Mr. Mavros

Hospitality Law

Tip-Pooling Practices May be a Thing of the Past

By John Mavros, Attorney at Law, Partner, Fisher & Phillips, LLP

Restaurants and other hospitality businesses in the Western U.S. recently received tough news as a Federal appeals court refused to strike down a controversial tip-pooling regulation from the U.S. Department of Labor (DOL). The DOL rule prohibits businesses from requiring employees to share their tips with back-of-the-house staff -- even if the tipped employees are paid minimum wage. Although a group of hospitality employers had hoped that the Ninth Circuit Court of Appeals would reject the rule as contrary to well-established law, it was upheld. The decision applies to all businesses operating within the Ninth Circuit, including the states of California, Nevada, Washington, Arizona, Oregon, Idaho, Montana, Hawaii, and Alaska.

Background of Tip Credits and Tip-Pooling

Under the Fair Labor Standards Act (FLSA), employers are permitted to utilize a limited amount of employees' tips as a credit against their minimum wage obligations through a tip credit. Under current Federal law, if an employee earns $5.12 an hour in tips, it would be permissible for a restaurant to only pay the employee $2.13 an hour in cash wages in order to meet the $7.25 federal minimum wage.

In most Western states, however, employers cannot take a tip credit (including California, Nevada, Washington, Oregon, Montana, and Alaska) pursuant to state law. Restaurants in these states are required to pay employees cash wages at minimum wage levels regardless of the tips they receive. Some employers in these and other states have instituted tip-pooling programs. Under such plans, restaurants require servers to share the tips they receive with workers in customarily non-tipped positions, such as those that work as back-of-the-house staff (i.e., dishwashers and cooks).

Case History of Tip-Pooling

In 2010, the Ninth Circuit considered in Cumbie v. Woody Woo, 596 F.3d 577 (9th Cir. 2010) whether section 203(m) of the FLSA prohibits all employers from allowing non-customarily tipped employees from sharing in the company's tip pool, even when the front-house staff does not take a tip credit. The Ninth Circuit noted the FLSA's silence with regard to redistribution of tips and held that the FLSA does not prohibit employers from redistributing employees' tips where no tip credit against the minimum wage is claimed. This decision allowed employers in the hospitality and restaurant industry to broaden their tip pools to include back-of-the-house employees. The Cumbie decision held that as long as the employer does not attempt to take a tip credit and pays at least the minimum hourly wage, an employer may, without violating the FLSA, permissibly mandate tip-pooling with employees who do not customarily and regularly receive tips.

Dissatisfied with the court's decision, the USDOL issued a new rule in April 2011, stating that tips are the "sole property" of the tipped employee and cannot be used in a pool to share with back-of-the-house staff.

In 2012, a group of concerned hospitality employers challenged this rule in the case of Oregon Restaurant and Lodging Association v. Perez. The group argued that the USDOL had exceeded its statutory authority by issuing that rule and ignored the binding precedent established by Cumbie. Around the same time, three casino dealers working for Wynn Las Vegas brought a wage and hour lawsuit against the casino. The employer required dealers and other tipped employees to participate in a tip-pooling program, and the dealers claimed the casino was unlawfully taking their tips to share with other workers.

In 2013, a Federal judge in Portland, Oregon handed a victory to that group by invalidating the USDOL's new tip-pooling rule. Shortly thereafter, a Federal judge in Las Vegas ruled in favor of Wynn Las Vegas. The USDOL appealed the Oregon decision and the Ninth Circuit consolidated the companion case against Wynn Las Vegas into one appeal.

The Ninth Circuit Revives the DOL Rule

In February 2016, the Ninth Circuit upheld the DOL rule finding that the DOL had the authority to expand its tip-pooling regulations. The Ninth Circuit acknowledged the 2010 Cumbie decision and the right of employers to institute tip pooling programs. However, the February 2016 decision reasoned that Cumbie did not prevent the DOL from barring the practice. By issuing this decision, the court essentially reversed itself and rejected its earlier holding in Cumbie, explaining that the DOL's interpretation of section 203(m) was "reasonable" and therefore entitled to deference from the courts.

The Oregon Restaurant and Lodging Association sought a review of this decision before a full panel of Ninth Circuit judges to revisit the decision in hopes that it would be overturned. However, the Ninth Circuit recently issued an order that it will not take the case up on a full panel appeal.

What Has Changed

A tip is now considered the sole property of the tipped employee regardless of whether the employer takes a tip credit. This requirement does not preclude a valid tip pooling arrangement among employees who customarily and regularly receive tips. The FLSA defines "customarily and regularly tipped employees" as those receiving more than $30 per month in tips. Therefore, employers using a tip pool will need to ensure that none of their back-of-the-house staff partake in sharing the tip pool, including the head chef, dessert chef, caller, line cooks, dishwashers, expeditors, porters, or any other staff that may not fall within the FLSA's definition of "customarily and regularly tipped employees."

What will Andy Puzder do?

Despite these rulings, Donald Trump's pick for Labor Secretary - Andrew "Andy" Puzder - will have a huge impact on American businesses. Mr. Puzder has been the chief executive of CKE Restaurants, the parent company of Carl's Jr. and Hardee's for 16 years, and is an outspoken proponent of pro-growth policies, reducing Federal regulations (specifically within the restaurant industry), and reversing the anti-business stance taken by the previous DOL. Only time will tell whether Mr. Puzder actually rolls back "burdensome" regulations for businesses, but many experts wholeheartedly expect him to do so.

Guidance for Hospitality Employers

Unless Mr. Puzder immediately amends the DOL rule, or the ruling is overturned by the US Supreme Court, many restaurants and hospitality businesses in the Western U.S. may have to reevaluate how they disperse tips. Below are five alternatives for new tipping practices:

No Tipping

No-tip restaurants are by no means common, but the idea is starting to take hold as a means to comply with the DOL's new rule and to discourage competition among employees. Such a policy not only maintains compliance with the law, but also the theory is that tips disrupt the working environment and leave workers unsure of their take-home pay from week to week. For some restaurants, employers pay workers $15 an hour and any money left on the tables go to charity.

No Tip-Pooling

Employers can abandon tip-pooling and allow each employee to keep his or her own tip. As a result, performance and quality of service by the employee may increase, however, a possible consequence of such practice may: (1) Discourage teamwork; (2) Create disagreements over who is assigned less lucrative sections or guests; and (3) Lead to employees objecting to work lower revenue shifts.

Tip-Pooling Only Among "Customarily and Regularly Tipped Employees"

Tips received by "customarily and regularly tipped employees," such as servers, can be pooled and redistributed among only those employees. Be sure that any tip-pooling agreement is acknowledged and in writing.

Separate Tip Lines

Include separate tip lines on customer checks for front-house and back-house staff. Some restaurants have the traditional tip line in addition to a "kitchen" line as a means to comply with the DOL's rule and to increase the pay for back-house staff without raising customer prices.

Mandatory Service Fee

Many employers are abandoning the tipping system altogether and are instead charging customers a mandatory service fee. A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer's gross receipts. Sums distributed to employees from service charges will not be counted as tips received and can be divided among front-house and back-house employees.

Depending on your jurisdiction, tip-pooling is now a risky proposition. Restaurants and other hospitality businesses in the Western U.S. should immediately evaluate compliant alternatives to fit their business needs and take action to ensure that their employment policies comply with state and federal law.

This article provides an overview of the law and is not intended to be, nor should it be construed as legal advice for any particular fact situation.

John Mavros, Attorney at Law, is a partner in Fisher Phillips’ Irvine office. He represents employers with labor and employment law, such as unpaid compensation claims, including unpaid minimum wages, overtime, meal/rest period premiums, vacation pay, and/or business expenses, on both an individual and class action basis. Mr. Mavros defends businesses involved in civil litigation or arbitration. This includes defending claims brought before the Division of Labor Standards Enforcement (DLSE aka the Labor Board) and the California Unemployment Insurance Appeals Board. He assists employers with employee handbook preparation, wage/hour audits, new hire policies, employee compensation plans, severance agreements, reductions in force, and day-to-day workforce issues. Mr. Mavros can be contacted at 949-798-2134 or jmavros@laborlawyers.com Extended Bio...

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