Ninth Circuit Limits Tip Pooling To Customarily Tipped Employees

In a decision with important implications for employers throughout the service industry, the federal Ninth Circuit Court of Appeals ruled on February 23 that employers cannot implement policies requiring tipped employees to share their tips with untipped employees. The 2-1 decision in Oregon Restaurant & Lodging Assoc. v. Perez, — F.3d -, No. 13-25765 (9th Cir. Feb. 23, 2016) ("Oregon Restaurant") upheld a regulation issued by the federal Department of Labor ("DOL") in 2011 and reversed trial court decisions to the contrary from Oregon and Nevada.

Section 203(m) of the Fair Labor Standards Act ("FLSA") permits an employer to fulfill part of its hourly minimum wage obligation to a tipped employee with tips the employee receives from customers - a so-called "tip credit." An employer can take a tip credit as long as it (1) notifies its employees of the practice, and (2) allows tipped employees to keep all tips they receive or to participate in a valid "tip pool" whereby tips are combined and then distributed amongst employees who are "customarily and regularly" tipped.

An employee customarily and regularly receives tips if he or she (1) has more than de minimis interaction with the customers who leave the tips, and (2) is engaged in customer service functions.1 The employee's job title is irrelevant. Thus, for example, a sushi chef who serves diners directly at a counter may be a tipped employee, while a chef who works in a kitchen and does not interact with diners is not.2

In 2010, the Ninth Circuit ruled in Cumbie v. Woody Woo, Inc. that section 203(m) did not apply to employers that do not take tip credits; as a result, such employers could use tip pools to benefit both tipped and untipped employees.3 The DOL responded to the Cumbie ruling in 2011 by issuing a regulation that limits tip pooling to customarily tipped employees regardless of whether their employers take tip credits.4 It reasoned that this was necessary to close a "loophole" in section 203(m) whereby employers could use tip pooling to subsidize the wages of untipped employees. In 2013, a federal district court in Oregon held the regulation invalid based on Cumbie. 5 A district court in Nevada followed suit in 2014. 6

The Ninth Circuit reversed both district courts in Oregon Restaurant. Writing for the majority, Senior Circuit Judge Harry Pregerson wrote that Cumbie did not render the DOL regulation invalid. The majority read Cumbie to say that section 203(m) was silent...