Two weeks ago, the federal Fifth Circuit Court of Appeals struck down one of the U.S. Department of Labor’s rules governing tipped employees and tip credits under the Fair Labor Standards Act (FLSA). (For a primer on Overtime Law for South Carolina Employees, read this blog post.)
Under the FLSA, tipped employees are those who regularly and customarily receive more than $30 in tips a month, typically waiters at restaurants and the like. Employers can claim a “tip credit” when paying those employees, which allows the company to pay $2.13 an hour (less than the $7.25/hour minimum wage) with the idea that the employee will make up the rest of the money through tips. If the employee does not make at least $7.25 an hour when tips are factored in, then the company must pay the difference.
So What Rule Did the DOL Issue Regarding Tip Credits?
Some employees don’t fall exclusively into roles that are easily identifiable as “tipped” roles versus “non-tipped” roles. Think of the server who also busses tables who also helps prepare food who also prepares silverware and napkins who also wipes down the windows. Only the server role is an official tipped role, while the other work would normally be done for a standard minimum wage.
The DOL’s current guidance, issued in 2021, confirmed what’s called the 80/20 rule. This rule meant that only 20% of an employee’s time could be spent doing non-tipped work like cleaning, with the other 80% spent doing tipped work like waiting tables. If the employee spent more than 20% of the time doing cleaning work, then the employer could not claim the tip credit. Also, the employee could not do the non-tipped work (like cleaning) for more than 30 minutes at a time.
Why Did the Court Strike Down the 80/20 Rule?
Groups representing the interests of restaurants filed a lawsuit in 2021, seeking to prevent the rule from going into effect. Ultimately, the trial court denied that attempt and found that the DOL had the authority to issue the rule. Under a longstanding U.S. Supreme Court case, Chevron v. Natural Resources, courts are required to give the benefit of the doubt to the federal agencies who issue rules like this one.
However, in June 2024, the U.S. Supreme Court overruled Chevron, meaning that the courts no longer had to give deference to an agency such as the DOL in interpreting regulations. Based on that new ruling, the Fifth Circuit Court of Appeals determined in August 2024 that the DOL’s 80/20 rule was not in accordance with the underlying language of the Fair Labor Standards Act (recall that the rule or regulation was designed to interpret the broader statements of the FLSA itself, to put into effect the protections that the FLSA provides to employees). The court found the rule for these tip credits to be arbitrary and capricious, and thus, struck down the rule.
What Does That Mean for Tipped Employees in South Carolina Moving Forward?
If you are a South Carolina employee who is paid via tip credits (i.e., you get paid $2.13/hour plus tips), then you should still be mindful of whether your job truly qualifies for the tip credit. If you are paid $2.13 an hour yet spend most of your time cleaning or working the in kitchen, then you probably aren’t getting paid properly. The 80/20 rule takes away a more bright line standard, but you still need to be doing mostly tipped work for the company to qualify for tip credits.
The biggest takeaway is that South Carolina employees must be paid a minimum wage, whether through a standard hourly wage or through a combination of hourly wage and tips. If you fall below $7.25, then your employer is engaging in wage theft in violation of federal law. If you complain about unpaid minimum wage or unpaid overtime, then you are protected against retaliation by the company.
In my experience, most South Carolina employees are unfamiliar with their rights under the Fair Labor Standards Act. If you have questions, I recommend that you reach out to our office at (864) 233-4351 for a review of your employment situation.
