Friday, March 18, 2016

Ninth Circuit Lets DOL Overrule Ninth Circuit

By Brian Farrington

Under the Fair Labor Standards Act (“FLSA”), employers are required to pay most employees the minimum wage, currently $7.25 per hour. Employers of tipped employees can claim a “tip credit,” however.  That is, the employers can pay a cash wage which is less than the minimum (currently $2.13/hr), and claim a tip credit of $5.12 per hour.

The employer cannot claim a tip credit for an employee, however, “…unless such employee has been informed by the employer of the provisions of this subsection, and all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips.” 29 USC § 203(m) (emphasis added)

So a condition of claiming a tip credit is that the employer can’t take possession of employees’ tips. The only exception is a bona-fide tip pool. This has been interpreted by both the courts and the U. S. Dept. of Labor, Wage and Hour Division (USDOL/WH or “Wage Hour”), the agency which enforces the FLSA, to mean that only serving employees who have direct customer contact can be in a tip pool. Tipped employees cannot be required to share their tips with “back of the house” employees like cooks, dishwashers, and certainly not with managers.

Some states have even stricter rules than the FLSA standards. Some have higher minimums, some allow less tip credit than the FLSA, and some prohibit tip credit altogether. Among the states which prohibit tip credit altogether are the West Coast states of California, Oregon, and Washington. All of these states are in the Ninth Circuit, widely viewed as being the most protective of employees.

In 2010, the Ninth Circuit issued a decidedly pro-employer decision on the issue of employees retaining their tips. In Cumbie v. Woody Woo Inc., 596 F.3d 577 (9th Cir. 2010), the employer was an Oregon restaurant which, because of state law, did not claim a tip credit. The restaurant required its servers to share their tips with dishwashers. One of the servers sued, saying this violated the rule that tipped employees got to keep their tips. The Ninth Circuit disagreed. The Court held that the rule that tipped employees had to retain their tips was only a condition of claiming a tip credit. Since the employer didn’t claim a tip credit, the Court reasoned, the condition didn’t apply.

This decision was decidedly contrary to USDOL/WH’s interpretation of the law—in fact, the Secretary of Labor had filed an amicus brief on the side of the employee with the Court. A year later, in 2011, DOL issued an amended version of its regulation which addressed these issues. The new regulation said in part:

Tips are the property of the employee whether or not the employer has taken a tip credit under section 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 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.  29 CFR § 531.52 (emphasis added)

Move forward to 2016. Another Oregon restaurant which did the same thing as Woody Woo was sued because the servers, who did not take tip credit, had to pool their tips and share them with dishwashers. The District Court said that under Woody Woo, the servers lose. The Ninth Circuit, however, reverted to its pro-employee form.

In a 2 – 1 decision, a panel of the Ninth Circuit held that Woody Woo had been based on the fact that the statute did not prohibit the tip sharing at issue. In Oregon Rest. & Lodging Ass'n. v. Perez, 2016 U.S. App. LEXIS 3119 (9th Cir. Or. Feb. 23, 2016), by contrast, the DOL has  now issued a regulation prohibiting tip sharing, and this meant the employees prevailed. Since the statute did not clearly address the issue at hand, DOL’s regulation was entitled to deference.

The dissenting judge was not amused. He opened his dissent saying: “Colleagues, even if you don't like circuit precedent, you must follow it.” He then said that there was no basis for holding that the intervening regulation was entitled to deference, since the statute was clear.

This case seems ripe for an en banc hearing—that is, a review by all of the judges of the Ninth Circuit. Meanwhile, there is great rejoicing at the Department of Labor.

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