In a recent case, a federal district court in Oregon invalidated a Department of Labor (DOL) rule that prohibits employers who do not take a tip credit against their minimum wage obligations from including non-tipped employees in a tip pool. Oregon Rest. & Lodging Ass’n v. Solis, No. 12-cv-1261 (D. Or. June 7, 2013).

Background  

Tip pooling is the common practice of collecting all tips from tipped employees so that they can be redistributed among a group. Until recently, under federal law, employers could contract with their tipped employees to include non-tipped employees in the tip pool. This allowed employers to set up employment arrangements that incentivized and rewarded the whole line of service, including employees like cooks and dishwashers who were not customarily or regularly tipped.

In 2011, the DOL issued regulations that target the use of tips by the employers of tipped employees. The new regulations prohibit employers from contracting with their tipped employees to include non-tipped employees in the tip pool.

Under the Fair Labor Standards Act (the FLSA), employers must pay their employees a minimum wage. The FLSA’s definition of the term “wage” recognizes that under certain circumstances, an employer of tipped employees may credit a portion of its employees’ tips against its minimum wage obligation, a practice commonly referred to as taking a “tip credit.”

The tip credit provision in Section 3(m) of the FLSA provides in relevant part:

In determining the wage an employer is required to pay a tipped employee, the amount paid such employee by the employee’s employer shall be an amount equal to—

(1) the cash wage paid such employee which for purposes of such determination shall be not less than the cash wage required to be paid such an employee on August 20, 1996; and

(2) an additional amount on account of the tips received by such employee which amount is equal to the difference between the wage specified in paragraph (1) and the wage in effect under section 206(a)(1) of this title.

The Court’s Opinion  

The lawsuit alleged that the DOL’s 2011 rule unlawfully prohibited back-of-the-house kitchen workers from sharing in tips left by restaurant customers when the employer does not take a tip credit against minimum wage. The plaintiffs claimed the regulations exceeded the DOL’s authority and that they are inconsistent with the plain language of the FLSA as well as the Ninth Circuit’s ruling in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). In that case, the court held that the FLSA does not restrict employer-mandated employee tip-pooling arrangements when no tip credit is taken by the employer. In other words, Woody Woo held that an employer is not prohibited from instituting a contractual tip pool that includes back-of-the-house workers if the employees who share in tips are paid the full minimum wage and no tip credit is taken by the employer.

On cross motions for summary judgment, the court invalidated the DOL’s rule. According to the court, “[t]he $64,000 question, then, is whether the absence of language regarding an employer’s use of tips when no tip credit is taken amounts to an implicit gap left for the agency to fill or an area where Congress intended free economic choice.” The court went on to take the DOL to task:

For the DOL, silence is always an implicit gap to be filled by regulation. The DOL’s position seems to be that Congressional silence regarding an area of economic activity is never a considered decision to let the economic actors make their own choices. In its view, the text of Section 3(m) is an afterthought. It does not matter that “section 3(m) applies only to those employers who take a tip credit toward their minimum wage obligation.” If Congress did not come out and say that the DOL cannot regulate an employer’s use of tips when no tip credit is taken, that should be the end of my inquiry. The Court’s ability to discern Congressional intent is not so limited. Congressional silence often signifies unclear intent. But not here. Employing traditional tools of statutory construction, as I have done above, the intent of Congress in Section 3(m) is clear: Congress intended to impose conditions on employers that take a tip credit but did not intend to impose a freestanding requirement pertaining to all tipped employees.

The DOL expressed 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 acknowledged that this is technically true, but reasoned as follows:

... 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 [Secretary of Labor]” (citations omitted).

Conclusion  

This decision provides more flexibility in tip pooling arrangements for employers in the federal district of Oregon. It is unclear whether other federal courts will reach the same conclusion. Moreover, employers must remember that some states have laws that place restrictions on tips and tip pooling.