Ninth Circuit Rules Against Mandatory Tip-Pooling

Ninth Circuit Rules Against Mandatory Tip-Pooling

Some employers, including many Nevada casinos, require their employees to participate in tip-pooling arrangements whereby customarily tipped employees have to share their tips with employees who are not customarily tipped.  On February 23, 2016, the Ninth Circuit Court of Appeals effectively invalidated this practice.  Employers can no longer mandate tip-pooling arrangements that include employees who are not customarily tipped.

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The Ninth Circuit last addressed this issue six years ago in a case entitled Cumbie v. Woody Woo, Inc. 596 F.3d 577 (2010).  The employee in that case worked as a waitress and was paid an hourly wage that exceeded federal minimum wage.  She also received tips that her employer required her to contribute to a tip pool that was then redistributed to all non-management restaurant employees in proportion to their hours worked.  The employee challenged this tip-pooling arrangement, arguing that it violated the minimum-wage provisions of the Fair Labor Standards Act (“FLSA”), which prohibits tip-pooling arrangements that include distributions to employees who are not customarily tipped where the employer takes a “tip credit,” i.e., the employer does not fulfill any part of its hourly minimum-wage obligation to its employees with tip income.  The employer argued that, because it did not take “tip credit,” its tip-pooling arrangement did not run afoul of the FLSA.  The Ninth Circuit agreed with the employer and held that a tip-pooling arrangement is presumptively valid in the absence of “statutory interference,” and that “an employer practice does not violate the FLSA unless the FLSA prohibits it.”  It held that, because the FLSA does not restrict tip-pooling when no tip credit is taken, the employer’s practice did not violate the FLSA.

In 2011, the Department of Labor (“DOL”) promulgated a rule that said that the tip pool restrictions actually extend to all employers, not just employers who take tip credit (the “2011 Rule”).  The 2011 Rule explained:

“Tips are the property of the employee whether or not the employer has taken a tip credit under [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 . . . : As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.”

This rule differed significantly from the prior DOL rule, which stated that “In the absence of an agreement to the contrary between the recipient and a third party, a tip becomes the property of the person in recognition of whose service it is presented by the customer.”  Under this rule, employers were free to contract with their employees to utilize tip-pooling arrangements that included both customarily tipped employees and employees who were not customarily tipped.

On February 23, 2016, the Ninth Circuit announced an abrupt about-face from its ruling in Cumbie in the case of Oregon Restaurant & Lodging Ass’n v. Perez, a ruling that applied to two lower-court cases: Cesarz v. Wynn Las Vegas and Oregon Restaurant & Lodging Ass’n v. Solis. Both of those cases arose out of the 2011 Rule that provided that the tip pool restrictions extend to all employers, not just those who take tip credit.

In Cesarz v. Wynn Las Vegas, a group of casino dealers sued Wynn, arguing that the casino’s tip-pooling arrangement improperly required its tipped employees to share their tips with normally non-tipped employees.  The Nevada federal court judge dismissed the case, holding that the “DOL may not read the tip credit condition out of the [FLSA] via its regulations.” A similar ruling was rendered in Oregon Restaurant & Lodging Ass’n v. Solis, where the plaintiffs (a restaurant employee, a restaurant owner, and various restaurant associations in Oregon, Washington and Alaska) challenged the validity of the 2011 Rule.  The Oregon federal court judge held that Cumbie left no room for the DOL to regulate employers that do not take tip credit, thereby finding the DOL’s 2011 Rule to be invalid.

On appeal, the Ninth Circuit reversed and remanded both cases back to the lower courts for redetermination.  The Court’s rationale was as follows: the DOL’s new interpretation of the FLSA in the 2011 promulgated rule was entitled to “controlling weight” because (1) the DOL has delegated authority under the FLSA to make rules carrying the force of law, (2) the FLSA is silent on the issue of whether employers that do not take tip credit may require tip-pooling arrangements that include normally non-tipped employees, and (3) the DOL’s 2011 Rule was reasonable and “closely aligned” with the FLSA’s congressional intent.  Based on this reasoning, the Court held that employers can not include in tip-pooling arrangements employees who are not customarily tipped.

The Court’s ruling in Perez unequivocally overturns its 2010 determination that such tipping-arrangements are allowed by the FLSA so long as employers pay their tipped employees minimum wage and do not take a tip credit.  The practical effect of this ruling is clear: employers with tip-pooling arrangements that include employees that are not customarily tipped would be wise to consider suspending their mandatory tip-pooling arrangements to avoid the risk of running afoul of the FLSA – as currently interpreted by the Ninth Circuit.

Contributor:  Sherry S. Bragg, Attorney at Law | Weintraub Tobin