On February 23, a three-judge panel of the Ninth Circuit ruled in a long-awaited decision that the Department of Labor can regulate the tip-pooling policies of employers around the country, even if the employer is not using a “tip credit” to help pay the employees’ minimum wage.1
This ruling reverses rulings from the two federal trial courts that considered the issue before it was presented to the Ninth Circuit. Any employer with employees who receive tips from customers — whether the tips are paid by cash or credit and whether the tips are part of the employees’ base wage or extra income — should keep reading and consider whether your tipping policies and practices will meet the regulatory test.
We all know the basics, right? Employees must be paid no less than the minimum wage, which in Washington in 2016 is $9.47 per hour.2 The Fair Labor Standards Act (FLSA) allows employers to take a “tip credit” against their minimum wage obligation to tipped employees.3
The statute requires that tipped employees be notified of the tip credit before it is applied and that they retain all tips received, “except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.” Even though federal law permits tip credits, employers in Washington are not allowed to use tips as a credit toward meeting minimum wage obligations.4
In 2010, a waitress in Portland filed a class-action lawsuit that challenged her employer’s tip-pooling practice.5 The plaintiffs alleged that by requiring servers to pool their tips and then redistributing those tips among all employees — most of whom were kitchen staff — the employer violated the FLSA.
In Cumbie v. Woody Woo, the Ninth Circuit ruled that the FLSA does not restrict tip-pooling practices of employers who do not take tip credits. In other words, if an employer does not take the tip credit — as is true for all Washington employers — the employer is free to implement any tip-pooling policy it chooses, even one that requires pooling and sharing tips with “back-of-house” staff.
The Department of Labor (DOL) did not like the Woody Woo ruling and in 2011 revised the regulation to require that even employers who do not take a tip credit could only pool tips among customarily tipped employees, i.e., no pooling with “back-of-house” employees such as dishwashers.6
The issue before the Ninth Circuit was whether the DOL had overreached its authority by extending the regulation to employers who do not take tip credits. In 2013, a group of restaurant and trade associations, which used tip pools, challenged the DOL’s rule. The employers’ tip pools required customarily tipped employees (front-of-house staff) to share tips with non-customarily tipped employees (kitchen and other back-of-house staff), but the employers did not take a tip credit.
The Oregon trial court agreed that the 2011 regulations were invalid because the intent of the relevant section of the FLSA was only to limit the use of tips by employers when a tip credit is taken, and the FLSA did not expressly prohibit the restaurants’ practices.
The Ninth Circuit’s ruling in Perez, however, concluded that the DOL’s regulation is justified and enforceable. Two of the judges found that the FLSA and Woody Woo “left room” for agency discretion where the statute was “silent” with respect to employers who do not take a tip credit. The judges then reviewed the statute’s legislative history and found DOL’s interpretation of the statute more closely aligned with congressional intent and, at the very least, reasonable. The panel decided that the courts should thus defer to the DOL’s judgment as expressed in its regulation.
A third Ninth Circuit judge — one of the three who decided Woody Woo — dissented, taking the position that Woody Woo was controlling precedent. He argued that Woody Woo found the statute clear and unambiguous and only imposed a condition on employers using the tip credit. This left no need for the judges to consult legislative history nor any room for DOL to interpret the statute differently.
But because two of the three panel members supported the DOL’s position, the regulation is enforceable as the law of the land, at least in the Ninth Circuit (Alaska, Washington, Oregon, California, Montana, Idaho, Nevada, Arizona, Hawaii and Guam).
Best Practices for Tip Pooling
Where does this leave an employer whose employees receive tips? Here are some good practices to implement — good for compliance, and also likely good for morale.
1. Do not require or force servers or front-of-house staff to pool tips with back-of-house employees.
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