennsylvania challenging the new rule to the Fair Labor Standards Act (“FLSA”). The Final Rule (“the Rule”) is scheduled to take effect March 1, 2021 and regulates the payment of wages to tipped employees. Pennsylvania’s Attorney General, Josh Shapiro, is the lead plaintiff in the suit, joined by attorneys general from Illinois, Delaware, Washington, D.C., Maryland, Massachusetts, Michigan, New Jersey, and New York.

The Rule, announced in December 2020, concerns tipped employees in the hospitality and restaurant industries. The Rule addresses which employees may share tips and when employers may use a tip credit. Specifically, under the Rule, an employer can implement a tip pool that includes non-tipped employees if the employer does not take a tip credit. In addition, the Rule removes the longstanding “80/20 rule,” which ensured that an employer may only assign non-tipped duties for 20% or less of a tipped employee’s work time while paying them tipped minimum wage. The Rule also prohibits employers, managers, and supervisors from collecting tips received by employees, and defines which employees qualify as supervisors and managers.

The federal complaint seeks a preliminary and permanent injunction to prevent the DOL from implementing or taking any action under the new regulations and asks the court to declare the new regulations unlawful. “This new rule issued by the U.S. Dept. of Labor is indefensible and would result in tipped workers doing more work for less pay all in the midst of a global pandemic,” Shapiro said in a statement. “Businesses and employers are struggling and need real relief during this pandemic but it cannot come out of the pockets of their employees. My office will continue to fight for workers in Pennsylvania and across the country to earn fair pay for a fair day’s work.”

The plaintiffs allege that the Rule not only contradicts the text and purpose of the FLSA, but it is also arbitrary and capricious. It unlawfully reverses decades of policy and practice by removing the 20% bright-line cap on non-tipped-related duties an employee may perform while receiving the sub-minimum wage; therefore, tipped workers will be required to perform more work for less pay, which will only exacerbate the impact the COVID-19 pandemic has had on tipped workers nationwide.

In addition to challenging the 80/20 rule, the complaint also challenges the Rule’s willfulness requirement, arguing that the language of the Rule encourages employers to ignore the advice of the Department’s compliance officers. The Rule makes the “receipt of advice from a responsible official of the Wage and Hour Division to the effect that the conduct is question is not lawful” a mere factor to be considered in determining whether conduct is willful. Further, the complaint states, the Rule removes an employer’s failure to inquire further into whether its conduct was in compliance with the Rule from the description of willfulness, contradicting the Supreme Court’s long-established definition.

Further, the states plead that the reduced wages will reduce tax revenue for the plaintiffs’ states. The Rule lowers workers’ pay, which in turn will lower the income tax receipts for plaintiffs’ states and could force more employees to see and qualify for public benefits that the states fund or administer.

Although President Biden has rescinded or taken steps to reverse policies implemented under the Trump Administration, the new Administration cannot cancel this Rule as it went through the process outlined by the Administrative Procedure Act. Instead, President Biden’s DOL would have to propose a new rule rescinding the order, which would then have to go through the same Administrative Procedure Act process and could take over a year.

We will continue to monitor this lawsuit and provide updates. If you have any questions regarding the DOL’s Final Rule or paying tipped employees, Montgomery McCracken’s Labor and Employment attorneys are available to assist.