Ninth Circuit Upholds Regulation Restricting Tip Pooling Practices

Ninth Circuit Upholds Regulation Restricting Tip Pooling Practices

By Jennifer Suberlak

In Oregon Restaurant & Lodging Association v. Perez (9th Cir. No. 13-35765, Feb. 23, 2016), the Ninth Circuit Court of Appeals (“Ninth Circuit”) upheld a regulation promulgated by the U.S. Department of Labor (“DOL”), which prohibits employers from using employees’ tips for any purpose other to take a tip credit or to further a valid tip pool.  Consequently, employers may not adopt a tip pooling policy that allows employees who are not “regularly and customarily” tipped to participate in the pool, regardless of whether a tip credit is taken.

Pursuant to the federal Fair Labor Standards Act (“FLSA”), an employer may fulfill part of its minimum wage obligation to a tipped employee with the employee’s tips (i.e., by taking a tip credit).  Under section 203(m) of the FLSA, employers who take a tip credit must (1) give notice to their employees of this practice; and (2) allow employees to retain all tips they receive, unless the employees participate in a valid tip pool.  A tip pool is valid if it is comprised of employees who are “customarily and regularly” tipped.

In Oregon Restaurant, the employers paid tipped employees at least the federal minimum wage, choosing not to take a tip credit.  However, the employers required their tipped employees to participate in tip pools, which were comprised of customarily tipped employees and non-customarily tipped employees.  Two district courts ruled that a recent Ninth Circuit decision, Cumbie v. Woody Woo, Inc. (9th Cir. 2010) 596 F.3d 577, validated this tip arrangement, and further determined that a DOL regulation that prohibited such an arrangement was invalid.  The Ninth Circuit reversed the district courts, holding that the DOL was not foreclosed from promulgating the regulation at issue and that the regulation was entitled to Chevron deference.[1]

In Cumbie, the Ninth Circuit analyzed a tip pooling practice in which tipped employees earned at least the minimum wage in cash, but were also required to contribute their tips to a tip pool that included employees who were not regularly or customarily tipped.  The Court of Appeal determined that section 203(m) applied only to employers who did take a tip credit, because the section 203(m) created a “statutory inference” relating to that practice.  On the other hand, section 203(m) is silent as to the validity of tip pooling where an employer meets its minimum wage obligation without taking a tip credit; there is no “statutory inference” to be drawn in that situation.  Accordingly, in the absence of a “statutory inference” to the contrary, the court upheld the tip pooling practice.

However, shortly after Cumbie was decided, the DOL promulgated a formal rule (the “2011 rule”) extending the tip pool restrictions of section 203(m) to all employers, not just those who take a tip credit.  Pursuant to the 2011 rule:

Tips are the property of the employee whether or not the employer has taken a tip credit under section [20]3(m) of the FLSA.  The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section [20]3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.

(29 C.F.R. § 531.52.)  The employers in Oregon Restaurant argued that Cumbie’s holding foreclosed the DOL’s ability to promulgate the 2011 rule and that the 2011 rule was invalid under Chevron.

The Ninth Circuit disagreed.  First, the appellate court explained that Congress has not directly spoken on whether the DOL may regulate the tip pooling practices of employers who do not take a tip credit.  In Cumbie, the court noted that, where a statute is silent as to a particular practice, and no relevant provision expressly or implicitly prohibits the practice, there is no violation.  “[N]othing in the text [of the FLSA] purports to restrict” a tip pooling practice where a tip credit is not taken; the FLSA is thus silent as to this practice.  Accordingly, the Ninth Circuit found that the first step in the Chevron analysis was satisfied.

Second, the Court of Appeal determined that the DOL’s interpretation of section 203(m) was reasonable.  The agency promulgated the rule after a notice-and-comment period, after receiving many comments that section 203(m) was “confusing” or “misleading” as to the ownership of tips.  Thus, it was appropriate for the DOL to clarify the statute.  Moreover, the legislative history of the FLSA supported the DOL’s statutory construction that “tips are the property of the employee,” as the Committee reports indicated that tipped employees should have greater protection and that customers have the right to determine who is the recipient of the tip.  Therefore, the Ninth Circuit concluded that the DOL’s interpretation reflected a permissible construction of the statute.  Accordingly, the regulation was valid.

The Oregon Restaurant decision brings federal law closer in line with California law, which provides that tips are the sole property of the employee(s) to whom they are given or for whom they are left.  (Cal. Labor Code, § 351.)  Although the Labor Code prohibits the use of any tip credits, voluntary tip pooling and involuntary tip pooling, where the practice is reasonable (e.g., includes employees who are in the “chain-of-service”) are permissible under state law.  Employers subject to the FLSA should review their tip pooling policies to ensure that they are in compliance with this decision.

[1]  In Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. (1984) 467 U.S. 837, the U.S. Supreme Court set forth the analytical framework for determining whether an agency’s interpretation of a statute is valid—if a regulation or other agency interpretation survives this framework, it is valid and therefore entitled to so-called “Chevron deference.”  The Chevron analysis requires the court to address two questions: (1) has Congress directly spoken to the precise question at issue; and (2) if the statute is silent or ambiguous as to Congress’ intent, is the agency’s action based on a permissible construction of the statute?


Jennifer Suberlak represents employers in all aspects of employment litigation. The material contained in this article has been prepared for informational purposes only. It should not be construed as legal advice. Pettit Kohn expressly disclaims all liability with respect to actions taken or not taken based on the content of this article.