• Ninth Circuit Holds FLSA Does Not Invalidate Employer's Tip-Pooling Arrangement
  • March 26, 2010 | Authors: Christina A. Daskas; Paul DeCamp; Allan S. Rubin
  • Law Firms: Jackson Lewis LLP - Southfield Office ; Jackson Lewis LLP - Reston Office ; Jackson Lewis LLP - Southfield Office
  • In a case of first impression, a federal court of appeals in San Francisco has determined that the Fair Labor Standards Act (FLSA) does not restrict employer-mandated employee tip-pooling arrangements when no tip credit is taken by the employer.  Cumbie v. Woody Woo, Inc., et al., No. 08-35718 (9th Cir. Feb. 23, 2010).  The Ninth Circuit Court of Appeals further decided that employees are not entitled to all of their tips under the FLSA except when a tip credit is taken by their employer.  Accordingly, the Court affirmed dismissal of the putative collective and class action claim brought by a restaurant server against her employer.  This decision directly affects cases brought under the FLSA in the Ninth Circuit, which has jurisdiction over Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam and the Northern Mariana Islands.

    The Facts

    Plaintiff Misty Cumbie was employed as a waitress at a restaurant in Portland, Oregon, owned and operated by the defendants.  The restaurant had a tip-pooling policy that required servers to contribute their tips to a “tip pool.”  Funds from the pool were redistributed to all restaurant employees.  The largest portion of the pool (55% to 70%) went to the kitchen staff, who customarily are not tipped in the restaurant industry.  The remainder (30% to 45%) was returned to the servers in proportion to their hours worked. 

    In addition to redistributed tips, the servers were paid wages at or exceeding Oregon’s minimum wage (which, at the time, exceeded the federal minimum wage). 

    Cumbie sued her employer, alleging the tip-pooling arrangement violated the minimum-wage provisions of the FLSA and seeking certification of a collective action and class action.  The federal district court dismissed the plaintiff’s complaint for failure to state a claim, and the plaintiff appealed to the Ninth Circuit.

    Ninth Circuit Court’s Decision

    Generally, under the U.S. Supreme Court’s decision in Williams v. Jacksonville Terminal Co., 315 U.S. 386, 397 (1942), tips belong to the recipient in businesses where tipping is customary, unless there is an explicit contrary understanding, which is only invalid by statute. 

    The appellate court found section 206(a) of the FLSA requires that employers pay their employees a minimum wage, and section 203(m) recognizes that under certain circumstances, the definition of “wage” may include tips as wage payments. 

    Pursuant to section 203(m), an employer must pay a tipped employee a cash wage of a least $2.13.  If the cash wage is less than the federal minimum wage, however, the employer can make up the difference with the employee’s tips (known as “tip credit”).  The difference may not be greater than the actual tips received.  If the cash wage plus tips would not meet the minimum wage, the employer must “top up” the cash wage.  Thus, unless an employee participates in a tip pool with other customarily tipped employees, an employer may take a partial tip credit toward its minimum wage obligation as long as the employer informs the employee of the tip-credit provision and allows the employee to keep all tips.

    The plaintiff argued that under section 203(m), an employee must be allowed to retain all of her tips, except in the case of valid tip pooling involving only “customarily tipped” employees, regardless of whether her employer claims a tip credit.  Rejecting this argument, the Court observed that the plaintiff essentially argued that section 203(m) has overruled Williams, rendering tip-redistribution agreement presumptively invalid.  The Court stated that if the legislature wanted to articulate a general principle that tips are the property of the employee, absent a valid tip pool, it would have done so without reference to the tip credit.  Thus, it concluded that there was no basis to find the employer’s tip pooling arrangement violated section 203(m) because the defendants did not take a tip credit. 

    The plaintiff then argued that the rule against forced transfer of tips originated in section 206(a) and her forced participation in the invalid tip pool constituted an indirect kick-back to the kitchen staff for the employer’s benefit, in violation of the Department of Labor’s “free-and-clear” regulation.  (29 C.F.R. § 531.35.)  The Court reasoned that this inquiry hinges on whether the tips belong to the servers, which depends on whether there existed an agreement to redistribute tips that was not barred by the FLSA. It concluded such an agreement existed by virtue of the defendants’ tip-pooling arrangement and the only tips that belonged to the plaintiff were redistributed to her from the pool and therefore could not reduce her wages below the statutory minimum. 

    The plaintiff then asserted that the employer functionally was taking a tip credit by using the tip-pooling arrangement to subsidize the wages of its non-tipped employees.  The Court rejected this argument, finding it absurd and stating that the conclusion in this case does not thwart the purpose of the FLSA, which is to protect workers from substandard wages and oppressive working hours.  Here, the plaintiff received a wage that was far greater than the federally prescribed minimum wages plus a substantial portion of her tips.  The Court further concluded that the FLSA does not create an entitlement to all tips where no tip credit is taken and the Supreme Court has made it clear an employment practice does not violate the FLSA unless the FLSA prohibits it.  Christensen v. Harris County, 529 U.S. 588 (2000).

    Summary

    The Ninth Circuit Court of Appeals held that:

    1. Nothing in the statutory language of the FLSA purports to restrict employee tip-pooling arrangements when no tip credit is taken by the employer;
    2. Mandatory employer tip-redistribution agreements are not presumptively invalid;
    3. A tip does not belong to the employee if there is an arrangement to redistribute tips and the employer pay full minimum wage, and only the redistributed tips belong to the employee;
    4. Employees are not entitled to all of their tips under the FLSA except when a tip credit is taken; and
    5. The U.S. Supreme Court has made it clear than an employment practice does not violate the FLSA unless the FLSA expressly prohibits it.

    This decision is good news for employers in the Ninth Circuit for several reasons.  First, the decision permits an employer in states which permit tip pooling to pool tips among tipped and non-tipped employees, so long as the employer does not take a tip credit. Second, the decision permits employers who pay full minimum wage to require employees to share tips with non-tipped employees.  Finally, the decision permits employers who pay full minimum wage to enter into agreements with employees as to ownership of the tips they receive. 

    Although the Ninth Circuit has weighed in favorably on the issue of tip-pooling, the Department of Labor, however, in all likelihood will continue to adhere to its position that tips belong to the employees who receive them and may not be pooled for the benefit of non-tipped employees.  Only time will tell whether Woody Woo remains the law in the Ninth Circuit and gains traction nationwide to becomes the prevailing rule.

    Employers should consult with employment counsel to determine whether and how their policies are affected by this decision.