All around the country, tipping practices have been coming under scrutiny.  Restaurants increasingly have abandoned their use of tip credit — and tipping — partially due to a belief that a higher wage not tied to the fluctuations of tipping is better for morale and operations, and partially due to the complexities of dealing with wage and hour compliance issues for tipped employees.  For those in the latter camp, however, the Ninth Circuit, in Oregon Rest. and Lodging Ass’n et al. v. Perez et al., just decided that the Department of Labor may regulate tip pooling even when the employer does not use the FLSA’s tip credit.

As we have reported previously, restaurant trade associations in Washington and Oregon challenged the Department’s 2011 final rule amending the tip pool regulations.  In promulgating those regulations, the Department expressly rejected a prior Ninth Circuit case, Cumbie v. Woody Woo, Inc., and stated that tips are the property of the employee whether or not the employer has taken a tip credit and that a valid tip pool may only include “those employees who customarily and regularly receive tips.”  In Woody Woo, the Ninth Circuit found that Congress intended only to limit the use of tips by employees when the employer claims a tip credit.

Relying in large part on the Woody Woo decision, the trial court in Oregon held that the 2011 regulations were invalid.  According to the district judge,  the clear intent of section 3(m) of the FLSA was “only to limit the use of tips by employers when a tip credit is taken” and because “an employment practice does not violate the FLSA unless the FLSA prohibits it.”

On appeal, the divided Ninth Circuit panel distinguished the Woody Woo decision by noting that Woody Woo was decided on the statutory language alone — it contained no discussion of the proper measure of deference to agency regulations because, at the time of the decision, there were no agency regulations.  Thus, because the statute did not prohibit the practice, the practice was not restricted.  According to the panel’s majority, the 2011 regulations filled the statute’s “silence” on the issue of whether the FLSA restricts tip pooling practices absent taking a tip credit.

The panel then proceeded to analyze whether the Department’s interpretation of the statute was “reasonable.”  Relying on legislative history and the “purpose and structure of the FLSA,” the court decided that “the DOL’s interpretation is more closely aligned with Congressional intent, and at the very least, that the DOL’s interpretation is reasonable.”

The dissenting judge criticized the majority’s rejection of Woody Woo, which the dissent viewed as binding circuit precedent.  That precedent, the dissent reasoned, held that “section 203(m) did not impose statutory interference because the plain text of section 203(m) had only imposed a condition on employers who take a tip credit, rather than a blanket requirement on all employers regardless of whether they take a tip credit.”  This clear Congressional intent, according to the dissent, ends the inquiry.  No deference — Chevron­ or otherwise — is due to the Department’s interpretation.

Almost certainly, this will not mark the end of the road for this issue.  Undoubtedly, en banc review will be sought.  In the meantime, however, employers who do not take tip credit must understand that the Department of Labor’s position — now approved by one Circuit Court of Appeals — is that the regulatory limitations on tip pooling will apply.  Those employers who are moving away from tip credit should be clear that any “service charge” or “commission” or “labor surcharge” attached to a bill is not a tip, so as to protect the employer’s ability to use those fees in a way it deems appropriate, and not subject to any tip pooling rules.  Unfortunately, even providing clarity that certain charges are “not tips” may be insufficient under certain state laws, and employers should be careful to comply with those requirements as well.