Fourth Circuit Finds that Tip Pooling Policy Permitted Under FLSA Where No Tip Credit is Taken

In Trejo v. Ryman Hospitality Properties, Inc., the U.S. Court of Appeals for the Fourth Circuit joined the Ninth Circuit in holding that an employee cannot bring a claim for wages based on allegedly misappropriated gratuities under the FLSA unless the employer used the tip credit set forth in 29 U.S.C. § 203(m).

The plaintiffs, Mohammad Sazzad and Anthony Gomes, were servers for hotels and restaurants at the National Harbor complex in Prince George’s County, Maryland, and also members of the UNITE HERE, Local 25 union. During their employment, plaintiffs regular wages exceeded minimum wage at all times. Their employer, however, required that plaintiffs take part in a tip-pooling agreement, which took a portion of the plaintiffs’ tips and redistributed those tips to bartenders, server assistants, busboys, and food runners. Plaintiffs filed suit, arguing that the mandatory tip pooling policy violated the FSLA. Importantly, plaintiffs did not allege their employers paid them below the minimum wage or that they were forced to work overtime without proper pay.

Under 29 U.S.C. § 203(m), the FLSA the term “wage” for “tipped employees” is defined as follows:

In determining the wage an employer is required to pay a tipped employee, the amount paid such employee by the employee’s employer shall be an amount equal to—

  1. the cash wage paid such employee which for purposes of such determination shall be not less than the cash wage required to be paid such an employee on August 20, 1996; and
  2. an additional amount on account of the tips received by such employee which amount is equal to the difference between the wage specified in paragraph (1) and the wage in effect under section 206 (a)(1) of this title.

The additional amount on account of tips may not exceed the value of the tips actually received by an employee. The preceding 2 sentences shall not apply with respect to any tipped employee unless such employee has been informed by the employer of the provisions of this subsection, and all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.

As such, the FLSA clearly permits employers, under certain circumstances, to take a credit against the minimum wage by using an employee’s tips, as wages.

In Trejo, the defendant employers brought a motion to dismiss plaintiffs’ case, and the district court agreed, finding that because the servers were paid above minimum wage, the FLSA’s tip credit provision was inapplicable. On appeal, the plaintiffs argued that because they were never informed of the FLSA’s tip-credit provision, and the tip-pooling arrangement included employees that were not regularly tipped (such as busboys), they contended that the tip-pooling arrangements were invalid.

The Fourth Circuit affirmed the district court’s dismissal of the case. It found that because plaintiffs were not seeking the recovery of tips related to a minimum wage or overtime claim, the statutory requirement that an employer inform an employee of section 203(m) and permit the employee to retain all his tips, did not apply.

In making its decision, the Fourth Circuit followed the Ninth Circuit’s ruling in a 2010 case where it found that an arrangement to redistribute tips was not barred by the FLSA where no tip credit was taken.  In Cumbie v. Woody Woo, Inc., Cumbie earned a minimum wage, and was required to contribute any tips earned to a “tip pool” that was redistributed to various restaurant employees. After her complaint was dismissed by the district court, Cumbie argued on appeal that because Woo’s pool included employees who are not “customarily and regularly tipped employees,” it was “invalid” under the FLSA. Cumbie further argued that her forced participation in the tip-pool was an indirect kick-back to the kitchen staff for the employer’s benefit, in violation of Department of Labor regulations. The Ninth Circuit found that where there was an “an explicit contrary understanding” to the rule that tips belong only to the recipient (through an agreement to pool tips), only the tips redistributed to Cumbie from the pool belonged to her. The court further noted that, even assuming the tips belonged to her, they were not wages because the employer did not take a tip credit. As such, the court concluded that the arrangement to redistribute the tips was not barred by the FLSA because Woo did not take a tip credit.

While the Fourth Circuit and Ninth Circuit decisions seem to clearly permit tip-pooling policies under the FLSA (provided minimum wages are paid and no tip credit taken), it is likely that this is an area of law that will remain hotly contested. Following the Cumbie decision, the Department of Labor sought to regulate the distribution of tips. While those regulations fell upon challenges in court, this area of law remains evolving. While employers may continue to require tip-pooling agreements as permitted in Trejo and Cumbie, they should remain cognizant of proposed regulations and developing case law.

Contributor:  Meagan D. Bainbridge, Attorney at Law  |  Weintraub Tobin