Ninth Circuit Holds That Employers Cannot Create Tip Pools With Back Of House Employees

Due to escalating labor costs as a result of significant increases to the minimum wage and government mandates, such as the Affordable Care Act, hospitality employers are developing creative ways to compensate their employees, particularly for non-service employees. Some employers have eliminated tipping entirely, while others have added certain "surcharges." In fact, where permitted by state law, other employers have kept tipping in place but have expanded tip pools to include non-service employees. Until now it was believed that as long as the employer did not take a tip credit, the Fair Labor Standards Act imposed no impediments on the breadth or dimensions of employer tip pools. Unfortunately, a recent decision by the Ninth Circuit - which covers Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Northern Mariana Islands, Oregon, and Washington - has now removed a tool that some employers used to compensate non-service employees. On February 23, 2016, in a pair of cases, Oregon Restaurant and Lodging Association et al. vs. U.S. Department of Labor, Case No. 13-35765 and Joseph Cesarz et al. v. Wynn Las Vegas LLC et al., Case No. 14-15243 (9th Circuit), the Ninth Circuit upheld the validity of a U.S. Department of Labor Wage and Hour Division (DOL) rule that prohibits tip pools that include non-service employees or managers when an employer does not take a tip credit.

Background

Under the Fair Labor Standards Act (FLSA), tip pooling requirements have been a source of confusion and litigation, especially where employers do not take a tip credit. In 2010, in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010), the Ninth Circuit held that an employer could require servers to pool their tips with kitchen and other "back of the house staff" as well as managers, so long as the employer did not take a tip credit and paid all employees at or above the federal minimum wage. The Cumbie Court opined that because the FLSA was silent on tip pool arrangements when no tip credit was taken, an employer could implement any tip pool arrangement it wanted under the FLSA.

After Cumbie, the DOL initially announced that it would permit employers in the Ninth Circuit to impose mandatory tip pooling on employees who did not customarily and regularly receive tips (i.e., non-service employees and managers), if the employer did not take a tip credit. However, in 2011, the DOL reversed course and promulgated a rule strictly limiting tip pool...