On February 26, 2016, in Oregon Rest. & Lodging Ass’n v. Perez, the Ninth Circuit Court of Appeals ruled that the Fair Labor Standards Act (“FLSA”) restricts restaurant employers from maintaining a tip pool that includes “back of the house” employees regardless of whether a tip credit is taken and employees are paid at least minimum wage.
The FLSA permits employers to utilize a “tip credit” to include an employee’s tips toward the payment of its hourly minimum wage obligation. In order to utilize the “tip credit,” employers must provide notice to employees and permit employees to retain all of the tips they receive, unless the employees participate in a valid “tip pool.” Under the FLSA, a tip pool is valid if it is is comprised exclusively of employees who are “customarily and regularly” tipped. In a restaurant setting, this usually includes servers, bussers, front-of-house bartenders and hosts. Employees who work in the kitchen, back-of-house bartenders, and supervisors are typically are not generally eligible to participate in tip pools.
In recent years, however, the question has arisen whether an employer who does not utilize the tip credit against minimum wage, i.e. an employer who pays at least minimum wage to its tipped employees, can require employees to participate in a tip pool that includes both front-of-house and back-of-house employees. In Cumbie v. Woody Woo, Inc., the Ninth Circuit previously held that tip pooling under these circumstances was lawful because the FLSA was silent regarding employers who did not utilize the tip credit. Not long after Cumbie was decided, the Department of Labor (“DOL”) issued a formal rule that clarified the DOL’s position on tip pool restrictions to include all employers, not just those who utilized the tip credit.
In Oregon Rest. & Lodging Ass’n, the Ninth Circuit effectively overruled Cumbie, holding that the DOL had the authority to interpret its tip-pooling regulations and to apply the regulations to all employers, even those who do not utilize the tip credit. It is likely that this case will continue, either through an en banc review, or an appeal to the Supreme Court.