In a game-changing event, on February 23, 2016, the U.S. Court of Appeals for the Ninth Circuit (the court that covers nine western states, including Washington, Oregon and California) in a 2-1 decision ruled that it is a violation of federal law for an employer to use a tip-pooling arrangement that shares tips with normally non-tipped employees, such as kitchen workers or supervisors, even when the employer does not take advantage of the minimum wage “tip credit” permitted by the federal Fair Labor Standards Act (FLSA).

FLSA Background

In 1966 when Congress extended the FLSA to cover hotels and restaurants, it added language that permitted those employers to use employee tips to satisfy part of the minimum wage requirement, so long as certain requirements were met.  One of those requirements was that if the employer required that tips be pooled rather than retained individually, non-tipped employees (e.g., cooks and dishwashers) who did not “customarily and regularly” receive tips could not share in the proceeds.  If an employer required tips be shared with non-tipped employees, it could not use any portion of the tips to satisfy the minimum wage requirement; instead, it had to pay at least minimum wage in addition to whatever tips the employees received.

In 1974, Congress amended the FLSA again to impose additional requirements for the tip credit.

In states such as Washington, however, state law also imposes minimum wage requirements that do not permit a tip credit.  Therefore, employers in those states do not use the federal tip credit; instead, they pay their employees at least the applicable minimum wage (the higher of the federal or the state minimum wage) without regard to whatever tips they also receive.  Some of those employers also routinely adopt tip pooling policies that require tipped employees to share their tips with kitchen workers and other employees who did not meet the “customarily and regularly” tipped requirement of the FLSA.  Because those employers had not sought to avail themselves of the FLSA tip credit—and, indeed, were already paying all employees at least the minimum wage—they have not considered themselves constrained by the FLSA tip pooling limitations.

In 2010, the Ninth Circuit agreed that, so long as an employer did not take advantage of the FLSA tip credit for minimum wage, the FLSA tip-pooling limitations did not apply.

In 2011, however, the U.S. Department of Labor adopted a regulation to overturn that result.  The new regulation, 29 C.F.R. § 531.52, was revised to read:

Tips are the property of the employee whether or not the employer has taken a tip credit . . . .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 . . .: [a]s a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool [one that limits pooling to “customarily and regularly tipped” employees].

The Ninth Circuit Upholds the Validity of the New Regulation 

In its recent decision in Oregon Restaurant and Lodging Association v. Perez, Case No. 13-35765 (February 23, 2016), the Ninth Circuit upheld this regulation.

This means that, unless the decision is reviewed and overturned by the full Ninth Circuit or the U.S. Supreme Court, employers in the Ninth Circuit are not permitted to impose tip-pooling arrangements that share tips with anyone other than customarily-tipped employees.

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