Ninth Circuit Validates USDOL Tip Pool Rules

In a surprising decision, on Tuesday, February 23, 2016, the United States Court of Appeals for the Ninth Circuit validated the 2011 Rule by the United States Department of Labor (DOL) prohibiting tip pooling programs that include “back of the house” employees and other workers who are not customarily and regularly tipped (e.g., cooks, dishwashers).  The Ninth Circuit decision confirms the DOL’s position that the 2011 Rule applies even to restaurants that do not take a tip credit.  This decision is binding in the following jurisdictions that previously relied on a different ruling:  Washington, Oregon, Alaska, Idaho, Montana, Nevada, California, Arizona, Hawai’i, Guam, and Northern Mariana Islands.

A bit of history behind the decision:  The issue about tip pooling, and who can be included in a tip pool, arises from Section 3(m) of the federal Fair Labor Standards Act (FLSA).  That is the section of the FLSA that permits an employer to fulfill part of its hourly minimum wage obligation by taking a tip credit, and places certain requirements on employers who use a tip credit.  Section 3(m) also states that a tip pool is only valid if it is comprised exclusively of employees who are “customarily and regularly tipped.”

The question has been whether this “customarily and regularly tipped” language applies only to employers who take a tip credit, or if it also applies to employers who do not take a tip credit, like employers in states like Washington.  The Ninth Circuit seemingly resolved this question in 2010, in a case called Cumbie v. Woody Woo, 596 F.3d 577 (9th Cir. 2010).  In that case, the court determined that Section 3(m) of the FLSA only applied to employers who take a tip credit.  Accordingly, employers who did not take a tip credit could implement a tip pooling scheme that included workers who were not “customarily and regularly tipped,” such as back-of-the-house employees.

Then, the DOL jumped in the “pool” to undo the Woody Woo ruling.  In 2011, the DOL implemented a rule reiterating that tips belong solely to the tipped employee, regardless of whether the employer takes a tip credit.  The 2011 Rule also provided that – contrary to the decision in Woody Woo – to comply with Section 3(m), a tip pool must include only employees who are customarily and regularly tipped, again regardless of whether the employer takes a tip credit.

Judge N. Randy Smith dissented from today’s decision.  Notably, Judge Smith served on the panel in the Woody Woo case, and called on the Ninth Circuit to hear the case en banc so that at least eleven judges sitting on the Ninth Circuit, rather than merely three, could vote on this case that now contradicts Woody Woo.   Nevertheless, unless and until it is reheard en banc or overturned on appeal, today’s decision from the Ninth Circuit upholds the validity of the DOL rule for all employers in Washington State and other jurisdictions in which tip credits are prohibited.  In short, unless today’s decision is overturned on review or appeal, all employers must implement tip pooling programs that only include employees who are customarily and regularly tipped.

What You Should Do:

Employers in Washington need to immediately evaluate their tip pooling programs.  Some options to consider:

  • Implement a tip pooling program that includes only employees who are customarily and regularly tipped.  This means that “back of the house” employees and others who do not provide direct customer service must be excluded from the tip pool.
  • Eliminate tips and implement mandatory “service fees.”  Because mandatory service fees are not considered “tips” under the law, service fees are not impacted by Section 3(m) or other laws regulating the use of tips.  Employers may distribute service fees however the employer chooses, so long as the customer is notified of service fee distribution, as required by law.  This notice must be included in the menu and on the receipt.*
  • Implement a tipping program where the customer directly tips “back of the house” or employees who would otherwise be excluded from a tip pool.  Because direct tips by a customer are not a “tip pool,” this would not violate Section 3(m) of the FLSA or the DOL Rule.

Because the law can be complicated, and compliance crucial, please consult with counsel before implementing any sort of tip program that goes beyond an individual employee retaining his or her own tips.

*  We also recommend notifying employees of how service fees are split.