Changes the U.S. Department of Labor made in 2011 to its tip credit regulations, extending tip pool restrictions to employers who do not take a tip credit, are invalid, the federal district court in Oregon has ruled. The court found the changes contrary to the plain language of the Fair Labor Standards Act. Oregon Restaurant & Lodging Ass’n, et al. v. DOL, No. 3:12-cv-01261 (D. Or. June 7, 2013). 

The District Court’s ruling follows cross-motions for summary judgment brought by the DOL and a group of restaurant associations represented by Jackson Lewis LLP. Brought in July 2012, the associations’ suit challenged portions of DOL’s 2011 tip credit regulations that declared an absolute property right in tips and prohibited tip pools from including non-tipped employees, even when the employer does not take a tip credit. 

In granting summary judgment and declaring DOL’s 2011 tip pool regulations invalid, the District Court determined the regulations conflicted directly with the plain and unambiguous language of the FLSA. 

Background

The FLSA establishes rules for paying minimum wage and overtime. Under section 3(m) of the FLSA, and where allowed by state law, employers of tipped employees may take a “tip credit” against the employer’s minimum wage obligation, provided certain conditions are met. Those conditions require the employer to provide notice to employees of the tip credit and mandate that tipped employees retain all tips received, except where the employee participates in a tip pool with other tipped employees.

The U.S. Court of Appeals for the Ninth Circuit, in San Francisco, in Cumbie v. Woody Woo, 596 F.3d 577 (9th Cir. 2010), ruled that the FLSA and section 3(m) do not prohibit an employer from organizing a tip pool to include “back-of-the-house” workers, such as kitchen staff and other non-tipped employees, if that employer pays its employees full minimum wage and does not take a tip credit. 

Approximately one year later, in April 2011, the DOL issued regulations that were in direct conflict with the Ninth Circuit’s holding, even noting in the regulations’ preamble that it deemed Woody Woo wrongly decided. Then, in February 2012, DOL issued a field assistance bulletin reiterating its rejection of Woody Woo and stating that it would enforce the 2011 final rule on a nationwide basis. According to DOL at that time, as well as in its recent arguments before the Oregon federal court, “A tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit.”

District Court’s Decision

The District Court disagreed. Relying on Woody Woo, the court explained that section 3(m) only creates conditions to an employer taking a tip credit against the minimum wage; it does not apply to tip pools occurring outside of the tip credit context. The court found DOL’s 2011 regulations attempted to create absolute requirements for all employers, even those who do not take a tip credit, to allow employees to retain all tips and to exclude non-tipped employees from tip pools. The court rejected DOL’s interpretation as contrary to the FLSA, determining it would convert the conditions for taking a tip credit into absolute requirements divorced from the tip credit.

The court explained further that it would reach the same conclusion even in the absence of Woody Woo, given the plain language of section 3(m) and the limited reach of the FLSA. It explained that “the purpose and general structure of the FLSA suggest that Congress did not intend to limit an employer’s use of tips when no tip credit is taken.”

The court concluded by addressing the DOL’s concern that “if there are no restrictions on an employer’s use of its employees’ tips when it does not utilize a tip credit, the employer can . . . mandate that employees turn over all of their tips and use those tips to pay the minimum wage or for any other purpose.” The court observed that although “this is technically true, one suspects that most employers would find such business practices unwise. In an industry where tipping is the norm, employers who forced tipped employees to surrender all of their tips would remove a major incentive for good service. Tipped employees’ performance would deteriorate, customer satisfaction would decline, and the employers’ profits would decrease. In any event, the court will not alter the text [of a statute] in order to satisfy the policy preferences of the [DOL].”