The National Restaurant Association (NRA), Council of State Restaurant Associations, and National Federation of Independent Business filed suit against the U.S. Department of Labor (DOL) over an amended Fair Labor Standards Act regulation. The amended rule affects hundreds of thousands of businesses that employ tipped workers.

The organizations are suing for declaratory and injunctive relief from a new regulation that the DOL issued April 5. The regulation makes substantive changes in the notice employers must provide to tipped employees about the tip credit. Employers had no opportunity to comment on the new regulatory requirements, and DOLgave employers only 30 days to comply.

The tip credit is the portion of tip income that federal law allows employers to apply toward their obligation to pay tipped employees the minimum wage. Employers are not permitted to claim a tip credit unless they meet certain conditions, including informing employees of the employer’s intent to take a tip credit under section 3(m) of the FLSA.

The 2011 Final Rule containing the new tip-credit-notice rules went into effect May 5.

The Final Rule followed a notice of proposed rulemaking (NPRM) that the DOL  published in 2008 that would have made only technical and non-substantive changes to the tip credit notice regulation. Nothing in the 2008 NPRM put the public on notice that the DOL was contemplating significant changes to the tip-credit notice requirements. 

Restaurants now face an unanticipated, increased, and unnecessary regulatory burden and expense in complying with the new tip-credit notice requirements. Failure to follow the new regulation could result in an employer losing the right to apply any tip income toward minimum wage obligations—putting employers in legal jeopardy that could literally bankrupt a restaurant business.

The change affects the notice that restaurants provide to more than 2 million tipped employees in the restaurant industry.

"We believe the Department of Labor’s new rules—put into effect with just one month’s notice and without properly considering their impact on the nation’s nearly 1 million restaurants—are confusing and will expose our members to regulatory violations and enforcement actions," says NRA President and CEO Dawn Sweeney.

"The economy is in a fragile recovery, but we continue to see the administration assail small-business owners and entrepreneurs with costly rules and regulations that increase their burden and put their businesses at risk," says executive director of NFIB's Small-Business Legal Center Karen Harned. "This latest rule is especially egregious because employers were given no opportunity to comment on these new requirements and have only a short window in which to comply, making the impact on NFIB members potentially devastating."

"We are pursuing this legal challenge on behalf of our members because the DOL didn't give the public any notice to comment on very specific, detailed requirements for employers, as required by federal law. We're also challenging that those requirements are contrary to law and arbitrary and capricious," Sweeney says.

The federal Administrative Procedure Act prohibits agencies from adopting final rules that differ from proposed rules “when the changes are so major that the original notice did not adequately frame the subjects for discussion.”

The groups also said the DOL ignored President Obama’s expressed requirement that federal agencies weigh the effect of new regulations on businesses. The President published Executive Order 13563 this January to require agencies to review existing and proposed regulations to identify whether they may be made more effective or less burdensome.

"The Executive Order very carefully sets forth that if an agency is going to impose new and additional regulations that cost business, the regulations have to be well-justified," Sweeney says.

"In this case, that order was totally ignored. This new regulation imposes additional, unnecessary burdens and costs on employers while ignoring the President's guidance on the type of analysis that agencies ought to do before imposing extra costs on business. This is especially difficult in the restaurant business, a business that operates on very narrow profit margins.”

The DOL itself acknowledged that the final rule was a significant change from the 2008 NPRM, but said it determined the final rule won't result in any extra compliance costs for employers. It is unclear on what basis the DOL came to that conclusion.