Court Upholds DOL Rule That Restricts Tip Pooling

Daily Labor Report® is the objective resource the nation’s foremost labor and employment professionals read and rely on, providing reliable, analytical coverage of top labor and employment...

By Kevin McGowan

Feb. 23 — The Labor Department reasonably interprets the Fair Labor Standards Act to prevent all employers from establishing invalid tip pools, even if an employer doesn't take advantage of the act's “tip credit” and instead pays the full minimum wage to tipped employees, a divided U.S. Court of Appeals for the Ninth Circuit ruled Feb. 23.

Reversing two district court decisions, the court 2-1 upheld a Labor Department rule promulgated in 2011 that makes the tip pool restrictions found in the FLSA applicable to all employers, not just to those that use the tip credit to pay employees who receive tips less than the minimum wage .

The court's ruling is a defeat for restaurants, casinos, hotels and other employers that challenged the DOL rule. They contended the FLSA only prohibits invalid tip pooling arrangements when an employer invokes the act's tip credit, which is codified at 29 U.S.C. § 203(m). An employer that pays the full minimum wage to all its workers, including those who receive tips, can establish tip pools free of the FLSA's restrictions, the employers argued.

Under the FLSA, a valid tip pool means an employee shares his or her tips with other workers who are customarily tipped. But if the tip pool includes distributions to supervisors or other workers “who do not customarily and regularly receive tips,” then the tip pooling arrangement violates the act.

The Oregon Restaurant and Lodging Association had persuaded a federal district court in Oregon and Wynn Las Vegas LLC, which operates hotels and casino resorts, had convinced a federal district court in Nevada that the DOL's regulation was an invalid interpretation of the FLSA.

‘Silence' Gave the DOL Room to Regulate

But on a consolidated appeal, the Ninth Circuit found that the DOL permissibly interpreted the FLSA's statutory “silence” to mean employees generally own their tips and that no employer can require employees to share their tips with other workers who don't “customarily and regularly receive tips” from the business's customers.

The FLSA's text, its legislative history regarding the tip credit amendments and its broad remedial purpose support the DOL's interpretation, the court said.

“[T]he purpose of the FLSA does not support the view that Congress clearly intended to permanently allow employers that do not take a tip credit to do whatever they wish with their employees' tips,” Judge Harry Pregerson wrote.

The district courts' reading that the FLSA provides “specific statutory protections” related only to “substandard wages” and “oppressive working hours” is “too narrow” an interpretation of the statute's reach, the Ninth Circuit said.

“As previously noted, the FLSA is a broad and remedial act that Congress has frequently expanded and extended,” the court said.

“Considering the statements in the relevant legislative history and the purpose and structure of the FLSA, we find that the DOL's interpretation is more closely aligned with Congressional intent, and at the very least, that the DOL's interpretation is reasonable,” Pregerson wrote.

Applying the principles for reviewing an agency's statutory interpretation set out in Chevron USA, Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the court said Congress hasn't addressed the issue because Section 203(m) is “silent” regarding the tip pooling practices of employers that don't take the tip credit.

“There is no convincing evidence that Congress's silence, in this context, means anything other than a refusal to tie the agency's hands,” Pregerson wrote.

By “exercising its discretion to regulate,” the DOL issued a rule consistent with the FLSA's language, legislative history and purpose, the court said.

Judge John B. Owens joined in the majority opinion.

Dissent Cites Conflict With Precedent

In dissent, Judge N. Randy Smith said the majority effectively ignores a Ninth Circuit precedent that held employers that don't take the tip credit aren't bound by the FLSA's restrictions on tip pooling.

The court in Cumbie v. Woody Woo, Inc., 596 F.3d 577, 15 WH Cases 1590 (9th Cir. 2010), ruled an Oregon restaurant that paid its servers a cash wage that met or exceeded the state's minimum didn't violate the FLSA or state law through a tip pooling arrangement that included workers who aren't customarily tipped .

The Ninth Circuit in Cumbie found that the “plain text” of Section 203(m) only imposes a “condition” on employers that take the tip credit, not a “blanket requirement” on all employers regardless of whether they take the tip credit, the dissent said.

The current case raises issues “identical” to those in Cumbie, but the majority upholds a DOL rule that interprets the FLSA in exactly the opposite fashion, Smith wrote.

“Because we are obligated to follow precedent, this case should have ended with a memorandum disposition,” the dissent said.

That the DOL promulgated a rule after Cumbie was decided doesn't change the result, Smith said.

“As the majority notes, if Congress's intent behind a statute is clear, that is the end of our inquiry,” the dissent said. “We need not defer to an agency's interpretation of this statute.”

In Cumbie, the Ninth Circuit “explicitly and unequivocally found Section 203(m) clear and unambiguous,” Smith wrote.

“Regardless of how much the DOL dislikes this interpretation, it must follow it,” the dissent said. “The DOL is not free to manufacture an ambiguity, which circuit precedent mandates is not there.”

Jackson Lewis P.C. represented the Oregon Restaurant and Lodging Association. Gibson Dunn & Crutcher LLP and Kramer Zucker Abbott represented Wynn Las Vegas. The Department of Justice represented the labor secretary.

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com