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Labor Department to Clarify Tip-Pooling Restrictions

Posted by Eric Kingsley | Jul 31, 2017 | 0 Comments

Restaurant workers tip pooling

On July 20th, the U.S. Department of Labor (DOL) announced its intent to rescind its previously issued tip-pooling restrictions, which limited employers' ability to force employees to share tips. This may be good news for cooks, expediters and other back-of-the house employees who historically have not been able to legally share in the tips that are pooled and distributed among the front of the house employees such as servers and hosts. However, the DOL's announcement may have little impact in some jurisdictions, such as California, that have adopted specific laws governing tipping and prohibit distribution of gratuities to non-tipped employees under any circumstances.

Background on the Fair Labor Standards Act and the Pooling of Tips
1938 – Congress passed the Fair Labor Standards Act (FLSA) and set a national minimum wage rate for the first time. For the following 40+ years that the FLSA was in effect, there was no differentiation between employees who received tips and those who did not.

1974 – Congress amended the FLSA and for the first time allowed employers to apply a tip credit towards the wages of employees who received gratuities. The tip credit allows employers to count a portion of an employee's tips as wages in order to satisfy the minimum wage requirements.

2010 – Questions mounted whether or not the FLSA prohibits the sharing of tips with non-tipped employees such as kitchen or maintenance staff. In 2010, the U.S. Court of Appeals for the Ninth Circuit issued a decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577, 581, which held that section 203(m) of the FLSA does not restrict the tip-pooling practices of employers that do not apply a tip credit towards its employees' wages. Therefore, an employer that pays its employees at least the full minimum wage can mandate a policy where tips are shared among all employees, even those who do not regularly and customarily receive tips such as kitchen and maintenance staff.

2011 – In response to the Ninth Circuit's decision in Woody Woo, the DOL promulgated new rules to specify that tips are always the property of the employee. Specifically, the DOL revised 29 C.F.R. § 531.52 by inserting the following language, “[t]ips are the property of the employee whether or not the employer has taken a tip credit . . . The employer is prohibited from using an employee's tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section [the FLSA], as a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.”

2015 – The Fourth Circuit finds that the 2011 DOL regulation is invalid because it violates the express language of Section 203(m) of the FLSA. Specifically, the Fourth Circuit ruled in Trejo v. Ryman Hosp. Props., Inc., 795 F.3d 442, 448 (4th Cir. 2015) that “§ 203(m) does not state freestanding requirements pertaining to all tipped employees, but rather creates rights and obligations for employers attempting to use tips as a credit against the minimum wage.”

2016 – The Ninth Circuit, which was the first court to hold that an employer that does not apply a tip credit can keep gratuities, reversed course. In Oregon Rest. & Lodging Ass'n v. Perez, 816 F.3d 1080, 1086–89 (9th Cir. 2016), the Ninth Circuit found that the DOL's regulation was entitled to deference, and that the practice of sharing tips with employees who are not customarily and regularly tipped is prohibited by Section 203(m) of the FLSA in all cases. Note: the Oregon. Rest. & Lodging Ass'n case is currently on appeal to the United States Supreme Court.

2017 – The Tenth Circuit Court of Appeals recently ruled that the DOL's regulation is invalid, holding the tip credit provision does not apply where an employer pays employees at least the required minimum wage, and in such situations the employer may thus retain the tips. Specifically, the Tenth Circuit ruled in Marlow v. New Food Guy, Inc., 861 F.3d 1157 that “[a]ll that § 203(m) does is permit a limited tip credit and then state what an employer must do if it wishes to take that credit.” This decision by the Tenth Circuit agrees with previously-issued decisions from the Fourth and Eleventh Circuits.

The Labor Department's Revocation of the 2011 Regulation
In what is likely an attempt to avoid the Supreme Court's review of the DOL's power to issue regulations, the DOL recently announced that it would begin the process of revoking the 2011 regulation that it adopted in response to the Woody Woo decision. Accordingly, once the rule is revoked, under federal law, an employer that does not apply a tip credit towards tipped employees' wages will be able to keep tips, distribute tips to kitchen staff, or otherwise set the parameters for sharing tips in any way it sees fit.

Impact of DOL's announcement and California Law
The DOL's revoking of the 2011 regulation is welcome news to many employers that reside in jurisdictions that solely follow the FLSA. However, the DOL's announcement may have a limited impact in California because California employers are not permitted to take a tip credit. Under the California Labor Code, California tip pools can only include employees who provide “direct table service” or who are in the “chain of service” and are customer facing. In other words, California only permits tip pooling where participants in the tip pool contribute to the patron's service. This prohibition will remain in place unless it is changed by California's legislature.

Even with this prohibition, California employers should continue to keep abreast of state and local laws which could limit or prohibit their use of tip pooling arrangements or require some type of notification or posting. California employers should consult with an attorney to determine whether their locality adopts more stringent requirements than those promulgated by the FLSA or the California Labor Code.

The experienced California employment lawyers at Kingsley & Kingsley will continue to follow these and other developments at the Labor Department and determine their impact on California's labor laws.  In the meantime, to discuss these laws, or a related claim on your behalf, feel free to call us toll-free at (888) 500-8469 or click here to contact us via email.

About the Author

Eric Kingsley

In practice since 1996, the firm's lawyer and co-founder, Eric B. Kingsley, has litigated complex cases and written numerous appeals in state and federal courts on behalf of the California law firm Kingsley & Kingsley, including More than 150 collective actions. Mr. Kingsley focuses his practice ...


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