Labor costs are always a prime consideration in restaurant management. With restaurants typically operating on slim profit margins, it can be difficult to pay higher wages. As an alternative, some Idaho restaurant owners have started pooling their employees’ tips. Tip pooling is an arrangement where tips are collected from all employees and are redistributed with the goal of incentivizing and rewarding the entire line of service, sometimes including employees who do not usually receive tips, such as cooks and dishwashers. As tip pooling programs have become more attractive for restaurant owners and employees alike, it is more important than ever for those in the restaurant business to understand the legal landscape.
HOW TIP POOLING RISKS LIABILITY
Under the federal Fair Labor Standards Act (FLSA), employers must pay their employees at least minimum wage (currently $7.25 per hour in Idaho), but may satisfy that requirement by claiming a “tip credit” when the employee’s tip earnings bring their total compensation up to the minimum wage. Importantly, tips are counted toward the minimum wage only if they are actually received by the employee. And although this FLSA provision allows tip pooling, it does not allow pooling with “back-of-the-house” staff who do not customarily and regularly receive tips, such as cooks and dishwashers. Based on this provision, tip pooling programs have been under attack in recent years.
CHALLENGES TO TIP POOLING PROGRAMS
The case of Cumbie v. Woodie Woo involved an Oregon restaurant that paid a cash wage greater than the minimum wage, but required its wait staff to participate in a tip pool with the kitchen staff. Employees filed a class action against the restaurant company, alleging that its tip pool violated the minimum wage provisions of the FLSA. Ultimately, the Ninth Circuit Court of Appeals held that an employer could require servers to pool their tips with kitchen staff, so long as the employer did not take a tip credit. In essence, the Ninth Circuit interpreted the tip pooling regulation as a condition of using the tip credit, and not as a free-standing prohibition on pooling tips with kitchen staff.
The Department of Labor (Department) rejected the Ninth Circuit’s decision, and declared that it would continue to enforce its rule against mandatory tip pools that include employees who do not customarily and regularly receive tips.
The tip pooling provision was reviewed again in the case of Oregon Restaurant and Lodging Association v. Solis, where the U.S. District Court for the District of Oregon agreed with the Ninth Circuit’s prior holding, and concluded that the FLSA only imposes limitations on employers who take a tip credit.
After the District Court’s ruling, the Department published a Wage and Hour Fact Sheet (Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)) stating that while the federal government “considers its options for appeal,” the Department would not enforce the tip pooling regulation against employers who have not taken a tip credit. The Department then filed an appeal, which is pending before the Ninth Circuit.
INSIGHTS FOR EMPLOYERS
Because the Department has taken an aggressive posture on this issue, and its enforcement policy is subject to change at any time, employers who mandate tip pooling with “back-of-the-house” employees should proceed cautiously even if they are not taking a tip credit. It remains to be seen what the Ninth Circuit will decide on the Department’s latest appeal, and whether the decision will result in any change to the Department’s policy.
Please contact a Gjording Fouser lawyer at 208.336.9777 if you would like any additional information about this topic or any other employment issues facing your company.