Department of Labor Appears Set to Tip the Balance Back in Favor of Tip-Pooling

Department of Labor Appears Set to Tip the Balance Back in Favor of Tip-Pooling

Department of Labor Appears Set to Tip the Balance Back in Favor of Tip-Pooling

In December, the Trump Department of Labor issued a Notice of Proposed Rulemaking seeking to roll back yet another Obama-era regulation. This time, the target is the Department of Labor’s 2011 rule restricting mandatory tip pooling.

As many employers in the hospitality and food service industries know, the Fair Labor Standards Act permits employers to establish tip pools among employees that “customarily and regularly” receive tips, like waiters, bartenders, and other service-oriented staff members.  Tip pools have generally been restricted to staff members who participate in front-of-house positions that more directly serve customers. The FLSA requires that the means of distribution must be fair and reasonable and that the pool cannot distribute tips to the employer or an agent of the employer.

Like each workplace, tip pools vary widely in how they are set up and executed. It should then come as no surprise that lawsuits have sprung up to challenge the validity of tip pools or the laws or regulations permitting them—often with inconsistent results. One such result was the 2010 Ninth Circuit Court of Appeals case Cumbie v. Woody Woo, Inc., in which the court held that so long as an employer paid the front-of-house staff over the minimum wage, front-of-house servers’ tips could be pooled and partially distributed among back-of-house staff. In arriving at this conclusion, the court held that the FLSA only limits tip distributions to back-of-house staff when servers are paid below minimum wage and tip credits are used to make up the difference.

In response to the apparent confusion over tip pooling in the courts, the Obama Department of Labor issued a rule in 2011 that directly contradicted the Woody Woo case’s holding. The DOL’s rule interpreted the FLSA as prohibiting mandatory tip pool distributions to back-of-house employees who do not customarily and regularly receive tips.

Restaurant groups have challenged the 2011 DOL ruling in federal court, arguing that the DOL did not have legal authority to effectively overrule Woody Woo.  However, in February 2016, the Ninth Circuit reversed course, adopting the 2011 DOL ruling and abandoning the position the court held in Woody Woo. The Ninth Circuit’s new position on tip-pooling now presents a conflict between Circuit Courts, and a petition to the Supreme Court to take the case is pending.

But the Trump administration will try to settle things first. In December 2017, the Trump DOL proposed a rule that would allow sharing of tips with back-of-house staff, where front-of-house receives above the minimum wage. The 60-day public comment period on that rule closed yesterday, February 5, 2018, leaving the Department 60 days to finalize the new rule.

Because California has separate laws regarding tip pools, California tip pools likely will not be greatly affected, for now. California law still requires that tip pools exclude back-of-house staff from tip pool distributions whether or not front-of-house staff make minimum wage. Nevertheless, employers in the restaurant and hospitality industries should monitor these developments to ascertain how they may affect their businesses.

Employers whose staff are subject to mandatory tip pooling or who might be interested in establishing a tip pool are encouraged to reach out to one of the knowledgeable attorneys at Murphy, Campbell, Alliston & Quinn to help you set up or stay in compliance with state and federal laws on tip pooling.

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