A New Hope (For Tip Pooling)

A New Hope (For Tip Pooling)

By Catharine Morisset, Partner, Fisher Phillips

Washington employers continue to face challenges when it comes to tips and tip-pooling rules, but there may be hope. The controversial regulation preventing employers from pooling tips under the federal Fair Labor Standards Act (FLSA) is likely to be rescinded. Last July, the U.S. Department of Labor (DOL) stated it will issue a “Notice of Proposed Rulemaking,” which is the first step in changing its 2011 tip regulation.  That rule currently prevents mandatory tip pooling even in states, like Washington, where employers must pay employees full minimum wage, without any tip credit.

Background

Federal Law:  The FLSA’s tip-credit provision gives employers of tipped employees the option of paying a reduced hourly wage rate of $2.13 per hour if employees receive enough tips to bring their hourly rate to the $7.25 (the federal minimum wage). If there are not enough tips, the employer must pay the difference; if there are excess tips, the employees get the excess. However, not all states – Washington among them – allow employers to take a “tip credit.”  Thus, employers have argued that in states where employers cannot take a tip credit, employers may retain tips or redistribute them among front and back of the house by pooling them.

Federal Cases: Court battles about mandatory tip pooling policies that include back-of-the-house employees have had diverse outcomes.

  • In 2010, in Cumbie v. Woody Woo Inc., the Ninth Circuit Court of Appeals (covering Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) rejected a server’s lawsuit claiming that the restaurant’s mandatory tip pool violated federal law. There, the Court reasoned that the FLSA permits tip-pooling arrangements so long as the employer does not take tip credits against employees’ wages.
  • In 2011, in direct response to Woody Woo, the DOL instituted a new regulation stating that tips are the sole property of the tipped employee and cannot be added to a pool to share with back-of-the-house employees. The DOL’s claimed that an employer can only use an employee’s tips as a credit towards minimum wage – an arrangement unavailable to employers in many Western states credit (including Washington). In February 2012, the DOL issued a directive to its field agents to begin enforcement of its new regulation.
  • In 2012, in reaction to the DOL regulation a group of restaurant and lodging associations from Washington, Oregon, and Alaska sued the DOL, arguing that the DOL had exceeded its rule making authority and ignored precedent in a case entitled Oregon Restaurant and Lodging Association v. Perez. Around the same time, two casino dealers working for Wynn Las Vegas brought a wage and hour lawsuit against the casino, challenging it policy requiring dealers and other tipped employees to participate in a tip-pooling plan.
  • Both cases were eventually considered together by the Ninth Circuit Court of Appeals in 2016. In a controversial decision, the Court held that because federal law was silent on the question of tip pooling, the DOL was authorized to fill the gap with a rule. Thus, it affirmed the DOL’s tip pooling prohibition.
  • This remained the leading authority until June 2017 when the Tenth Circuit Court of Appeals (covering Colorado, Kansas, New Mexico, Oklahoma and Wyoming) ruled in Marlow v. The New Food Guy, Inc. that the DOL’s rule was invalid. In other words, the Court held the opposite of Perez, finding no tip pooling prohibition when the employer took no tip credit. This case, however, did not change the law for employers in the Ninth Circuit.

What Next?

The July announcement reflected DOL’s intention to act within the next 12 months, and the White House is currently considering the proposed Notice.  However, even if the NPRM goes forward, the rule making process takes time.  It also does not guarantee that the proposed rule will be the final version, as the process allows for input from employees and employers alike.  Next, while DOL enforcement of the tip pooling prohibition rule is stayed pending possible review by the U.S. Supreme Court, such review is uncertain. The conflict between Marlow and Perez is the kind of legal conflict that the U.S. Supreme Court typically decides to resolve. But the DOL has delayed submission of its briefs, possibly signaling a change in position given its announcement regarding its intent to rescind the rule.  That may become clearer in the next few months.  Employers should also remember that an individual employee could still file a private lawsuit against an employer over its tip pool practices.  Even with the current enforcement of the rule stayed, as has always been the case, employers could have to pay damages even for the period of the stay and punitive damages.  Further, Washington has its own wage-hour laws, and we do not know how a changed federal law and our ever-changing state and local laws may interact. A prudent employer will seek legal advice regarding tip pooling and service charges before adopting a final policy.

Varied Solutions

Given this legal landscape, and ever increasing minimum wage, Washington hospitality employers have taken different approaches.  Some adopted a mandatory tip pool that included only the front of the house. Such a practice is not without difficulties.  For many restaurants, excluding a large portion of staff from tip opportunities was disastrous for morale.  So, some restaurants included separate tip lines for front-of-the-house and back-of-the-house staff on a customer’s bill, or invited front of the house staff to voluntarily tip out the back of the house. Others abandoned the tipping system altogether and instead charged customers a mandatory service fee – with varied success depending on the type of guests involved and even guest experience.

Is Change Coming?

Employers who want to reinstate mandatory tip pooling programs should remain patient, although change is likely coming.  The DOL appears to be backing off its position altogether due to the change to a Republican administration.  Its July announcement gave a new hope for a return to tip pooling.

This article provides an overview of case history and a federal regulatory announcement. It is not intended to be, and should not be construed as, legal advice for any particular fact situation. As with any employment law issue, if you need legal advice, consult your attorney. 


Catharine Morisset is a litigation partner in Fisher Phillips’ Seattle office, representing local and national employers in litigation in state and federal courts, on appeal, and also before the EEOC and similar state agencies in all aspects of workplace law, such as the ADA, ADEA, FLSA, FMLA, FCRA, NLRA, Title VII, UTSA, and similar state laws.

Catharine believes in working closely with clients to address workplace issues proactively and as a valued partner to develop a successful workforce. She uses her litigation experience to work closely with clients across all industries to provide effective preventive counseling and workforce training. This includes regularly advising and training clients on drug testing, background checks, hiring, diversity, wage-hour compliance, leaves, noncompetition agreements, reasonable accommodations, investigations, employment agreements, discipline, terminations, and mass layoffs. Catharine is an experienced management and workforce trainer, sharing her legal knowledge and experience in an accessible, dynamic, and interactive manner.