Earlier this year, the U.S. Court of Appeals for the Ninth Circuit in a 2-1 panel decision upheld the United States Department of Labor’s (DOL) 2011 revisions to its regulations applying tip-pooling restrictions to employers that do not use a tip-credit to satisfy minimum wage obligations. This is particularly significant in Nevada which does not allow tip-credits toward the minimum wage obligation. Employers may have relied on earlier Ninth Circuit precedent which permitted employers who do not use a tip-credit to include in tip pools employees who do not “customarily and regularly” receive tips. Under this recent decision, Nevada employees in positions that are not considered “customarily and regularly” tipped may no longer share in any portion of tips left by customers.
Prior Rule: Cumbie v. Woody Woo, Inc.
The Ninth Circuit first addressed rules regarding tip-pooling for employers who do not use tip-credits in Cumbie v. Woody Woo, Inc. At issue was whether Section 203(m) of the Fair Labor Standards Act (FLSA), which permits an employer to fulfill part of its hourly minimum wage obligation to a tipped employee by taking a credit for the employee’s tips if certain criteria are met, also applies to employers who do not use a tip-credit. Specifically, in Cumbie, a server working at an Oregon restaurant sued her employer alleging that its tip-pooling arrangement violated the FLSA because it included kitchen staff in addition to servers. The employer in Cumbie argued that Section 203(m) did not apply to its tip-pooling arrangement since it did not take a tip credit toward payment of the minimum wage. The Ninth Circuit agreed with the employer and held that section 203(m)’s restrictions on tip-pooling applied only to employers that use a tip-credit to satisfy minimum wage obligations.
2011 Department of Labor Regulations
In 2011, in the wake of Cumbie, the DOL revised its rules to state that all employers are bound by the tip-pooling restrictions “whether or not the employer has taken a tip credit under section 203(m) of the FLSA.” The DOL’s revisions, however, were generally viewed as directly conflicting with the Ninth Circuit’s holding in Cumbie. As a result, courts consistently applied section 203(m) only to employers who used tip-credits. Oregon Rest. & Lodging Ass’n was the consolidation of two such cases, one from the District of Nevada (Cesarz v. Wynn Las Vegas) and the other from the District of Oregon (Or. Rest.& Lodging v. Solis. In both cases, the district courts, citing Cumbie, held the DOL’s 2011 rule was invalid because it was contrary to Congress’s clear intent.
New Rule: Oregon Rest. & Lodging Ass’n v. Perez
In a case decided this year, Oregon Rest. & Lodging Ass’n, the Ninth Circuit upheld the validity of the DOL’s 2011 amendment. The court reviewed the DOL’s regulatory interpretations under a two-step analysis. At the first step, the Court determined that section 203(m)’s silence as to employers who do not use tip-credits “left room” for the DOL to regulate that practice. At the second step, it determined that, because the DOL considered comments prior to promulgating its revisions to the rules and because the DOL’s revisions did not conflict with the legislative history of section 203(m) of the FLSA, the DOL’s rules were not arbitrary and capricious. Accordingly, the court held the DOL revisions were valid and properly extended tip pooling restrictions of Section 203(m) to employers that do not use a tip-credit to satisfy minimum wage obligations.
The plaintiffs in Oregon Rest. & Lodging Ass’n filed a petition for panel rehearing and a petition for rehearing en banc review with the Ninth Circuit. Until further ruling by the Ninth Circuit, however, Oregon Rest. & Lodging Ass’n represents the new state of the law, at least in the Ninth Circuit. Accordingly, employers are well-advised to carefully review their practices in light of this change in the law.
Rick Roskelley and Kathryn Blakey are attorneys with the Las Vegas office of Littler Mendelson.