Tip Pooling Arrangements That Share Tips With Employees Who Do Not Normally Receive Tips Violate Fair Labor Standards Act
On February 23, 2016, the U.S. Court of Appeals for the Ninth Circuit decided Oregon Rest. & Lodging Ass'n v. Perez, and ruled in a 2-1 decision that it is a violation of federal law for an employer to use a tip pooling arrangement that shares tips with normally non-tipped employees, such as kitchen workers or supervisors, even when the employer does not take advantage of the minimum wage “tip credit” permitted by the federal Fair Labor Standards Act (FLSA).
The FLSA permits an employer to count a tipped employee's tips toward its hourly minimum wage obligation. This is known as a “tip credit.” Section 203(m) of the FLSA requires employers who take a tip credit to give notice to employees and allow employees to retain all of the tips they receive, unless such employees participate in a valid tip pool. Under section 203(m), a tip pool is valid if it is comprised exclusively of employees who are “customarily and regularly” tipped, commonly referred to as “front-of-the-house” employees.
The employers in Oregon Rest. & Lodging Ass'n, however, did not take a tip credit against their minimum wage obligation. Rather, the employers in Oregon Rest. & Lodging Ass'n paid their tipped employees at least the federal minimum wage and required their employees to participate in tip pools. Unlike the tip pools contemplated by section 203(m), however, these tip pools included both front- and back-of-the-house employees.
Consolidated Cases Before the Ninth Circuit
The case referred to as Oregon Restaurant and Lodging Association actually involved two separate cases that were consolidated on appeal before the Ninth Circuit. In the first case, the Oregon Restaurant and Lodging Association sued the DOL, challenging the new rule and seeking to prevent its enforcement. The second case was brought by a group of casino dealers against the Wynn casino in Las Vegas, in which the casino dealers argued that the Wynn's tip pooling practice violated DOL's new rule. In both cases, the employers paid their employees at least minimum wage and did not take a tip credit. The trial courts in both cases ruled in favor of the employers.
The Ninth Circuit reversed the lower courts' decisions in favor of the employers, finding that the DOL had the authority to expand its tip-pooling regulations to cover employers who do not take the tip credit. In 2010, the 9th Circuit Court of Appeals decided in Cumbie v. Woody Woo Inc. that an employer who pooled employee tips and distributed them to “both customarily tipped and non-customarily tipped employees” was within his or her rights because the Fair Labor Standards Act of 1938 was silent about employers who don't take a “tip credit.”
Circuit Judges Harry Pregerson and John B. Owens held that its earlier decision in Cumbie did not prevent the DOL from regulating tip pools under the FLSA, even for employers who do not take a tip credit. The court reasoned that because the FLSA was silent as to employers that do not take a tip credit, the DOL acted within its authority when it issued its rule prohibiting the practice.
Circuit Judge N. Randy Smith, in a dissenting opinion, reprimanded the panel for disregarding Cumbie, calling this case “nothing more than Cumbie II.” Referring to Cumbie—and perhaps foreshadowing the next step in this case—he wrote, “Colleagues, even if you don't like circuit precedent, you must follow it. Afterwards, you call the case en banc. You cannot create your own contrary precedent.” According to the dissent, based on Congress' apparent intent as it relates to employers that maintain tip pools but do not take a tip credit, the panel should have affirmed both rulings below.
California Employment Law
Unless the decision is reviewed and overturned by the full Ninth Circuit or the U.S. Supreme Court, employers in the Ninth Circuit are not permitted to impose tip-pooling arrangements that share tips with anyone other than customarily-tipped employees.
If you are living in Los Angeles, San Francisco, Sacramento, or San Diego and you have questions about the Ninth Circuit decision, contact Kingsley & Kingsley to speak with one of our experienced lawyers.