Tip pooling: What restaurants need to know

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By Paul Schlienz

Tip pooling has been surrounded by controversy in recent years. The reason for this is a series of legal actions, the final outcome of which is still pending.

Tip pooling comes in two arrangements: employer-mandated tip pools and voluntary tip pools. Generally, employer-mandated tip pooling is not prohibited by federal law, but federal law places restrictions on such tip pools, and restaurant operators should be aware of recent developments affecting employer-mandated tip pools.

Legal battles

In 2010, the United States Court of Appeals for the Ninth Circuit, which has jurisdiction over nine Western states, including Washington and Oregon, issued a ruling on mandatory tip pooling in Cumbie v. Woody Woo, Inc. The court, in an opinion favoring restaurants, ruled that federal restrictions on employer-mandated tip pools (requiring employees to receive notice of the tip pool requirements, and limiting the tip pool to customarily and regularly tipped employees) do not apply when the employer is paying at least the federal minimum wage and is not taking a tip credit against the federal minimum wage.

The U.S. Department of Labor is in charge of enforcing the Fair Labor Standards Act (FLSA) and writing regulations that further the purposes of this statute. In 2011, the DOL issued revised regulations, amending its tip credit regulations in response to the Woody Woo decision.  The revised regulations state that mandatory tip pools that include non-customarily tipped employees are prohibited under federal law, and that tips are the sole property of the tipped employee, regardless of whether employers pay the full minimum wage and take no tip credit. The DOL announced its intention to enforce these revised regulations within the Ninth Circuit, even though they conflict with the Ninth Circuit’s Woody Woo decision. Essentially, DOL revised these regulations to directly contradict the Woody Woo decision.

In response to these actions by DOL, the Washington Restaurant Association, along with several other restaurant associations, asked the DOL to reconsider its decision. When the DOL refused to change course, the WRA and other plaintiffs filed a lawsuit against the DOL in Oregon federal district court. In the resulting case, Oregon Restaurant and Lodging Ass’n v. Solis, the plaintiffs sought to invalidate the revised regulations on several grounds: DOL exceeded its authority in issuing the revised regulations, the revised regulations are inconsistent with the text of the FLSA, and the revised regulations are inconsistent with the Woody Woo decision. Before filing this lawsuit, the restaurant associations had asked DOL to reconsider its decision to enforce the rule against Ninth Circuit employers who comply with Woody Woo (i.e., employers who pay full minimum wage and take no tip credit).

In 2013, the U.S. District Court for the District of Oregon declared invalid the DOL’s 2011 regulations that limit an employer’s use of its employees’ tips when the employer has not taken a tip credit against its minimum wage obligations.

The National Restaurant Association then filed a petition with the Supreme Court against the Department of Labor (DOL). Due to complicated legal action, the actual date when restaurants must change tip pooling practices still remains unclear.

What this means:

  • Restaurants are free from DOL review or penalty concerning tip pooling until until July 10. This deadline may also be extended further depending on Supreme Court action.
  • This does not change the ability of individual employees to take legal action.
  • We recommend you contact your lawyer on this issue if you have not yet done so, to assess and understand your options.

Once the NRA petition is filed, the DOL has three options:
1. The DOL can acquiesce, at agree that the Supreme Court should grant certiorari (opt to hear the case);
2. The DOL can waive its right to file a response to the petition (although the Justices, after reading the petition, could still ask the DOL for its response); or,
3. The DOL can file a brief in opposition. If they choose this option, they have 30 days to file a brief in opposition. Furthermore, the thirty days deadline can easily be extended. (Note: if the DOL decides to file a brief in opposition, NRA has the right to file a reply brief, rebutting the points made by the DOL and reiterating arguments).

Waiting for the decision

In the meantime, as restaurant operators await the decision. In general terms, if a Washington employer has a tip pool, it would be well-served to consider objectively whether the tip pool is fair, whether it is fully explained to the employees and if it is something with which most of the employees are happy. Employers should avoid any practices that could possibly be construed as unfair by aggressive plaintiff’s attorneys.

While we are optimistic about restaurant operators’ prospects in ultimately receiving a favorable decision from the Supreme Court, they should be cautious with their tip pooling policies until the court issues its opinion.

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