Under the Fair Labor Standards Act (FLSA), employers who use a tip credit to satisfy their minimum wage obligations for tipped employees must follow certain rules related to those tips.  One of those rules relates to  the use of tip pools – i.e., pooling of tips received by multiple tipped employees and then dividing the total among the pool participants based on a specified formula.  Under Section 3(m) of the FLSA, employers who rely on the tip credit and who require their tipped employees to contribute their tips to a tip-pooling arrangement must ensure that the only employees who participate in the pool are those that “customarily and regularly” receive tips.  This typically means that managers, hostesses, cooks, dishwashers, and other non-tipped employees cannot participate in the tip pool if the employer wants to rely on the FLSA’s tip credit.

In 2011, the DOL revised its regulations to attempt to expand the “customarily and regularly” limitation for tip pooling in Section 3(m) of the FLSA to apply to all employers, not just those employers who rely on the tip credit.  Under that revised regulation, even if an employer pays its employees minimum wage without reliance on the tip credit, it nonetheless can only use a tip-pooling arrangement if the pool is limited to employees that customarily and regularly receive tips.

Many believe that the DOL’s revised regulation is inconsistent with the plain text of Section 3(m) and with prior court decisions, including a decision from the U.S. Supreme Court.  Among other problems, the limitation imposed by the DOL is nowhere to be found in Section 3(m) of the FLSA, and thus, the DOL cannot be said to be merely “interpreting” the FLSA.  As a result, when the revised regulation was issued, industry groups launched challenges to the revised regulation.

The first of such challenges was resolved by the Ninth Circuit Court of Appeals on February 23, 2016 in Oregon Restaurant and Lodging Association v. Perez, No. 13-35765.  In that case, the Ninth Circuit held that the DOL’s revised regulation was a valid exercise of the DOL’s authority to interpret the FLSA and was thus enforceable.  The Ninth Circuit’s decision is particularly significant because the Ninth Circuit had issued a decision  prior to the revised regulation holding that Section 3(m)’s “customarily and regularly” limitation only applied to employers who rely on tip credits.  The Ninth Circuit’s willingness to allow the DOL to essentially overturn the Court’s own interpretation of the FLSA, and add a limitation to the statute that is not found in the text, is highly unusual and may be considered persuasive precedent in future litigation over the issue.

Thus, though this is just the first decision in a series of challenges to the revised regulation, the Ninth Circuit’s decision should serve as a warning to employers who have yet to adjust their tip-pooling practices to comply with the revised regulation.  Barring a shift in judicial thinking, the revised regulation may be here to stay, and employers should make sure that their tip-pooling arrangements are in compliance, at least until this issue is fully and finally resolved by the courts.