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Tip Pooling Update

Catch up on Joy's previous tip pooling update here and continue reading for the latest ruling.

On June 7, 2013, a federal judge in Oregon ruled that the Department of Labor went beyond its authority when it issued regulations in 2011 prohibiting the use of tips by an employer even when the employer does not take a tip credit.  Judge Michael Mosman held that Congress had intended to impose conditions on employers that take a tip credit but did not intend to impose a freestanding requirement pertaining to all tipped employees. Consequently, the 2011 tip pooling regulations are not valid in the Ninth Circuit.  The decision may be appealed, so employers aren't out of the woods yet, but for now this is a big win for the restaurant industry.

Those of you following the challenge to the Department of Labor (“DOL”) tip pooling regulations interpreting the Fair Labor Standards Act (“FLSA”) may recall the events below. You may also want to view our past updates and insights on the tip pooling topic in the following articles: DOL RestrictionsTip Pooling Remains a Hot TopicTip Pooling - UpdateTip Pooling in Oregon and Washington.

  • In 2010, in a case called Cumbie v. Woody Woo 596 F.3d 577 (9th Cir. 2010), the Ninth Circuit (with jurisdiction over Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington) ruled that the FLSA did not prohibit employer-mandated tip-pooling arrangements if the employer did not take a tip credit.  This meant it was lawful for employers in the Ninth Circuit to require that their tipped employees share tips with non-tipped employees (bussers, dishwashers and cooks, for example), just so long as all employees got paid minimum wage and the restaurant did not take a tip credit.  (Seven states – Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington – do not allow a tip credit.)

  • The DOL then issued regulations in April 2011 addressing ownership of employee tips, in conflict with the ruling of Cumbie v. Woody Woo.  The regulations created legal uncertainty for any employers who were engaging in mandatory tip-pooling with back-of-the-house employees.

  • In February 2012, the DOL issued a field assistance bulletin to its staff, declaring ”the employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit …” and the DOL would “enforce nationwide the 2011 final rule explaining that a tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit[.]”  The field assistance made clear on no uncertain terms that that the DOL considered it a violation of the FLSA for an employer to institute a tip pool that required sharing tips with back-of-the-house employees, even if the employer did not take a tip credit.

  • In July 2012, restaurant industry associations and others filed a lawsuit in Oregon federal court, contending that the DOL regulations unlawfully prohibit back-of-the-house kitchen workers from sharing in tips left by customers when the employer does not take a tip credit against minimum wage.  See Oregon Restaurant and Lodging Association v. Solis et al., Case No. 3:12-cv-01261 (D. Or.).

Money on a restaurant table

A recent Field Assistance Bulletin issued by the U.S. Department of Labor (DOL) on February 29, 2012, announced a substantial change of the DOL’s enforcement position regarding mandatory tip pooling with back-of-the-house employees. 

As we have discussed in this blog previously tip pooling is the practice by which the tips of regularly tipped employees are pooled together and then redistributed among employees, including, on occasion, employees who do not customarily receive tips.  Employees may voluntarily participate, or they can be required to participate by the employer.

In 2010, the U.S. Court of Appeals for the Ninth Circuit issued a decision, Cumbie v. Woody Woo, Inc. (596 F.3d 577 (9th Cir. 2010), which held that DOL limitations on an employer's use of the employee's tips did not apply when the employer does not take a tip credit.  In states like Oregon and Washington, where the employer must pay a tipped employee the full minimum wage and is prohibited by state law from taking a tip credit, the employer is permitted to impose a mandatory tip-pooling arrangement and insist that tipped employees share their tips with back-of-the-house employees, not just with employees who customarily receive tips.  The court's ruling was a significant win for employers in the Ninth Circuit; the employer was represented by Garvey Schubert Barer (my partner, Eric Lindenauer, gets full credit), amicus briefs were filed by Oregon Restaurant and Lodging Association and others, and the DOL even submitted a brief and argued part of the case for the employee -- and lost.   

As many of you will recall, I dedicated two posts earlier this year to tip pooling and Oregon and Washington restaurant owners' ability to share tips with traditionally non-tipped employees - Tip Pooling in Oregon and Washington, Tip Pooling Update.  With the amount of attention that tip pooling continues to receive, I thought it time to enlist my Portland, Oregon partner, Eric A. Lindenauer, the lawyer who actually represented the Portland restaurant owner in the seminal Cumbie v. Woody Woo, Inc. decision, to provide a brief summary of the Woody Woo decision and recent developments in the ongoing tip pooling saga.

Thank you Eric for updating all of us.

The extent to which an employer can require employees to share tips with non-tipped employees remains a hot topic, especially in the federal Ninth Circuit, which encompasses Alaska, Washington, Montana, Idaho, Oregon, Nevada, California, Arizona and Hawaii.

Under the Fair Labor Standards Act (“FLSA”) where an employer claims “tip credit” toward the federal minimum wage, the employer may only require that employees pool tips with other employees who “customarily and regularly receive tips.” Assuming an employee is informed of the intent to take tip credit and other requirements are met, an employer can use an employee’s tips to offset all but $2.13 of the federal minimum wage.

As many of you are aware, the 9th Circuit Court of Appeals gave Northwest restaurant owners much to cheer about early last year when it authorized Northwest restaurants to initiate mandatory tip pools including back-of-house employees who traditionally do not receive tips. A complete description of the Court's decision in Woody Woo and its immediate effects can be found in my blog post from last November.

Given the number of questions I've received recently from clients who've heard rumors about tip pooling becoming legal, I thought it time to update everyone. The short answer is (at least for now) that employers in Washington and Oregon may initiate mandatory tip pools under certain circumstances.

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Greg Duff
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Greg Duff founded and chairs Foster Garvey’s national Hospitality, Travel & Tourism group. His practice largely focuses on operations-oriented matters faced by hospitality industry members, including sales and marketing, distribution and e-commerce, procurement and technology. Greg also serves as counsel and legal advisor to many of the hospitality industry’s associations and trade groups, including AH&LA, HFTP and HSMAI.

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