On April 28, 2023, the U.S. Court of Appeals for the Fifth Circuit directed a Texas court to further examine a lawsuit challenging the U.S. Department of Labor’s 80/20 Rule, which impacts employers utilizing a tip credit to fulfill their minimum wage obligations under the Fair Labor Standards Act (FLSA). This decision is part of an ongoing process to determine the legitimacy of the 80/20 Rule.

The U.S. Department of Labor announced a final rule on October 20, 2021, which overturned a previous regulation from December 2020 and reinstated the 80/20 Rule. This regulation stipulates that a tip credit cannot be claimed if tipped employees spend over 20% of their time on non-tip-generating tasks.

In December 2021, the Restaurant Law Center (RLC) and the Texas Restaurant Association (TRA) filed a lawsuit in a Texas federal court contesting the validity of the 80/20 Rule. Both organizations requested a preliminary injunction to prevent the Department of Labor from enforcing the rule. However, on February 22, 2022, Judge Robert Pitman denied the request, stating that the RLC and TRA had not demonstrated irreparable harm resulting from the implementation of the 80/20 Rule, despite expressing doubt regarding the merits of the legal challenge.

The RLC and TRA appealed the decision to the Fifth Circuit, arguing that the final rule exceeded the Department of Labor’s authority and led to numerous unintended consequences and overwhelming compliance challenges. Opponents of the rule also claimed that the regulatory requirements were unsuitable for the industries being regulated and would continue to adversely affect both employees and businesses.

On April 28, 2023, the Fifth Circuit ruled that Judge Pitman had improperly dismissed evidence of irreparable harm. The court highlighted that the 30-minute continuous limitation introduced within the 80/20 framework likely creates extensive recordkeeping obligations and imposes substantial costs overlooked by the Department of Labor. The case was then returned to the Texas court for further examination of the 80/20 Rule’s legal challenge.

What happens next? The Fifth Circuit may be asked to reevaluate its decision before the case proceeds in the Texas court. In the meantime, both parties have filed a motion for summary judgment in the Texas court, requesting a ruling on the legal challenge’s merits. In October 2022, the case was reassigned from Judge Pitman to Judge David A. Ezra.

If there is no delay in the case’s return to the Texas court, Judge Ezra will likely reconsider the preliminary injunction motion and rule on the summary judgment motions. However, these rulings will only be the next phase in determining the 80/20 Rule’s ultimate validity. Any rulings are expected to be appealed, sending the case back to the Fifth Circuit once more. Until further notice, the 80/20 Rule remains in effect.