On September 6, 2016, a divided Ninth Circuit denied petitions for rehearing over a hotly contested opinion on tip pooling, thus leaving the controversial ruling in place and creating circuit splits on multiple issues.1 As a result, Ninth Circuit law currently holds that employers cannot require their customarily tipped employees to share their tips with non-customarily tipped employees under the federal Fair Labor Standards Act (FLSA), regardless of whether the employer is engaged in tip crediting.2 Employers who do not engage in tip crediting but require tip pooling—including those in states where tip crediting is prohibited, such as California and Oregon—are advised to take note of this decision.

The opinion over which rehearing was sought was the Ninth Circuit’s February 23, 2016 decision in Oregon Rest. & Lodging Ass'n v. Perez.3 There, Circuit Judges Harry Pregerson and John B. Owens upheld the United States Department of Labor’s (DOL) 2011 regulations forbidding employers from instituting tip pools as described above, which many have viewed as completely contradictory to the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc.4 Circuit Judge N. Randy Smith wrote a blistering dissent in the Oregon Res. & Lodging Ass’n matter, stating, “Colleagues, even if you don’t like circuit precedent, you must follow it. Afterwards, you call the case en banc. You cannot create your own contrary precedent.”5

The employers filed a petition for panel rehearing and petition for rehearing en banc (separately, they have petitioned the US Supreme Court to review the Ninth Circuit’s February 2016 decision, which is currently pending). Unsurprisingly, in the Ninth Circuit’s September 2016 decision, Circuit Judges Pregerson and Owens voted and/or recommended to deny both petitions, whereas Circuit Judge N.R. Smith voted to grant them. The full Ninth Circuit was advised of the petition for rehearing en banc and, although the matter did not receive a majority of votes of the nonrecused active judges in favor of en banc consideration, yet another blistering dissent criticizing the February 2016 decision and the denial of rehearing en banc was penned by Circuit Judge Diarmuid F. O'Scannlain. Perhaps not coincidentally, Circuit Judge O’Scannlain was the author of the Ninth Circuit’s unanimous decision in Cumbie. His dissent was joined by nine other circuit judges, underscoring the Ninth Circuit’s divide over this issue.

In Cumbie, the Ninth Circuit held that employers who do not engage in tip crediting are permitted to institute tip pools requiring customarily tipped employees (for example, restaurant servers) to share their tips with non-customarily tipped employees (for example, kitchen staff) under the FLSA.6 The Cumbie court began its analysis by referring to the United States Supreme Court’s decision in Williams v. Jacksonville Terminal Co., which held that “[w]here . . . an arrangement is made by which the employee agrees to turn over the tips to the employer, in the absence of statutory interference, no reason is perceived for its invalidity.”7 The Cumbie court held that, “[h]aving concluded that nothing in the text of the FLSA purports to restrict employee tip-pooling arrangements when no tip credit is taken, we perceive no statutory impediment to [this] practice.”8 The Cumbie court reasoned that, based on the plain language of section 203(m) of the FLSA, it was clear that the FLSA meant to impose conditions on employers taking tip credits by forbidding them from instituting tip pools comprised of both customarily and non-customarily tipped employees.9 It reasoned, however, that the FLSA did not intend to prohibit employers who did not engage in tip crediting from instituting such tip pools, employing the sound logic that “[a] statute that provides that a person must do X in order to achieve Y does not mandate that a person must do X, period.” 10

In 2011, the DOL, referring to the Cumbie decision as a “loophole” allowing employers to exploit the FLSA’s tipping provisions, promulgated a formal rule that extended the FLSA’s tip pooling restrictions in section 203(m) to all employers, not just those who took tip credits.11

Years later, in Oregon Rest. & Lodging Ass'n v. Perez and Cesarz v. Wynn Las Vegas, both an Oregon district court and a Nevada district court granted favorable decisions to employers, holding that they were not prohibited from requiring their customarily tipped employees to share their tips with non-customarily tipped employees in a tip pool, because those employers did not engage in tip crediting and they met their minimum wage obligations via cash payments.12 13 The cases were consolidated on appeal and the Ninth Circuit overturned both decisions in its February 2016 decision. 14 There, the majority distinguished Cumbie on the basis that the DOL’s 2011 regulations were not in existence at the time Cumbie was decided in 2010, and that the DOL’s 2011 regulations were valid because the FLSA was silent on the issue. 15

Circuit Judge O'Scannlain’s scathing dissent in September 2016 asserted that the majority did not give enough weight to Williams, which established the default rule that tip pooling was permissible absent statutory interference and was still good law.16 He argued that the majority’s ruling created a circuit split with the Fourth Circuit, which expressly agreed with Cumbie, and noted that “nearly every [district] court that has considered the DOL Regulation has invalidated it . . . .”17 He further argued that the Cumbie court held “no fewer than six times” that the FLSA’s “plain language” was “clear” in permitting tip pooling between customarily and non-customarily tipped employees for employers who did not take tip credits and that, in the absence of ambiguity in the FLSA, the DOL’s 2011 regulations were invalid.18 He contended that the majority’s reliance on the DOL 2011 regulations in the absence of statutory ambiguity placed it at odds with the D.C., Third, Fourth, Fifth, Seventh, and Eleventh Circuits, thereby creating a second circuit split with respect to how to analyze agency regulations under Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc.19 20