DOL to reverse course on tip pooling, but might not affect California

The Department of Labor announced last week that it intends to reverse course on the issue of tip pooling and give employers greater control over tips paid to employees. This is a rollback of rules established by the Obama administration in 2011, which strictly regulated tips as the property of tipped employees, and limited how businesses could set up tip pools. The new laws may have a large impact on the restaurant and hospitality industry nationwide. However, because California laws are stricter than the Federal Labor Standards Act and federal regulations, these changes will have a minimal effect on California employers.

Over 280,000 businesses in the U.S. employ tipped workers, including restaurant servers and bartenders. Under the FLSA, an employer may take a tip credit towards its minimum wage obligations for tipped employees, meaning that if the employer receives tips that take his or her salary up to the federal minimum wage, the employer could take a tip credit and not have to pay the federal minimum wage directly to the employee. This tip credit is equal to the difference between the required cash wage which must be paid to tipped employees ($2.13) and the federal minimum wage ($7.25). In some circumstances, employers may also mandate that employees share tips in a communal pool. The limitations and restrictions on tip pooling has become a challenging and evolving legal issue.

In 2010, the 9th U.S. Circuit Court of Appeals heard a lawsuit from a server claiming that her employer's mandatory tip pool policy, which required tips to be shared between servers and back of the house staff, violated the FLSA. The court determined that the restaurant employer could require its wait staff to participate in a tip pool that redistributed some of their tips to the kitchen staff, as long as the employer paid servers a cash wage greater than the minimum wage. Cumbie v. Woody Woo, Inc., 596 F.3d 577. The court held that nothing in the statutory language of the FLSA restricted the employer's ability to redistribute tips using a tip-pooling arrangement when no tip credit is taken.

Shortly after the 9th Circuit decision, the Department of Labor promulgated a rule to define and limit the practice of tip pooling to service-facing employees who would traditionally be tipped. Under these regulations, a tip pool is a "sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders." However, a "valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors."

The 2011 regulations limited employers' ability to control or access the mandatory tip pool. Under these regulations, tips are considered the property of the service-facing employee, and employers cannot require these employees to share these tips with employees who would not traditionally receive tips. Additionally, the employer must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees' tips for any other purpose.

The regulations explicitly prohibited any arrangement between the employer and the tipped employee in which any part of the tip received would become the property of the employer, even when a tipped employee received the minimum wage.

In the past six years, these regulations have been the subject of significant litigation, with the National Restaurant Association and other industry lobbying groups challenging the regulations and the authority of the Department of Labor. These multiple lawsuits have resulted in a circuit split.

In 2016, the 9th Circuit reversed its own precedent and held in a 2-1 decision that the 2011 regulations were valid. The court found that the 2011 regulations were entitled to controlling weight because (1) they were within the scope of the Department of Labor's delegated authority under the FLSA; (2) they were aligned with statutory intent of the FLSA; and (3) there was no explicit statutory language in conflict with the 2011 regulations. Oregon Restaurant & Lodging Ass'n v. Perez, 816 F.3d 1080.

Last January, restaurant industry groups filed a petition for a writ of certiorari with the U.S. Supreme Court, claiming that the 9th Circuit's decision in Perez represented an impermissibly broad overreach of the Department of Labor's authority. The petition argued that the circuit split on the issue of tip pooling created "divergent and irreconcilable interpretations of FLSA section 3(m)" that needed to be resolved by the Supreme Court. The Department of Labor declined to oppose the writ petition.

In June, the 10th Circuit added to the circuit split and held that if a restaurant pays an employee at or above minimum wage and does not claim a tip credit, it was entitled to retain employee tips. The court held that the 2011 regulations exceeded the Department of Labor's authority under the FLSA and that they were therefore invalid. Marlow v. The New Food Guy, 16-1134.

Shortly after Marlow, the Department of Labor announced that it would be rolling back the 2011 regulations. On Dec. 5, the Department of Labor published a Notice of Proposed Rulemaking to rescind the 2011 regulations. In the notice, the department expressed doubt about whether any tip regulations should apply to employers who pay employees the federal minimum wage and do not take a tip credit. Under the proposed rule, employers would be able to take some or all of the money in the tip pool without giving it back to the employees who were paid the tip. Additionally, mandatory tip pools could be shared between all employees, regardless of whether or not they are service-facing.

The Department of Labor's proposed changes have already received significant comment and press coverage, with many workers advocacy groups expressing concern about the shift in ownership of tips from service employees to restaurant owners. In light of the extended interest in the proposed rule, the Department of Labor announced on Tuesday that it was extending the comment period from 30 to 60 days. After that time, the department will promulgate a final version of the rule.

In its analysis of the proposed rule, the Department of Labor noted that 30 percent of all tipped employees work in states that, like California, prohibit employers from obtaining tips received by employees and that those employees would not be impacted by the proposed changes. Section 351 of the California Labor Code prohibits employers and their agents from taking any tips paid to employees. In California, mandatory tip pooling is allowed on two conditions: (1) that the tip pool may not be used to compensate the owner, manager or supervisor of the business; and (2) only service-facing employees are included the tip pool. Therefore, while the Department of Labor's rule change will have a significant nationwide impact, California businesses will be largely unaffected.