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Appeals Court Reopens Door for Injunction to Stop the New Tip Rule

    Client Alerts
  • May 05, 2023

In 2021, the U.S. Department of Labor’s Wage and Hour Division issued new regulations dealing with the Fair Labor Standards Act’s tip credit. The tip credit allows employers to pay a $2.13 hourly minimum wage to tipped employees and then use their tips to bridge the difference between that rate and the standard minimum wage. Over the past several decades, DOL has gone back and forth regarding the amount of non-tipped work that employees paid using the tip credit can perform. The new rule set a limit of 20% for non-tipped work and required payment of standard minimum wage for any continuous period of non-tipped work exceeding 30 minutes.

In response, several restaurant interest groups filed suit in federal district court in Texas, seeking a nationwide injunction to block the rule. These groups argued that DOL did not properly account for the costs employers would incur by having to monitor and record tipped employees’ different job tasks. The district court judge denied the injunction motion on the grounds that the plaintiffs did not show a specific harm that would justify blocking the rule from taking effect.

Last week in a 2-1 decision, the Fifth Circuit Court of Appeals reversed this decision, remanding the motion back to the district court for further review. In its decision, the Fifth Circuit majority concluded that the plaintiffs had demonstrated that the rule would in fact generate costs well in excess of those contained in DOL’s regulatory estimate.

This decision means that the district court will reconsider whether to issue the requested injunction. If the rule is enjoined nationwide, employers would revert to the previous standard until the case is resolved. That standard used an undefined amount of time to determine when tipped employees can no longer qualify for the tipped credit.