More on Tip Pooling…

One question that persists amongst hoteliers and restaurateurs of all sizes is whether they can require tip pooling.  The issue has gotten no less confusing given conflicting opinions from the Ninth Circuit and the Department of Labor.  Tip pooling is the practice of combining tips from employees who directly receive them and redistributing the total tips received amongst various employees, including some who may not usually receive tips (for example, cooks or stewards).  Many cite the desire to foster teamwork and to create greater wage parity as reasons for wanting to implement a tip pool.

No matter the intentions, any employer thinking of instituting a tip pool policy should be aware of the challenges that may result from doing so.  In Washington State, many believed that the issue was settled when the Ninth Circuit issued its decision in the 2010 case, Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).  According to that decision, an employer in the Ninth Circuit (Washington, Oregon, California, Arizona, Nevada, Idaho, Montana, Alaska, Hawaii) may require tip pooling only where no tip credit is taken and the employer pays tipped employees at least the federal minimum wage or any higher applicable state minimum wage.

Also, according to this Ninth Circuit decision, employees who are not “customarily and regularly tipped employees,” such as cooks and dishwashers, can be included in a tip pooling arrangement, so long as the employer does not claim a tip credit and pays the minimum wage.

This ruling does not prevent a challenge to tip pooling arrangements under state law.  In states that have specific tip pooling laws and regulations, e.g., California, employers must comply with the state law if it is more restrictive (benefits the employee) than federal law.  Washington State does not have a state law that addresses tip pooling.

The Woody Woo decision also does not discuss whether owners, managers or supervisory employees may participate in an employee tip pool where no tip credit is taken and all employees are paid at least the applicable minimum wage, and this remains an open question.

In contradiction to the Ninth Circuit’s ruling, the U.S. Department of Labor (“DOL”) issued a Final Rule on April 5, 2011.  This new rule clarifies the DOL’s long-standing position that tips are owned by the employee that receives them, except if such tips are contributed to a valid tip pool. See 29 CFR 531.52. The Final Rule states that, in order to be valid, a tip pool must conform to regulations issued under the FLSA even if the employer is not taking a tip credit. Thus, under the Final Rule, a tipping pool is not valid if an employer uses the tip pool to give tips paid to front-of-the-house servers to back-of-the-house employees. Obviously, the Final Rule puts into question the Ninth Circuit’s Woody Woo decision. However, the DOL’s enforcement policy with regard to tip pooling in Ninth Circuit states is unclear at this time.

Given the uncertainty of the laws surrounding tip pooling in the Ninth Circuit states, plaintiffs’ firms may bring lawsuits against restaurants and other employers that operate tip pools in violation of the DOL’s Final Rule requirements. Further, such firms are also looking to sue employers for other violations of tip pooling regulations, such as the inclusion of managers in a tip pool. The legal costs associated with defending such a suit could be substantial.

In light of the Final Rule and the increase in lawsuits being filed by plaintiffs’ firms over tip pooling violations, we recommend that employers either (i) put in place a voluntary tip pooling arrangement that would allow tipped employees to share their tips with the rest of the staff voluntarily, or (ii) establish a mandatory tip pooling arrangement that follows the DOL’s Final Rule. Before putting any type of tip pooling arrangement in place, you should contact your legal counsel to assist you with drafting a policy that complies with the DOL and helps to address your needs.

To learn more, explore the following DOL resources:

Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)

DOL-Wage and Hour Division-Field Assistance Bulletin: Enforcement of 2011 Tip Credit Regulations

If effected, we expect the courts to resolve the conflict between the “Final Rule” and the Ninth Circuit court decision shortly.