Here's a Tip You Can Share: Federal District Court Strikes Down DOL Regulations Restricting Use of Tip Pooling Arrangements

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Under federal and state wage-and-hour laws, tipped employees present unique compliance challenges for employers, particularly those in the restaurant and other service industries.  Recent cases illustrate the potential risk. Any employer utilizing tipped employees must ensure compliance with complex and ever-developing state and federal wage-and-hour laws.  This e-Alert addresses recent developments that both clarify and complicate the intricate legal framework surrounding tipped employees.
Employers are allowed under the federal Fair Labor Standards Act to take a "tip credit" to satisfy the employer's minimum wage obligations.  Currently, under federal law, a tipped employee must receive the minimum wage of a base wage no less than $2.13 per hour and the remainder in tips for each hour worked in a workweek.
In taking this tip credit, the FLSA also allows "tip pooling," which is the practice of collecting tips from tipped employees and then redistributing the tips among a group of service employees.  In order to incentivize and reward the whole line of service, employers set up mandatory tip pooling arrangements that share tips amongst tipped employees and other employees.
The FLSA provides that a tip credit "shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips." Usually, this means that, when the employer takes the tip credit, the tip pool may extend only to those employees who interact with customers. For example, in a restaurant, tip pooling with "back of the house" employees like cooks or dishwashers, may invalidate the taking of the tip credit.
But what happens if the employer decides to pay the full minimum wage to its wait staff but also require waiters to share "their" tips with bussers and hosts--or even "back of the house" employees like cooks and dishwashers?
In 2011, the Department of Labor issued new regulations that employers could not require waiters or other tipped employees to share tips, even where the employer does not claim a tip credit.
Restaurant and other service industries objected to these regulations as interfering with their ability to promote teamwork among employees.  Particularly, one group, the Oregon Restaurant and Lodging Association ("ORLA"), sued in federal district court in Oregon, seeking to strike down the 2011 regulations.
Last month, a federal court in Oregon issued its opinion agreeing with the restaurants and striking down the DOL's 2011 regulations.  Or. Rest. & Lodging Ass'n v. Solis, No. 3:12–cv–01261, 2013 WL 2468298 (D. Or. June 7, 2013).  The court concluded that, because the FLSA contains no provision specifically precluding the use of tip pooling between tipped and non-tipped employees, an employer that does not claim a tip credit may require tip pooling, even with "back of the house" employees.
In the short-term, the result of Or. Rest. & Lodging Ass'n v. Solis is that employers who do not claim a tip credit may maintain mandatory tip pooling arrangements in which tips are shared between tipped and non-tipped employees.  However, the Department of Labor will likely appeal the decision.  Thus, in the long-term, employers should continue to utilize caution when drafting or reviewing tip credit or tip pooling policies.
Another recurring issue is whether tip pools may extend to employees who may have some management or supervision responsibilities. Recent litigation also involving Starbucks shows the unique problems faced by employers seeking to utilize a tip pooling arrangement.  In New York, Starbucks faced litigation by baristas, who argued that shift leaders should be excluded under New York law to participate in tip pools, and another set of litigation where assistant managers argued they should have been included in the tip pool under New York law.  Agreeing largely with Starbucks, the New York Court of Appeals held that "an employee whose personal service to patrons is a principal or regular part of his or her duties may participate in an employer-mandated tip allocation arrangement under [New York state law], even if that employee possesses limited supervisory responsibilities."
Moreover, some state laws prohibit tip pooling, so employers in multiple jurisdictions should review all laws, both federal and state.  For example, the Starbucks case in New York addressed a discrete issue of its state law. While Starbucks achieved a ruling in New York that appeared to uphold its tip pooling arrangement, a Massachusetts court concluded that its wage law forbids virtually the same tip pooling arrangement.
Congress is also looking at the issue.  On June 26, Seth Harris, the acting head of the Department of the Labor, testified before the Senate Committee on Health, Labor, and Pensions.  Mr. Harris advocated that the base wage for tipped employees should be increased.  Mr. Harris argued that the increase would benefit workers, but also noted that it would ease enforcement efforts by the Department of Labor.  Noting that tip credits are complex and present the DOL with difficult accounting issues, Mr. Harris concluded, "The only way to assure these workers are going to get more money is to raise the cash wage employer has to pay that goes on a pay stub that my investigators can check."
While several bills have been introduced to increase the base rate, no bill has yet cleared the committee level in either the House or the Senate.
Conclusion
The potentially large damages awards (and recoverable attorney's fees) in collective actions brought under state and federal wage-and-hour laws will undoubtedly continue to feed litigation against employers across the country.  Given the complex and patchwork nature of the relevant laws, employers should utilize caution and prudence when drafting or reviewing tip credit or tip pooling policies and review federal, state, and local laws.