9th Circuit Upholds DOL’s Restrictions on Tip Pooling

On February 23, 2016, the Ninth Circuit Court of Appeals held in Oregon Restaurant and Lodging Association v. Perez (9th Cir., No. 13-35765 [Feb. 23, 2016]) that the U.S. Department of Labor (DOL) has the authority to regulate the tip pooling practices of all employers, not just those who take a tip credit. This is a considerable expansion of their authority.

In 2011, the DOL issued a rule that changed the requirements of tip pooling.  Prior to this rule, the DOL could only regulate the tip-pooling practices of employers who used a tip credit. The DOL did not have authority to impose these requirements on employers who pay their employees at least the federal minimum wage. The 2011 rule changed that. Now, all employers are subject to section 203(m) of the Fair Labor Standards Act (FLSA) regardless of whether the employer uses a tip credit or not.

Two cases were brought separately, one in Oregon and one in Nevada, challenging this rule. The district courts in both of these cases sided with the employers, holding that the new rule was not valid. The Ninth Circuit reversed both cases in a 2-1 decision, saying that the DOL had the authority to establish this rule. One judge issued a scathing opinion in dissent, saying that this ruling was contrary to precedent.

What are the requirements under the rule?

Any tip pool that includes employees who would not customarily receive tips is invalid. In a restaurant, servers and bartenders are customarily tipped, while the kitchen staff is not. A valid tip pool in a restaurant could not include kitchen staff. Therefore the employer cannot require the servers and bartenders share their tips with the kitchen staff. However, a tip pool comprised of only customarily tipped employees may still be valid.

When will this become effective?

A federal appellate court ruling is not effective until the court issues a mandate. The minimum timeline for a mandate is 21 days from when the court issues its opinion, so at the earliest this ruling will be effective on March 14, 2016. However, the deadline may be extended if the plaintiffs petition for a rehearing or if they petition the U.S. Supreme Court for a writ of certiorari.

According to the website for one of the plaintiffs, the National Restaurant Association, they are still considering their legal options. There is a good chance that at least one of the plaintiffs will either petition the Ninth Circuit for a rehearing or petition the Supreme Court of the United States. In the meantime, restaurants in states covered by the Ninth Circuit should be preparing to make changes to their tip pools on short notice. States covered by the Ninth Circuit are Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.

If you have questions about complying with these DOL regulations or the impact of this recent case, be sure to contact an attorney who is well versed in hospitality law.

Attorney Denise Gorrell has a unique background in hospitality law. She spent over a decade in the Seattle hospitality sector, which included time with wine retailer Esquin and the award winning restaurant Wild Ginger. Her experience gives her a deep understanding of the challenges faced by food and beverage entrepreneurs. She helps hospitality industry clients navigate complex, important issues such as business formation, real estate agreements, trademarks, OLCC rules and other governmental regulations.