Tip Pooling: How the Ninth Circuit ruling may affect your restaurant

Tip Pooling: How the Ninth Circuit ruling may affect your restaurant

By Bob Donovan, Donovan Employment Law

In my previous article, I gave a brief overview of the recent Ninth Circuit ruling, in which the court held that federal regulations concerning tips, and who may be included in a mandatory tip pool, are valid.  As explained in that article, it is likely the plaintiffs in that lawsuit (including WRA) will ask the court to review that ruling.

This article focuses on the question: “If I have a tip pool that might be unlawful under the regulations, should I make changes to the tip pool while a request to review the Ninth Circuit ruling is pending?”

There is no “one size fits all” answer to that question. You should consider a number of factors including, for example, legal risks, the impact that changing your current tip pool program will have on your business, and whether you would change the tip pool program back to the way it is if the court grants a request for review and ultimately changes its ruling.

Risks of continuing a tip program

The current understanding of risk of the U.S. Department of Labor (DOL) attempting to enforce the 2011 regulations against an employer while a request for review is pending is that this risk will be mitigated by a request to review the rul

ing by the plaintiffs. In 2013, the district court in this case ruled that the regulations are invalid, and that DOL is prevented from enforcing them against anyone who was a member of one of the plaintiff restaurant associations, including the WRA, at the time of the ruling. The current understanding is that the 2013 ruling, including the injunction against DOL , remains in place until any requested review of the Ninth Circuit’s ruling is finalized. This might just temporarily delay the risk, however, as a request for review may be denied within weeks of the request being made.

A  risk of being sued in a private lawsuit (e.g., by a current employee) lawsuit alleging that you are violating the 2011 regulations and seeking damages (e.g., repayment of tips improperly allocated to employees who should not be in the tip pool) remains even if the parties request review of the decision. Even if local courts are not required to follow the Ninth Circuit’s recent ruling while a request for review is pending, they may anyway – they are not required to follow the 2013 Oregon court’s ruling.

However, this risk may be tempered. For example, if a request to review the Ninth Circuit ruling is granted, a local judge might agree to stay a local lawsuit filed under the relevant regulations, pending a final ruling by the Ninth Circuit. In addition, other arguments are available to try to defeat such a lawsuit if one is filed. For example, a federal circuit court in another part of the country ruled that employees who are paid full federal minimum wage do not have a claim for an alleged invalid tip pool under federal law, since they received full minimum wage, and repayment of tips is not a remedy available under federal law. While local federal courts are not required to follow that ruling, it is persuasive and a local federal judge might agree with it.

Thus, while there is a risk of being sued in a lawsuit while a request for review of the Ninth Circuit ruling is pending, this risk is not absolute, and it is possible that this risk may be mitigated, particularly if a request for review is granted.

As you know, changing your tip pool model (or moving away from a tip pool model to, for example, a service charge model) is likely a big change – administratively, culturally, financially – and would likely impact a number of aspects of your business – such as your service model, pay structure, employee morale and others. It would be even more disruptive to make these changes, only to change things back again if a request for review is granted and the Ninth Circuit ultimately changes its ruling to say that the regulations are invalid.

The level of this impact depends, in part, on how drastically you envision changing your tip pool model. For example, if the change is to only move the dishwasher out of the tip pool, this will have a smaller impact than moving several positions out of the tip pool or doing away with tipping and a tip pool model completely.

Conclusion

I cannot tell you what is the right course of action for you to take while a request for review of the Ninth Circuit decision is pending.  While many employers who are potentially affected by a court ruling tend not to make significant changes to their practices before the appellate court rules on any requests for review, there is risk to taking such a course.

If you decide to not make any changes while a request for review is pending, you should at least consider what changes to make to your policies and practices to address this ruling, and be ready to make those changes upon relatively short notice (e.g., upon notice that a request for review was denied).

In the next and final article of this series, I will discuss some options to consider if you believe your tip pool might be unlawful under the federal regulations – such as a voluntary tip pool model, converting to a service charge model, and others.

Finally, please understand that the information in this series of articles is provided for educational and informational purposes only. The contents of this series of articles should not be construed as legal advice, and is not a substitute for obtaining legal advice. I urge you to seek legal counsel if you have questions or concerns about your current practices.

If you would like a private consultation with me to receive formal legal advice on this and its impact on your business, please feel free to contact me at bob@donovanemploymentlaw.com, or 206.743.9234. I am happy to offer a reduced rate for a 30-minute consultation on these important issues.

Read more