When May an Employer Control Pooled Distributions?

The most comprehensive resource available for payroll professionals. This service provides payroll news, white papers, custom research answers, webinars on the hottest payroll topics, survey and research reports, in addition to access to Bloomberg BNA’s Payroll Library™.

By Michael Baer

“You stole money from me,” Val Lei told her supervisor. “I earned all those tips, not a portion of them.”

“Now, Val, it's a tip-pooling arrangement and you got your fair share,” Soon Park said.

“Not so,” Lei responded. “You're going to court for wage violations.”

FACTS: A valet parking service collected tips and distributed them based on a formula among the valets working a shift. The employer paid workers the legal minimum wage and did not need to apply a tip credit to meet that obligation.

An employee filed a lawsuit against the company, claiming that all the tips she personally received were her property, that the car park employer illegally diverted those tips and that a portion was illegally used to offset business expenses, including hourly wages for valet employees. The employee filed the lawsuit under the federal Fair Labor Standards Act and state law.

The valet company countered that the employee's case should be dismissed because she did not say that the company used tips as a credit against the minimum wage or that she otherwise was not paid a minimum wage or overtime.

The employee and the company agreed that the employee's claim hinged on an interpretation of FLSA Section 203m, which addresses tips used to meet minimum wage obligations. The Labor Department interprets Section 203m as prohibiting all employers from controlling the tips earned by workers. Several courts, however, have said the Labor Department's rule is invalid and that the limit on control of tips only applies to employers paying tipped employees less than the federal minimum wage under the law.

For this reason, the company said that the FLSA claims are preempted. Additionally, the employer claimed that the state does not recognize the claims based on such alleged violations for an at-will employee.

The employee later amended her argument to include the U.S. Circuit Court for the Ninth District's decision Feb. 23 to uphold the Labor Department rule on Section 203m.

ISSUE: Did the employer violate the FLSA by withholding tips from the employee?

DECISION: The employer did not violate the FLSA by not paying all tips earned to employees, a federal district court ruled. The employer only is required to follow tipping requirements if employees are not paid minimum wages, the court said.

The court said the Ninth Circuit's decision “is not binding” and not persuasive to the federal district court.

Because the employees were paid more than the minimum wage, and the Labor Department regulation suggesting that employers may not keep tips intended for employees is invalid, the court ruled in favor of the valet company.

The court also dismissed the state law claims, which were based on contractual law, affirming the employer's claim that the employee's case should be dismissed ( Malivuk v. Ameripark LLC , 2016 BL 239702, N.D. Ga., 1:15-cv-2570-WSD, 7/26/16 ).

POINTERS: A special regulatory provision of the FLSA allows the practice of tip pooling. These arrangements may operate in variety of ways. Tips may be combined and divided among all employees on each shift, or certain employees—for example, busboys—may share in a percentage of tips received by waiters and waitresses. The principal characteristic of such arrangements is that a portion of the tips given to an employee is diverted to one or more co-workers.

Employers should be aware that several administrative issues surround tip pooling and tip sharing, and most are in the wage and hour area.

In 2011, the Labor Department issued final regulations that attempt to make clear that tips are the property of the employee and that regulations permitting employers to take control of employee tips through agreements limit the use “of an employee's tips, either through a tip credit or a valid tip pool, whether or not the employer has elected the tip credit.”

The rule prohibits employers from using an employee's tips for any reason other than as a tip credit to make up the difference between the required cash wage paid and the minimum wage or in furtherance of a valid tip pool, and declared that tips are the employee's property regardless of whether the employer has taken a tip credit.

This rule was successfully challenged in several instances, and generally was deemed invalid until the Ninth Circuit's February ruling, which recently was upheld (Story, page 150), affirmed the agency's authority and discretion to interpret Section 203m ( Or. Rest. & Lodging Ass'n v. Perez, 2016 BL 50460, 9th Cir., No. 13-35765, 2/23/16 ).

The district court “does not find the decision persuasive,” and asserts the Labor Department regulation “violates the plain language of Section 203m. “The [district] court declines to accept the Ninth Circuit's flawed reasoning.”

The federal tip-pooling requirements are complicated by separate state laws and rules on tip-pooling arrangements. In 2012, for example, Massachusetts barred Starbucks Coffee Co. from including supervisors who perform tipped employee duties from sharing in tip-pooling arrangements.

By Michael Baer

For More Information

This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.