Does your restaurant have a tip pool arrangement which includes "non-customarily tipped" employees, such as cooks, dishwashers, or food runners who have little interaction with customers? If so, the Ninth Circuit Court of Appeals in Oregon Restaurant and Lodging Assn v. Perez (9th Cir. 2016), in a decision issued on February 23, 2016, has held that your tip pool arrangement is unlawful, and in violation of the Fair Labor Standards Act ("FLSA").
Background:
The federal Department of Labor ("DOL") has traditionally interpreted the FLSA as prohibiting mandatory tip pooling arrangements which include "non-customarily tipped" employees. The DOL distinguishes between employees who "customarily and regularly receive tips," and are customer-facing, such as waiters, waitresses, hosts/hostesses, counter staff, bus staff, and service bartenders, and "non-customarily tipped" employees, such as chefs, cooks, dishwashers, expediters, etc. The DOL has long contended, and many courts have agreed, that only "front of the house" staff may participate in a tip pool, and any tip pool which re-distributes tips contributed by "front of the house staff" to its "back of the house staff" is unlawful.
In a 2010, case, Cumbie v. Woody Woo, Inc. (596 F.3d 577 (9th Cir. 2010), the Ninth Circuit took a different position, ruling that in situations where no tip credit is taken by the employer, the FLSA did not prohibit a tip pool which included both front of the house and back of the house employees. The court in Cumbie noted that the FLSA prohibits tip pools which include non-customarily tipped employees when a tip credit is taken against the minimum wage. However, it observed that the FLSA makes no mention of tip pooling arrangements in which no tip credit is taken, and therefore, the DOL overstepped its bounds by determining that non-customarily tipped employees could not participate in a tip pool in such circumstances.
In 2011, the DOL promulgated new tip credit rules which clearly and directly prohibit non-customarily tipped employees from participating in a tip pool with customarily tipped employees in all cases, even when the employer does not utilize the tip credit. The DOL's Commentary to the final rules laid out its rationale for the prohibition, and criticized the Cumbie ruling.
The new 9th Circuit decision in Oregon Restaurant & Lodging Assn. notes that when Cumbie was decided in 2010, there was no DOL regulation specifically addressing the issue of whether, in situations where no tip credit is taken, customarily tipped employees can be required to participate in a tip pool with non-customarily tipped employees. The Oregon Restaurant & Lodging Assn. decision now concludes that because (1) Congress delegated authority to the DOL to prescribe rules and regulations interpreting the FLSA, (2) the FLSA is silent on whether a mandatory tip pool including non-customarily tipped employees is unlawful, and (3) the 2011 rule promulgated by the DOL is a reasonable interpretive "gap-filler," it will enforce the DOL's 2011 regulation prohibiting such tip pools.
Action Steps:
Because this new decision contradicts the prior ruling in Cumbie, it is possible that it will be heard en banc by the full bench of Ninth Circuit judges. However, that could take years. In the meantime, food-service establishments which maintain tip pools that include back of the house staff should remove those back of the house staff from the tip pool, or at the very least, consult with employment law counsel on a proper course of action moving forward.