Update: Tip Pooling by Restaurant Owners Remains in Flux

Goulston & Storrs PC

This past April, we reported on a recent Ninth Circuit ruling which upheld a 2011 Department of Labor (“DOL”) rule that prohibits restaurants from instituting tip-pooling arrangements that include both front-of-house staff that are customarily and regularly tipped (such as waiters, waitresses, bellhops, and service bartenders) and back-of-house staff that are not customarily and regularly tipped (such as dishwashers, cooks, chefs and janitors), even in instances where the restaurant pays its front-of-house staff a full federal minimum wage. We noted in our April posting that a writ of certiorari with respect to the Ninth Circuit decision had been filed with the Supreme Court. While the issue of whether restaurant employers can institute such tip-pooling schemes remains in flux, there are some recent developments worth noting:

1. Since the Ninth Circuit upheld the 2011 DOL rule, several other circuit courts have questioned the validity or enforceability of the rule.

The 2011 DOL rule was promulgated pursuant to the DOL’s authority under the Fair Labor Standards Act (the “FLSA”) to regulate restaurant worker wages. Under the FLSA, an employer may elect, rather than paying a tipped employee a minimum wage of $7.25 per hour, to pay such tipped employee a minimum wage of $2.13 per hour, with the balance of the employee’s minimum hourly wage covered by the tips received by the employee. This practice is known as the employer taking a “tip credit.” The FLSA requires employers who take a tip credit (i) to give notice of such election to its employees, and (ii) to allow its tipped employees to retain all tips they receive, unless the employees participate in a valid tip pool. Under the FLSA, a tip pool is considered valid if it is comprised exclusively of employees who are “customarily and regularly” tipped; therefore, an employer who avails itself of the tip credit cannot include back-of-house employees who are not customarily and regularly tipped in a tip pool. The FLSA, however, is silent as to whether an employer can include back-of-house employees in a tip pool if the employer pays its front-of-house tipped employees at least $7.25 per hour. The 2011 DOL rule was intended to address that silence by prohibiting employees from instituting tip-pooling schemes that included back-of-house employees, even in instances where the employer did not avail itself of the tip credit. The Ninth Circuit held that the fact that the FLSA is silent on tip pooling restrictions when an employer does not take the tip credit did not foreclose the DOL from promulgating reasonable regulations with respect thereto.

More recently, however, the Tenth Circuit found the 2011 DOL rule to be invalid, holding that the FLSA does not regulate tip pooling when the employer does not avail itself of the tip credit, and that the DOL, in attempting to impose such regulation pursuant to the 2011 DOL rule, had exceeded its authority under the FLSA.

The Eleventh Circuit also weighed in, acknowledging the Ninth Circuit’s ruling but holding that a plaintiff cannot pursue a private cause of action to enforce the DOL’s regulation of tip pooling practices when the employer has not taken a tip credit because the 2011 DOL rule only carries the weight of regulatory authority, not statutory authority. While the FLSA provides a private cause of action with respect to tip pooling practices when an employer takes a tip credit, the Eleventh Circuit explained, the FLSA provides no such cause of action when the employer does not take a tip credit, regardless of the 2011 DOL rule.

While the Supreme Court has yet to rule on the writ of certiorari, the circuit split created by the disparate Ninth, Tenth and Eleventh Circuit rulings makes this issue ripe for input from the nation’s highest court.

2. The Trump administration has indicated its intent to repeal the 2011 DOL rule.

In its semi-annual Unified Regulatory Agenda published in July, the Department of Labor indicated its intent to repeal the 2011 DOL rule. On October 24, the Office of Management and Budget announced that it had received a proposal from the DOL to rescind the rule. The repeal must now work its way through the administrative rulemaking process. While specifics of the repeal are still unknown, it is believed that the repeal will not impact the prohibition that applies to tip-pooling schemes when the employer avails itself of the tip credit, but only repeals the prohibition on tip-pooling schemes when the employer does not take the tip credit.

It is possible that if the DOL succeeds in repealing the rule, the DOL will take the position that a court ruling on the validity of the rule is no longer necessary (the DOL has submitted and received several extensions to file its reply brief with respect to the writ of certiorari). Some restaurant industry advocates, however, are hopeful that the Supreme Court will nevertheless resolve the existing circuit split, noting that even if the Trump administration is successful in repealing the rule, absent a definitive court ruling, a future administration could attempt to reintroduce the rule.

For now, and until either the 2011 DOL rule is repealed and/or the Supreme Court takes up and rules on the existing court split, restaurant owners should continue to exercise caution before extending tip pooling arrangements to include back-of-house employees who are not customarily and regularly tipped.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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