Court documents state the Department of Labor underestimated economic impact.
The Texas Restaurant Association and The Restaurant Law Center, an entity under the National Restaurant Association, filed a lawsuit challenging the newly updated limits on tip credit announced by the Department of Labor.
In November, the Department of Labor clarified that restaurants can only use the tip credit when employees spend less than 20 percent of hours worked or less than 30 minutes continuously on non tip-producing work. Otherwise, they must pay the full federal minimum wage. The new rule is scheduled to go into effect on December 28.
During the Trump administration, rules were relaxed on restaurant operators enforcing the 80/20 rule, meaning side work was generally counted as tip-supporting. But the Biden administration has brought back the regulation from the Obama era.
“Tasks such as getting the restaurant ready for customers, restocking items during meal service, cleaning, and closing down the restaurant at the end of the day have long been an integral part of the tipped occupations commonly found in restaurants,” Emily Williams Knight, the Texas Restaurant Association’s president and CEO, said in a statement. “Because restaurant employees often move rapidly from one task to another throughout a shift, there is no practical way for an employer to keep the task-by-task records the administration’s regulations would demand to avoid potential liability."
She added, “Operators are exhausted after a very difficult 20 months of the pandemic. Now is the wrong time to burden them with unnecessary regulations.”
Victoria Vish, an associate attorney at Ogletree Deakins, told FSR in November that the tip credit has been the subject of a political tug of war, and that the Biden administration is trying to effectively get rid of it.
“This rule that they've now published is making it nearly impossible and impractical for employers to comply with the strict regulations,” Vish said. “The ultimate goal is likely for people to just pay full minimum wage.”
But restaurants are unhappy with the decision. The lawsuit states the ruling will "severely and irreparably harm thousands upon thousands of restaurants and their employees." The organizations note in court documents that the U.S. Small Business Administration's Office of Advocacy posed concerns about the Department of Labor's assertion that there would be no significant economic impact.
In comments to the rule, The SBA Office of Advocacy stated the Department of Labor "omitted some and underestimated other compliance costs of this rule for small employers," including assessing changes to wage costs, the costs of regulatory familiarization, adjustment costs, and management costs.
The Texas Restaurant Association and The Restaurant Law Center also state in court documents that the Department of Labor used data from 2018 and 2019 to estimate costs of implementing the rule, which doesn't take into account the changed landscape caused by COVID, including industrywide staffing shortages and inflationary pressures.
"The Final Rule represents sweeping and material changes to the Department’s longstanding formal regulation relating to the tip credit," the lawsuit states. "Those sweeping and material changes will impose devastating financial burdens on industries, and restaurants in particular, that employ tipped employees. "The COVID-19 pandemic has changed both the labor market and economic situation of tipped employees. But the Final Rule fails to take any of these facts or factors into account."
Plaintiffs also argue that the Department of Labor's rule is "arbitrary, capricious, and an abuse of discretion." The organization state the Fair Labor Standards Act doesn't give the Department power to subdivide a single workweek into hours or minutes based on tipped work or to dictate the appropriate mix of tasks within a tipped occupation.
Instead, the lawsuit contends the public policy underlying the Fair Labor Standards Act is meant to protect minimum wage rights while accommodating the long history of tipping in restaurants and other industries.
"Congress never intended for the Department to micromanage restaurant employment at the task level, nor did it ever give the Department the authority to do so," the lawsuit states.