You take your significant other out for a nice dinner. The wait staff was friendly, the atmosphere was wonderful, the food was great and even the busboy was friendly. With a warm glow of the great service still shining on your face, you leave a sizable tip; confident that–as is common in many establishments–the tip will be divided among the all those that contributed to your wonderful experience so they can all benefit from your generosity. You believe the tip will be shared with the kitchen staff. After all, the chef and sous chefs prepared the delicious meal. But is that what really happens? Are Tip Pools valid, and who can participate in a Tip Pool?
In Oregon Restaurant and Lodging Association v. Perez, the 3-judge panel departed from 9th Circuit and Supreme Court precedent regarding whether a “valid tip pool” can include persons who are not “customarily and regularly” tipped. The 9th Circuit previously held that an employer that does not use tips to satisfy the employer’s minimum wage obligation could require servers to contribute their tips to a tip pool that included kitchen staff who are not ordinarily tipped in the restaurant industry. Cumbie v. Woody Woo, Inc. (“Cumbie ”), 596 F.3d 577, 578-579 (9th Cir.2010)
Cumbie relied on Supreme Court precedent in Williams v. Jacksonville Terminal Co., 315 U.S. 386, 62 S.Ct. 659, 86 L.Ed. 914 (1942), which held that “[i]n businesses where tipping is customary, the tips, in the absence of an explicit contrary understanding, belong to the recipient. Where, however, [such] an arrangement is made …, in the absence of statutory interference, no reason is perceived for its invalidity.” Williams, 315 U.S. at 397 (internal citations omitted). Thus, “Williams establish[ed] the default rule that an arrangement to turn over or to redistribute tips is presumptively valid.” Cumbie, 596 F.3d at 579.
Under the Fair Labor Standards Act of 1938 (“FLSA”), as amended in 1974, an employer may fulfill part of its hourly minimum wage obligation to a tipped employee with the employee’s tips. 29 U.S.C. § 203(m). This practice is known as taking a “tip credit.” Section 203(m) of the FLSA obligates employers who take a tip credit to (1) give notice to its employees, and (2) allow its employees to retain all the tips they receive, unless such employees participate in a valid tip pool. Under section 203(m), a tip pool is valid if it is comprised exclusively of employees who are “customarily and regularly” tipped.
Under Cumbie, because §203(m) was silent regarding whether an employer who did not use tips to cover part of the employer’s minimum wage obligation could require a tip pool including employees who are not customarily and regularly tipped, the FLSA did not prohibit the practice. The court held that Congress only put restrictions on tip pools when the employer uses tips to cover part of the employee’s minimum wage.
After Cumbie, the Department of Labor issued new regulations. Specifically, the DOL revised 29 C.F.R. § 531.52 by replacing the sentence:
In the absence of an agreement to the contrary between the recipient and a third party, a tip becomes the property of the person in recognition of whose service it is presented by the customer.
with the following language:
Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.
The Oregon Restaurant court held that the “2011 rule expressly prohibits the use of a tip pool that violates section 203(m) regardless of whether an employer uses a tip credit.”
Even though the 9th Circuit previously held that the FLSA unambiguously allowed employers to split tips among all employees as long as the employer does not use the tips to satisfy any part of its minimum wage obligations, the court ignored the fact that “prior judicial construction of a statute ‘trumps an agency construction otherwise entitled to Chevron deference’ when ‘the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” Oregon Restaurant and Lodging Ass’n v. Perez (9th Cir., Feb. 23, 2016, 13-35765) 2016 WL 706678, at *11[quoting Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs. (“Brand X ”), 545 U.S. 967, 982, 125 S.Ct. 2688, 162 L.Ed.2d 820 (2005).]
The 9th Circuit already held the FLSA unambiguously allows employers to split tips among all employees in the chain of service, regardless of whether the employees “customarily and regularly” receive tips, so long as the employer does not use the tips to cover the employer’s minimum wage obligations. A subsequent interpretation of the FLSA by the DOL—which is what the regulations are—does not trump prior judicial precedent and the DOL regulations are therefore entitled to no deference. Since the revised regulations are entitled to no deference, in the absence of a congressional change in the law or binding precedent from the Supreme Court, the 9th Circuit is obligated to follow its prior precedent.
UPDATE: 9TH CIRCUIT DENIES PETITION FOR REHEARING EN BANC
On September 6, 2016, the 9th Circuit denied the defendants’ request for a panel rehearing and denied their request for a rehearing en banc. That means the court’s decisions stands, and it will now be up to the U.S. Supreme Court to decide whether to review the matter.
Judge O’Scannlain, joined by Judges Kozinski, Gould, Tallman, Bybee, Callahan, Bea, M. Smith, Ikuta and N.R. Smith, dissented from the denial of rehearing en banc because they believe the panel’s opinion rejected court precedents, and opened two circuit splits. In layman terms, that means some of the judges believed the other judge’s got it wrong. According to the dissenters, the majority decision creates a conflict between the different courts in the nation so employers won’t know what rules to follow.
Hopefully the U.S. Supreme Court will take the matter for review (the court is not required to hear every case), and decide the issue once and for all. Or at least, deny it until the Department of Labor decides to change the rules again.
So, where does that leave you and your tip. Under the FLSA–which is different than California law–tip pools are only valid if the tip goes to people who are customarily and regularly tipped. If you want the kitchen staff to receive a tip for the food they prepared, you may need to tip them separately.
Original article by Robert E. Nuddleman of Nuddleman Law Firm, P.C.
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