Section 203(m) of the Fair Labor Standards Act (FLSA) allows employers of tipped employees to take a tip credit against the employer's minimum wage obligation if: (a) notice of the tip credit is provided, and (b) tipped employees are allowed to retain all of their tips, except in the case of tipped employees participating in a valid tip pool that only includes other tipped employees. The DOL's 2011 Regulations provided that employers who do not take a tip credit pursuant to § 3(m) must pay their employees the full cash minimum wage, may not retain employees' tips, and may not require employees to participate in a tip pool that includes non-tipped employees. The 2011 Regulations were a direct response to, and rejection of, the Ninth Circuit Court of Appeals' decision in Cumbie v. Woody Woo, 596 F.3d 577 (9th Cir. 2010), which held that § 3(m) does not preclude employers who do not take a tip credit from maintaining a tip pool that includes non-tipped employees (e.g. cooks, dishwashers and other back-of-the-house employees).
Subsequently, the Oregon Restaurant and Lodging Association filed a lawsuit to enjoin the enforcement of this rule, claiming it was not valid in light of the Ninth Circuit's holding in Cumbie. In another case, after the rule became effective, casino dealers who earned tips sued their employer to oppose the employer's tip pooling practice, which required the casino dealers to share tips with employees who did not customarily receive tips. Relying on Cumbie, the district courts that decided these cases ruled that employers who did not take tip credits were permitted to have a tip pooling arrangement that distributed tips to all employees, including those who did not customarily receive them. The losing parties in both cases appealed to the Ninth Circuit Court of Appeals.
On February 23, 2016, the Ninth Circuit (the federal appeals court for Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Northern Mariana Islands, Oregon and Washington state) held that the DOL's 2011 Regulations were a reasonable interpretation of the FLSA. See Oregon Rest. & Lodging Ass'n v. Perez, No. 13-35765 (9th Cir. February 23, 2016). Although the Ninth Circuit did not specifically overruleCumbie, that is the effect of its decision, which reversed the lower courts' decisions in favor of the employers and remanded the proceedings consistent with its new opinion. As a result, at least in the Ninth Circuit, employers who do not take a tip credit pursuant to § 3(m) must pay their employees the full cash minimum wage, may not retain employees' tips, and may not require employees to participate in a tip pool that includes non-tipped employees.
Judge Smith vehemently dissented to the majority's holding, arguing that the Court was bound by its prior precedent in Cumbie. The fact that the DOL promulgated the rule change after Cumbie was decided was irrelevant because the Court in Cumbie held that the statute was clear and unambiguous. In light of that finding, the dissent argued the DOL's interpretation was invalid because the DOL had no authority to promulgate its interpretation.
Employers who do not take advantage of the tip credit but have in place mandatory tip pooling policies which include non-tipped employees are encouraged to revisit these policies and consider changing them to comply with the tip pooling requirements set forth by the DOL. But keep in mind that several courts have continued to follow Cumbieeven after the 2011 Regulations were promulgated, and it is unknown at this time how these courts will react to the Perez decision. Employers whose employees are voluntarily tip sharing are not affected by this decision as employees are still free, without employer coercion, to share their tips with non-tipped employees if they choose to do so.