By Chris Olmsted, Esq., Ogletree Deakins
Many restaurants and other businesses in the hospitality industry require employees to pool their tips. A recent Ninth Circuit case titled Oregon Restaurant and Lodging Association v. Perez clarifies the federal rules relating to tip pooling. California employers in particular are affected by this ruling because it clarifies that federal DOL regulations thought not to apply here do in fact apply.
Overview: Tip Pooling, Tip Credits
Restaurants, bars, and casinos in many states widely utilize tip pooling policies that include both employees who regularly receive tips and those who do not. For example, many restaurants maintain tip pooling policies that require service staff, who customarily and regularly receive tips directly from patrons, to share a portion of the tips they receive with bussers, kitchen staff, hostesses, and other employees who may not customarily and regularly receive tips from customers.
Tip credits allow some employers, where not otherwise limited by state law, to reduce the wages paid to service employees based upon their anticipated tips in order to meet minimum wage requirements. In California, tip credits are not permitted.
History: The Cumbie Decision
The Ninth Circuit’s latest decision on tip pooling represents a stark departure from the court’s 2010 Cumbie decision. In Cumbie, the Ninth Circuit held that under the Fair Labor Standards Act (FLSA), employers that do not take tip credits may implement tip pooling policies that require both employees who are customarily and regularly tipped (e.g., servers) and those who are not (e.g., kitchen staff) to share their tips. The Cumbie decision was premised on the fact that the statutory language of the FLSA only proscribes tip pooling practices for employers utilizing tip credits and is silent as to employers that do not take such credits. Accordingly, the Cumbie court held, the provision of the FLSA that restricts tip pooling for employers utilizing tip credits, to only those employees who “customarily and regularly” receive tips was inapplicable against employers that did not utilize tip credits.
Since no California employers utilize tip credits (since state law prohibits this), under the Cumbie decision, the federal rules did not apply.
Challenging the DOL’s Response to Cumbie
In 2011, the DOL promulgated new regulations, in part as a reaction to the Ninth Circuit’s ruling in Cumbie. The 2011 DOL regulation is explicit:
“Whether a tip is to be given, and its amount, are matters determined solely by the customer, who has the right to determine who shall be the recipient of the gratuity. Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. 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 3(m): As a credit against its minimum wage obligations to the employee, or in the furtherance of a valid tip pool.” 29 C.F.R. § 531.52 (2011).
These regulations effectively extended the statutory tip pooling restrictions of the FLSA to all employers, regardless of whether the employers take advantage of tip credits.
The two cases that were combined in the Oregon Restaurant and Lodging Association decision both challenged the DOL’s ability to promulgate such regulations in light of the Ninth Circuit’s precedent in Cumbie. In both cases, the lower courts sided with the employers and held that under Cumbie, the DOL’s 2011 regulations were invalid.
But on appeal, in a stark departure from Cumbie, the Ninth Circuit held that such regulations were permissible. Thus, under Oregon Restaurant and Lodging Association, the DOL’s 2011 regulations, which bar employers from utilizing tip pooling policies that include employees who are not customarily and regularly tipped, may be enforced.
What Does This Mean for Employers?
While Oregon Restaurant and Lodging Association may be appealed, for now, it now stands as the law of the federal Ninth Circuit, which includes California. Both the DOL and plaintiffs’ attorneys may seek to enforce the 2011 regulations and employees’ rights under those regulations. This may become a new fertile ground for collective actions, particularly for larger service industry employers that utilize tip pooling.
Prudent employers will review all existing tip pooling policies. If employers utilize tip pooling policies that include employees who are not customarily and regularly tipped, employers should consider alternative options.
For example, restaurant and bar employers may consider implementing a service charge to provide additional compensation to back-of-the-house employees who may no longer receive tips through a tip pool. Alternatively, restaurants may elect to include multiple tip lines on customer bills, one for servers and another for kitchen staff, which would allow customers to elect how much to tip separate groups of employees. Finally, in order to retain high-quality employees who do not customarily receive tips from patrons, some employers may want to consider increasing the compensation of those employees.