Early Returns on Loper and Labor Law

Two cases interpreting the Fair Labor Standards Act in the federal courts in Texas  have applied the Supreme Court’s Loper Bright decision to overturn to two separate Department of Labor regulations.

Tipped Employees

In the first case, Restaurant Law Center v. U.S. Department of Labor, 120 F.4th 163 (5th Cir. 2024), the Fifth Circuit overruled the lower court, which had upheld as lawful a 2021 Department of Labor rule that restricted when employers may claim a “tip credit” for “tipped employees” under the Fair Labor Standards Act.  A tip credit enables an employer to pay tipped employees an hourly wage below the minimum standard wage but requires the employer to pay any difference between what the tipped employee actually makes on tips and the minimum wage.

Under the rule at issue, finalized in December 2021, an employer was authorized to take the tip credit for tip-producing work (such as a waitress serving food), but if more than 20 percent of the employee’s workweek was spent on supporting work (such as setting or clearing tables), the employer could not claim the tip credit for that excess. In addition, for the credit to apply, the tipped employee could not perform supporting work for more than 30 minutes at any given time.

Finding the meaning of tipped employee under the Fair Labor Standards Act to be ambiguous, the lower court found the 2021 rule to be a permissible interpretation under the Chevron doctrine. By the time the Fifth Circuit heard the appeal, Loper Bright had overturned Chevron and the Fifth Circuit therefore reexamined the rule in light of that decision.  As it explained, “Courts are constantly faced with statutory ambiguities and genuinely hard cases. But [now] instead of declaring a particular party’s reading ‘permissible’ in such a case, courts use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity.”  Id. at 171; see id. (“[T]he Supreme Court’s intervening opinion in Loper Bright requires us to depart from the district court’s analysis at the very start. We must parse the text of the FLSA using the traditional tools of statutory interpretation.”).

Applying and construing the text of the Fair Labor Standards Act, the Fifth Circuit explained that the 2021 rule “sits uncomfortably with the operative statutory term: ‘tipped employee.’ Under the Final Rule, if an employee is not engaged in her occupation at a given moment, then she is not a ‘tipped employee’ at that moment. The Final Rule necessarily means, therefore, that when an employee is not engaged in her ‘tipped occupation,’ as the regulatory language puts it, she is engaged in some other occupation. Because the Final Rule is so granular in divvying up component tasks, a single occupation could quickly break apart, implausibly, into many.” Id. at 173.  Moreover,

The Final Rule is attempting to answer a question that DOL itself, not the FLSA, has posed. The FLSA is clear: an employer may claim the tip credit for any employee who, when “engaged in” her given “occupation … customarily and regularly receives more than $30 a month in tips.” 29 U.S.C. § 203(t) (emphasis added). The FLSA does not ask whether duties composing that given occupation are themselves each individually tip-producing.

Id. 

On this basis, the Fifth Circuit found the rule to be contrary to the text of the Fair Labor Standards Act.  In a separate section, it also found the rule to be arbitrary and capricious.  Based on these finding, the Fifth Circuit vacated the rule in its entirety.

Exempt Employees

The second case, Texas v. U.S. Department of Labor, is a district court case from the Eastern District of Texas.  In this matter, the State of Texas and several trade associations and employers challenged a Department of Labor rule that raised the minimum salary threshold at which executive, administrative, and professional (EAP) employees are exempt from overtime pay under the Fair Labor Standards Act.  Current law exempts certain employees from the minimum wage and overtime requirements of the Fair Labor Standards Act if they (1) are salaried, (2) are paid above a minimum salary threshold, and (3) perform the duties of their exempt job classification.  The new rule, finalized in April 2024, changed the second of these three criteria by significantly raising the salary threshold for the exemption, and also by including an automatic increase of that threshold every three years. thereby requiring employers to pay overtime to a much larger number of employees.

The court explained that, under Loper Bright, courts are no longer bound to defer to agency interpretations of their controlling statutes and that, in fact, “when there is an ambiguity ‘about the scope of an agency’s own power … abdication in favor of the agency is least appropriate.’” 2024 WL 4806268 at *13 (E.D. Tex. Nov. 15, 2024) (quoting Loper Bright).  Conducting its own independent statutory analysis, which included a detailed review of the mechanisms employed by the Department of Labor to reach its new salary thresholds, the court concluded that the rule effectively redefined the exemption in a way not authorized by the Fair Labor Standards Act.  As it explained, “because the EAP Exemption [under the Fair Labor Standards Act] requires that an employee’s status turn on duties—not salary—and because the 2024 Rule’s changes make salary predominate over duties for millions of employees, the changes exceed the Department’s authority to define and delimit the relevant terms.”  Id. at *17.

As with the decision described above, the court vacated the rule in its entirety.  The Department of Labor appealed the decision and the parties are currently briefing the case before the Fifth Circuit.

Conclusion

Both of these cases highlight how Loper Bright has empowered courts to scrutinize agency actions more diligently, especially where agencies have stretched statutory language to implement broad and controversial policy changes. They demonstrate that federal agencies will continue to face heightened judicial resistance to rules relying on expansive interpretations of their authority.

Lee Steven is senior legal counsel at Americans for Prosperity Foundation.