Since 2010, the law has been in flux as to whether certain restaurant employees may or may not be allowed to participate in tip pools, particularly in states located in the jurisdiction of the U.S. Court of Appeals for the Ninth Circuit (these states include Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington). However, a recent ruling from the Ninth Circuit has clarified this issue, and it is now clear that restaurants and hotels cannot require servers to pool and/or share tips with non-tipped kitchen and other back of the house staff such as dishwashers, chefs or cooks who do not customarily and regularly receive tips, even if the restaurant does not utilize the tip credit. To fully appreciate this decision, it is necessary to re-visit the recent history of uncertainty surrounding this rule.
The primary issue is whether tip-credit restrictions can be imposed on employers who do not take a tip credit. While employers can require servers to participate in a tip pool with others who customarily and regularly receive tips even if they take a tip credit, the Fair Labor Standards Act (“FLSA”) is silent as to whether employers who do not take a tip credit can require servers to participate in a tip pool with kitchen employees. Based on this premise, the Ninth Circuit held in 2010 in Cumbie v. Woody Woo, Inc., that an employer could require servers to pool tips to share with non-tipped kitchen and other back of the house staff who did not customarily and regularly receive tips, as long as (i) the servers were paid at least minimum wage; and (ii) the employer did not take a tip credit. The Ninth Circuit concluded that nothing in the text of the FLSA restricted employee tip pooling arrangements when no tip credit was taken.
A little over one year later, on April 5, 2011, the U.S. Department of Labor (“DOL”) issued regulations prohibiting mandatory tip pools that included employees who do not customarily and regularly receive tips, even in situations when the employer does not take a tip credit. In so doing, the DOL fully rejected the Ninth Circuit’s Woody Woo decision. In response, several hospitality groups, including the National Restaurant Association, filed a lawsuit in the District of Oregon against the DOL on behalf of restaurants and restaurant employees who share in tips and participate in tip pools. This lawsuit challenged the DOL’s ability to promulgate regulations that essentially overruled the Ninth Circuit’s ruling and effectively excluded kitchen staff from tip pools under the FLSA.
On June 7, 2013, the District of Oregon granted the hospitality groups’ motion for summary judgment, finding that the DOL had indeed exceeded its authority by issuing regulations on tip pooling in restaurants. The court stated that the language of the FLSA is clear and unambiguous, and only imposes conditions on employers that take a tip credit. This ruling barred the DOL from enforcing the regulations that it had promulgated two years earlier. Thus, until now, only employers in states located in the Ninth Circuit could require servers to pool and/or share tips with non-tipped kitchen and other back of the house staff.
However, in a split decision last week, a three-judge panel of the Ninth Circuit reversed the district court’s decision in favor of the employers, and held that Woody Woo did not foreclose the DOL’s ability to subsequently promulgate a formal rule that extended the FLSA’s tip pooling restrictions. In so ruling, the Ninth Circuit looked at language from past U.S. Supreme Court cases suggesting that the DOL had the power to prohibit certain tip pooling practices. As a result, the Court held that the DOL was well within its rights to regulate the tip pooling practices of employers who do not take a tip credit, including prohibiting those employers from including back of the house staff in tip pools.
Circuit Judge N. Randy Smith dissented from the Ninth Circuit’s opinion and argued that the panel of judges should have followed Circuit precedent and affirmed the ruling below because the DOL should not be able to legislate on its own, but rather must carry out Congress’ intent which he believes is unclear in this case.
As a result of this Ninth Circuit ruling, at least for the time being, the DOL has full authority to enforce its previously issued regulations requiring tip pools to be comprised solely of employees who customarily and regularly receive tips, such as wait staff, bussers, bartenders and counter personnel, even in situations when the employer does not take a tip credit. We anticipate that the National Restaurant Association and its co-plaintiffs will file a petition asking the full Ninth Circuit Court of Appeals for a rehearing. If the court agrees, the case will go to an 11-judge panel for review. It is also not out of the question that this case could eventually reach the Supreme Court, although it is too early to tell whether the High Court would have a ninth member by that time and how that new member could potentially impact a ruling.
Until a decision has been made regarding an appeal, however, you can rest assured that the DOL will begin attempting to enforce these regulations immediately, since it has essentially been “on hold” for the last six years. Thus, if your restaurant or hotel currently allows back of the house staff to participate in tip pools, you should endeavor to change these practices as soon as possible so that you do not find yourself on the wrong end of a DOL investigation.