Tip-Pooling Practices May be a Thing of the Past

By John Mavros Attorney at Law, Partner, Fisher & Phillips, LLP | January 29, 2017

Restaurants and other hospitality businesses in the Western U.S. recently received tough news as a Federal appeals court refused to strike down a controversial tip-pooling regulation from the U.S. Department of Labor (DOL). The DOL rule prohibits businesses from requiring employees to share their tips with back-of-the-house staff -- even if the tipped employees are paid minimum wage. Although a group of hospitality employers had hoped that the Ninth Circuit Court of Appeals would reject the rule as contrary to well-established law, it was upheld. The decision applies to all businesses operating within the Ninth Circuit, including the states of California, Nevada, Washington, Arizona, Oregon, Idaho, Montana, Hawaii, and Alaska.

Background of Tip Credits and Tip-Pooling

Under the Fair Labor Standards Act (FLSA), employers are permitted to utilize a limited amount of employees' tips as a credit against their minimum wage obligations through a tip credit. Under current Federal law, if an employee earns $5.12 an hour in tips, it would be permissible for a restaurant to only pay the employee $2.13 an hour in cash wages in order to meet the $7.25 federal minimum wage.

In most Western states, however, employers cannot take a tip credit (including California, Nevada, Washington, Oregon, Montana, and Alaska) pursuant to state law. Restaurants in these states are required to pay employees cash wages at minimum wage levels regardless of the tips they receive. Some employers in these and other states have instituted tip-pooling programs. Under such plans, restaurants require servers to share the tips they receive with workers in customarily non-tipped positions, such as those that work as back-of-the-house staff (i.e., dishwashers and cooks).

Case History of Tip-Pooling

In 2010, the Ninth Circuit considered in Cumbie v. Woody Woo, 596 F.3d 577 (9th Cir. 2010) whether section 203(m) of the FLSA prohibits all employers from allowing non-customarily tipped employees from sharing in the company's tip pool, even when the front-house staff does not take a tip credit. The Ninth Circuit noted the FLSA's silence with regard to redistribution of tips and held that the FLSA does not prohibit employers from redistributing employees' tips where no tip credit against the minimum wage is claimed. This decision allowed employers in the hospitality and restaurant industry to broaden their tip pools to include back-of-the-house employees. The Cumbie decision held that as long as the employer does not attempt to take a tip credit and pays at least the minimum hourly wage, an employer may, without violating the FLSA, permissibly mandate tip-pooling with employees who do not customarily and regularly receive tips.

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