On February 23, 2016, the Ninth Circuit Court of Appeals decided Oregon Restaurant and Lodging Association v. Perez,which validated a new Department of Labor (DOL) regulation that limits the tip pooling practices of employers who do not take a “tip credit.” The effect of this ruling is that whether or not an employer takes a tip credit, they may no longer pool their employees’ tips and distribute them among all employees, including those who do not customarily earn tips, such as the kitchen staff. Tip pooling is still allowed among employees who customarily receive tips.

This decision effectively reverses a previous Ninth Circuit Court of Appeals case, Cumbie v. Woodie Woo, 596 F.3d 577 (9th Cir. 2010), that found an Oregon employer who did not take a “tip credit” could have a tip pooling arrangement that pooled all tips, and distributed them among its waitstaff, who customarily earned tips, and its kitchen staff, who did not earn tips.

What exactly happened and what does this mean? To understand this decision, it is necessary to understand the legal terminology related to the payment of tipped employees.

Tip Credit – A tip credit is a practice allowed under the Fair Labor Standards Act (“FLSA”) where the employer can utilize some or all of the employee’s tips to assist in providing the employee with a minimum wage payment. In order for an employer to take advantage of the tip credit, the regulation requires that the employee retain tips (i.e., the employer does not take possession of the tips), and the employer inform the tipped employee that the employer is going to use a tip credit in order to pay the employee.

Tip Pooling – The same regulation that allowed for a tip credit also provided that it was legal to have a tip pooling arrangement among employees who customarily and regularly receive tips. This regulation did not mention including employees who do not customarily receive tips in a tip pooling arrangement.

In the 2010 Cumbie decision, theNinth Circuit Court of Appeals ruled that the tip pooling regulation that allowed tip pooling only among employees who customarily received tips applied only to employers who took tip credits. The Court found that an employer who paid the full minimum wage without taking a tip credit could therefore pool the tips of its employees and distribute them to all employees, tip earning and non-tip earning.

However, the Department of Labor took issue with the Cumbie decision and promulgated a new rule to clarify that tips earned by an employee are the property of the employee. The 2011 Rule states:

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 under [the FLSA]: As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool. 29 C.F.R. § 531.52 (emphasis added).

This new rule prohibits an employer from use of a tip pool that includes employees who do not customarily earn tips, such as kitchen employees, whether or not the employer actually takes advantage of the tip credit.

After issuance of this rule, the Oregon Restaurant and Lodging Association filed a lawsuit to enjoin its enforcement, claiming that it was not valid. In addition, after the rule became effective, a group of casino dealers who earned tips sued their employer to oppose the employer’s tip pooling practice, which required the casino dealers to share tips with non-customarily tipped employees, i.e., kithchen staff and casino floor supervisors. The district courts that decided these cases relied on the Cumbie decision and ruled that employers who did not take tip credits were permitted to have a tip pooling arrangement that distributed tips to all employees including those who did not customarily receive them.

The losing parties in both cases appealed to the Ninth Circuit Court of Appeals, which resulted in the new Perez decision. The Ninth Circuit held that the Cumbie decision “did not foreclose the DOL’s ability to regulate tip pooling practices of employers who do not take tip credits.”

What does this mean? Employers who do not take a tip credit are foreclosed from having a tip pooling arrangement where employees who do not customarily earn and receive tips share tips with customarily tipped employees. However, under the Perez decision, while an employer cannot force tipped employees to share their tips with non-tipped employees in a tip pool, nothing in the law would prevent tipped employees on their own accord, without involvement of their employer, from forming a tip pool to share their tips if they wished. The point of the 2011 DOL rule and the new Ninth Circuit decision is that the employer may not redistribute the property of its tipped employees in a tip pool to employees who did not earn the tips.

If you have any additional questions regarding this decision, the attorneys in Schwabe, Williamson and Wyatt’s employment group are ready to assist.

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