On Tuesday, February 23, the U.S. Court of Appeals for the Ninth Circuit issued its ruling in the consolidated appeal of Oregon Restaurant & Lodging Association v. Perez and Cesarz v. Wynn Las Vegas LLC. The court adopted a 2011 Department of Labor regulation establishing that, under the Fair Labor Standards Act (“FLSA”), employees who do not customarily and regularly receive tips may not participate in their employer’s tip pooling arrangement.

History
In 2010, in Cumbie v. Woody Woo, Inc., the Ninth Circuit held that a restaurant tip pooling arrangement may include kitchen staff who do not usually receive tips, but such an arrangement is only permissible if the employer does not take a tip credit.

Within a section of the FLSA relating to tip credits, the Act expressly permits the pooling of tips among employees who regularly and customarily receive tips. However, the FLSA does not directly address restrictions on tip pooling arrangements where the employer does not take a tip credit. Based on the Act’s silence on tip pooling arrangements where no tip credit is taken, Woody Woo established that tip pools may include non-tipped employees, but only if the employer does not take a tip credit.

Thereafter, in 2011, the DOL formally issued a new rule that rejected the Ninth Circuit’s conclusion in Woody Woo. The rule stated that tip pooling arrangements may only include tipped employees, regardless of whether the employer takes a tip credit.

The DOL’s 2011 rule was then challenged in federal court. In Oregon, a lawsuit was brought on behalf of restaurant owners and restaurant employees, asserting that the DOL’s rule excluding kitchen staff from participating in tip pools is in violation of the FLSA. The trial court in Oregon agreed with the plaintiffs and with Woody Woo, and concluded that the DOL may not exclude non-tipped employees from tip pooling arrangements in situations where the employer is not taking a tip credit.

In Nevada, a lawsuit was brought by casino workers who were required by the Wynn Las Vegas to share tips with tipped and non-tipped employees. The workers alleged this practice was illegal because it did not comply with the DOL’s 2011 rule. The Nevada court also followed the Ninth Circuit’s interpretation in Woody Woo, and found the challenged tip pooling arrangement to be permissible.

The Ninth Circuit’s February 23 Opinion
These two cases from Oregon and Nevada were appealed to the Ninth Circuit and the court consolidated the appeals for its February 23 ruling. The court reversed both cases, concluding that the DOL was within its authority to implement and enforce its 2011 rule barring non-tipped workers from participating in tip pools. Essentially, the court’s prior decision in Woody Woo could not prevent the DOL from subsequently clarifying the FLSA—an Act the DOL is expressly charged with administering.

Therefore, the Ninth Circuit followed the DOL’s interpretation that non-tipped employees may not participate in tip pools, even if their employer does not take a tip credit.

What This Means for Employers
Employers with employees who regularly and customarily receive tips may maintain a mandatory tip pooling program under the FLSA, provided that employees are given advance notice of the program and no tips are shared with management employees. However, non-tipped employees may not participate. Employers who were relying on Woody Woo to include non-tipped workers in their tip pooling arrangements will need to reevaluate and conform their practices to this new development in the law.

Employers with questions or concerns regarding whether their tip pooling program complies with applicable state and federal law should consult with qualified legal counsel.