Ninth Circuit Rules No Tip Pooling Among Employees who are not Normally Tipped

Employers in service industries should take note of the recent decision in Oregon Restaurant & Lodging Assoc. v. Perez, where the Ninth Circuit Court of Appeals upheld a U.S. Department of Labor (DOL) regulation which states that employers cannot require tipped employees to share their tips with untipped employees.  Prior to the decision in the Oregon Restaurant case, there was an ongoing debate among District Courts in the Ninth Circuit regarding the enforceability of the DOL regulation, causing some employers to disregard the DOL regulation entirely.

The DOL regulation is based on the Fair Labor Standards Act (FLSA), Section 203(m), which allows employers to meet minimum wage requirements with the tips an employee receives from customers by taking a tip credit. Employers may utilize tip credits so long as (A) employees are notified of the practice and (b) employees are either allowed to keep all tips they receive, or participate in a tip pool where all tips are combined, then distributed exclusively amongst those who are customarily tipped.  The DOL regulation is intended to prevent employers from utilizing tip pooling to subsidize the hourly wages of untipped employees. An employee may qualify as “customarily and regularly tipped” if they have more than de minimis interaction with tipping customers and is engaged in customer service functions. Note that employee job titles are not a deciding factor (e.g., chefs are often considered non-customarily tipped employees, but a chef that meets the above criteria, such as a sushi chef, may qualify as a tipped employee).  Employers who utilize tip credits should review their tip pooling arrangements for compliance with the current regulation.