This post was cowritten by Riley Moyer [of the San Francisco office of Outten & Golden LLP].
Summary: In this week's decision, the Ninth Circuit clarifies that the FLSA prohibits all employers from mixing ("pooling") tips of "customarily tipped" and "non-customary tipped" employees, regardless of whether or not the employer takes a "Tip Credit." This recognizes that a 2010 Ninth Circuit case, Cumbie v. Woody Woo, has been superseded by an intervening Department of Labor ("DOL") regulation.
What is a "Tip Credit"? The Tip Credit works as follows. When employees, like waitstaff or casino dealers, get tips from customers, the employer has the option to pay those employees less than minimum wage, so long as the hourly wage plus the hourly value of the tips is at least the minimum wage. This is called taking a "Tip Credit." The DOL has codified it at 29 C.F.R. § 531.52 . When an employer takes advantage of this Tip Credit exception to the minimum wage, the employer has to comply with the protections set forth in §203(m) of the FLSA. Under § 203(m), the employer must pool tips among all employees who are "customarily tipped," and only those employees; i.e., it cannot include other employees who are not customarily tipped. So for example, supervisors, managers, and even kitchen staff generally cannot participate in the "tip pooling."
Background: Cumbie (9th Cir. 2010): In 2010, the Ninth Circuit held that only employers taking advantage of the Tip Credit were precluded from pooling tips of customarily tipped and not customarily tipped employees. Employers that paid at least minimum wage could pool tips however they wanted and between whomever they wanted. Cumbie v. Woody Woo, Inc., 596 F.3d 577, 583 (9th Cir. 2010). In Cumbie, tip pooling among servers (customarily tipped) and kitchen staff (not customarily tipped) was deemed fine under the FLSA because the employer did not take a Tip Credit.
The next development: DOL regulation (2011): However, in 2011, the Department of Labor revised § 531.52 to prohibit any pooling among "customarily tipped" and "not customarily tipped" employees, regardless of whether the employer takes advantage of the "Tip Credit" exception to the minimum wage. This revision sought to treat all employers the same, but it directly conflicted with Cumbie.
This week's cases: Now, in Oregon Restaurant and Cesarz, the Ninth Circuit has confirmed the validity of the DOL's revised rule, overruling Cumbie. In Oregon Restaurant, the employer pooled tips for servers and kitchen staff, and in Cesarz, the Wynn pooled tips for casino dealers and casino floor supervisors. The Court engaged in a Chevron deference analysis, addressing the question of whether the DOL had the authority to promulgate a rule on this subject, particularly given the Ninth Circuit's directly applicable ruling on the subject in Cumbie. The analysis began with the Cumbie court's initial interpretation of FLSA § 203(m). The Oregon Restaurant / Cesarz court reasoned that because Cumbie found § 203(m) to be silent on whether non-Tip Credit employers can pool tips, then (1) Cumbie properly allowed the employer's tip pooling practice because there was no regulation (yet) prohibiting it, and (2) the DOL retained the power to promulgate regulations on the subject in the future.
Thus, the DOL was within its regulatory authority in promulgating the revised § 531.52, which was a reasonable rule. The employers had violated the § 531.52 tip pooling prohibition, and could be held liable under the FLSA.
The following tip pooling arrangements may violate the FLSA:
• Between Servers/bartenders/wine stewards/sommeliers and kitchen staff
• Between Servers/bartenders/wine stewards/sommeliers and hosts/supervisors/banquet managers/banquet captains/bar managers
• Between Delivery drivers and kitchen staff/support staff
• Between Casino dealers and maintenance/cleaning workers
• Between Casino dealers and floor supervisors/shift managers
• Between Casino hosts/concierges and supervisors/support staff
• Between Disc jockeys and support staff
• Between Disc jockeys and venue managers/supervisors
• Between Housekeeping/hospitality/bellhops/butlers and supervisors/floor managers/support staff
• Between Ship captains/Mates and support staff/maintenance staff
• Between Taxi drivers and support staff/mechanics/maintenance staff
• Between Tattoo artists and receptionists/supervisors
• Between Estheticians/hair dressers/barbers and supervisors/managers/support staff
• Between House Movers and supervisors/managers/support staff
• Between Golf Caddies and supervisors/managers/support staff
• Between Masseuses and supervisors/managers/support staff