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Ninth Circuit Allows Tip Pooling Rules to Extend to All Employers

March 2, 2016

By Benjamin P. O'Glasser & J. Kent Pearson, Jr.

On February 23, 2016, the Ninth Circuit Court of Appeals issued a very noteworthy opinion for hospitality and restaurant employers in the opinion Oregon Restaurant and Lodging Association v. Perez.  In sum, the Ninth Circuit held that the Department of Labor (DOL) is permitted to regulate all tip pools—including those of employers who do not claim a minimum wage “tip credit” under the FLSA.

Tip Credits and Tip Pooling in the Service Industry

Employees in the restaurant industry generally are compensated through a combination of hourly wages and tips.  Under the Fair Labor Standards Act (FLSA), employers can claim a “tip credit” against their minimum wage obligations on the basis of tips that their employees receive.  In contrast, under Oregon law, ORS 653.035(3), employers must pay Oregon’s minimum hourly wage, exclusive of any tips that employees receive from customers.  Because of this, prior to this recent decision, many Oregon restaurant employers have not needed to be concerned with the DOL’s regulations with respect to compensation that employees receive over and above minimum wage. Now, as explained below, Oregon restaurants are at risk if they fail to comply with DOL tip pool rules.

The FLSA authorizes a tip credit only if employees are provided notice of the credit and allowed to retain all of the tips they receive, unless the employee participates in a valid tip pool.  A valid tip pool must consist exclusively of employees who are “customarily and regularly tipped.”  The FLSA is silent as to whether these rules apply where an employer does not claim the tip credit, and prior Ninth Circuit case law had concluded that nothing in the FLSA restricts employee tip-pooling arrangements when no tip credit is taken.[1]  However, in 2011 the DOL issued a regulation purporting to bar all tip-pooling that does not comply with the FLSA’s notice and retention requirements, regardless of whether an employer claims the “tip credit”. 

The DOL regulation significantly restricts freedom of contract in the service industry.  A restaurant employer might conclude, for example, that its line cooks are partly responsible for enabling its service staff to receive tips.  However, insofar as line cooks are not customarily and regularly tipped, the DOL regulation would bar an employer from implementing a tip pool that shares tips with line cooks.
The Cases before the Ninth Circuit

Oregon Restaurant and Lodging Association was a consolidated appeal of two cases from Oregon and Nevada.  In Oregon, an industry group directly challenged the validity of the DOL’s 2011 regulations.  In Nevada, a group of casino employees challenged their employer’s tip-pooling policies.  The employer-side parties contended that once an employer compensates its employees at or above the FLSA minimum wage, there is no basis in the FLSA for the DOL to dictate what an employer’s tip pooling policies or programs should look like.

Ostensibly, there was strong authority for the employers’ positions:  in 2010, the Ninth Circuit held in Cumbie v. Woody Woo, Inc. that in light of the FLSA’s silence as to employers who do not take a tip credit, an employer’s tip pooling policy could not violate the FLSA if the employer did not claim a tip credit.  The lower courts in Oregon Restaurant and Lodging Association applied Woody Woo and held that the DOL’s 2011 rules were invalid and exceeded the scope of the FLSA.

The Court’s 2016 Decision

The Ninth Circuit held that the DOL regulations were valid, notwithstanding Woody Woo.  The Ninth Circuit concluded that the FLSA’s silence about employers who did not claim a tip credit meant that the DOL’s rules were not prohibited.  The Court went on to conclude that the DOL’s rules interpreted the FLSA and were reasonable and valid. 

The Dissent

One of the panel judges wrote a dissent excoriating the decision, stating that Woody Woo should have controlled the outcome of this case.  Based on this dissent, it is possible that the entire panel of Ninth Circuit judges may reconsider this decision. In the meantime, employers who do not maintain a valid tip pool are at risk, even though they do not use a federal tip credit toward the FLSA minimum wage.

Implementation and Best Practices

Employers in industries where employees receive tips should review their policies, regardless of whether they pay at or above minimum wage without counting tips.  Under the DOL’s regulations, tips are property of employees upon receipt.  Employers who pool tips should ensure that their arrangements are consistent with the FLSA requirements for “valid” tip pools (in sum, tipped employees must be given advance notice of the program and no tips may be shared with management or non-tipped employees).  Most importantly, employers who were relying on Woody Woo to include non-tipped workers in their tip pooling arrangements will need to reevaluate and conform their practices to this new development in the law.  Although the Ninth Circuit litigation is not over, failing to do so may expose such employers to legal claims.

Bullard Law can help analyze your current tip pooling arrangements in light of the Ninth Circuit and DOL restrictive position and help strategize ways to compensate service-industry employees.  For more information about this significant development and its potential impact, please feel free to contact us.
[1] Cumbie v. Woody Woo, Inc., 596 F.3d 577, 583 (9th Cir. 2010).