Ninth Circuit Approves DOL Rule Prohibiting “Tip Pooling” for Kitchen Employees Even Where No “Tip Credit” Is Taken

The Fair Labor Standards Act (“FLSA”) permits employers to use “tip credits” to satisfy minimum wage obligations to tipped employees.  Some employers use those “tip credits” to satisfy the minimum wage obligations; some do not.  (And in some states, like California, they cannot do so without running afoul of state minimum wage laws.)

Many hospitality employers use “tip pools” to divide customer tips among staff.  Those “tip pools” normally provide for tips to be divided among “front of the house” employees who are involved in serving customers – servers, bartenders, etc. Some employers have extended the “tip pools” to include “back of the house” employees – dishwashers, cooks, etc. – particularly where they are not using a “tip credit.” 

In 2011, the Department of Labor (“DOL”) issued a rule prohibiting employers from including kitchen staff in “tip pools” – even where no “tip credit” was being taken.  Two separate district courts held that the DOL did not have authority to issue such a rule where no “tip credit” was taken, relying on the Ninth Circuit’s ruling in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9^th Cir. 2010).

On February 23, 2016, in Oregon Restaurant & Lodging Assoc. v. Perez, No. 13-25765 (9^th Cir. Feb. 23, 2016), a divided Ninth Circuit Court of Appeals reversed those two district court decisions, holding that the DOL in fact has the authority to regulate the “tip pooling” practices of employers even when they do not take tip credits -- including prohibiting employers from including kitchen employees in “tip pools.” While confirming that the FLSA permits the use of “tip credits” to fulfill minimum wage requirements, the Court concluded that the DOL was acting within its authority in concluding that employers that establish “tip pools” may only do so when the persons who are included are persons who normally receive tips – and that, as kitchen staff do not normally receive tips, they cannot be included in “tip pools.”

The decision not only appears to be inconsistent with the Ninth Circuit’s own Cumbie decision, but with other courts that have reviewed this same issue.

The National Restaurant Association, a co-plaintiff in the case, has already indicated that it may seek review of the decision by a full panel of the Ninth Circuit.  And it is certainly possible that the decision will be reviewed by the United States Supreme Court.  But unless and until the decision is reversed, restaurant employers in the Ninth Circuit – which encompasses Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington --would be wise to review their “tip pooling” practices promptly with counsel.