Which employees can be validly included in a mandatory tip pool has been a source of conflict between the DOL and courts in recent years. On February 23, 2010, the US Court of Appeals for the Ninth Circuit held that an employer can require its servers to pool tips and share them with non-tipped kitchen and back-of-the-house staff who did not customarily and regularly receive tips, as long as:

(See Cumbie v. Woody Woo, Inc., 596 F.3d 577 (2010)).

In response to the Woody Woo decision, the DOL issued regulations on April 5, 2011 prohibiting the type of tip pooling arrangements that the Ninth Circuit had found to be lawful (76 Fed. Reg. 18832 (Apr. 5, 2011)). The DOL's regulations state that:

When the regulations were issued, the DOL was silent about whether the agency would enforce the new regulations against employers in the Ninth Circuit (covering California, Arizona, Nevada, Oregon, Washington, Idaho, Montana, Hawaii and Alaska) or permit them to follow Woody Woo and impose mandatory tip pooling on employees who do not customarily and regularly receive tips from customers.

In February 2012, the DOL clarified its position by fully rejecting the Ninth Circuit's Woody Woo decision. The DOL announced that it would enforce its regulations on a nationwide basis, including the Ninth Circuit (DOL Fact Sheet #15A: Ownership of Tips under the Fair Labor Standards Act (FLSA)).

In response to the DOL's enforcement statement, several hospitality groups filed a lawsuit against the DOL in federal court in Oregon. The suit asked the court to declare the 2011 DOL regulations unlawful and inapplicable to restaurants that both:

On June 7, 2013, the District Court of Oregon granted the plaintiffs' summary judgment motion. The court held that the DOL exceeded its authority by issuing regulations on tip pooling in restaurants. The court stated that the language of Section 3(m) of the FLSA is clear and unambiguous and only imposes conditions on employers that take a tip credit. Quoting the Ninth Circuit's opinion in Woody Woo, the District Court explained that "a statute that provides that a person must do X in order to achieve Y does not mandate that the person must do X, period." (Or. Rest. & Lodging Ass'n v. Solis, No. 12-c-1261, (D.Or. June 7, 2013).)

Practical Law reached out to Paul DeCamp, Partner and Chair of Jackson Lewis LLP's Wage and Hour group and lead counsel in the Oregon Restaurant & Lodging Ass'n case to get his thoughts on the practical implications of the ruling. Paul practices exclusively in the area of management-side wage and hour law. Before joining Jackson Lewis, Paul was the Administrator of the DOL's Wage and Hour Division, the chief federal officer responsible for interpreting and enforcing the nation's wage and hour laws on behalf of roughly 135 million workers in 7.3 million workplaces around the country. Appointed by the President, he was in charge of a federal agency with close to 1,300 employees in more than 220 offices nationwide, operating on an annual budget of more than $170 million.

It would be premature to suggest that an employer in Oregon or anywhere else can ignore the portions of the 2011 regulations that the judge invalidated in our case. While we believe the regulations are clearly invalid under the Ninth Circuit's Cumbie v. Woody Woo ruling, the DOL still maintains a contrary enforcement position. And although the nationwide injunction bars the DOL from enforcing its invalidated regulations against any employer that was a member of any of the plaintiff restaurant associations on the date of the judgment, the DOL may still appeal, or a private litigant may try to assert claims based on those same regulations. Therefore, employers in Oregon that already do not take a tip credit and have tip pools including back-of-the-house employees, may take some measure of comfort that their policies are lawful in light of the court's ruling. For employers that do not yet have this type of tip pool, we would suggest holding off on changing their practices until after any appeal in our case, or until the time for the DOL to appeal has expired.

We suspect that DOL wants to appeal, but the ultimate decision of whether to appeal rests at the Department of Justice with the Solicitor General's office. The Solicitor General's office must balance the desire of its "client" to challenge the district court's ruling against the institutional need to avoid potentially creating appellate case law that further undermines the deference that executive branch agencies receive from their regulatory and sub-regulatory pronouncements.

Recently, the DOL has had several highly-publicized losses, with district courts, circuit courts, and even the US Supreme Court rejecting DOL positions. Indeed, just weeks ago the Solicitor General's office filed a brief in the US Supreme Court taking a position contrary to the position the DOL took in an amicus brief in the court of appeals. The Solicitor General's office surely understands that appealing the ruling in our case presents a substantial risk of creating appellate precedent that, from the government's perspective, could be highly damaging. Until the time to appeal expires or the Ninth Circuit issues its ruling, my advice to Oregon employers would be to avoid adding back-of-the-house employees to their tip pool if the tip pool currently includes only front-of-the-house employees.

I suspect that there will be further challenges to the DOL's regulations for both the 2011 Final Rule and other aspects of the tip credit regulations. I think that each particular regulatory challenge stands on its own, and drawing conclusions about how a different regulation will fare in front of a different judge based on the result in Oregon is challenging at best. Suffice it to say that I think there are numerous DOL regulations that are subject to serious court challenge, and I believe the courts will invalidate several of those regulations in the coming years.

First and foremost, employers must make sure that they are familiar with the requirements for employers of tipped employees under federal and state law, including the enforcement positions the DOL takes. It makes no sense to take what could be a more aggressive position without fully appreciating all of the pros and cons involved. For restaurants that are members of one or more of the plaintiff associations in our case, as of the date of the judgment, if your tip practices comply with the Ninth Circuit's ruling in Cumbie v. Woody Woo, then I would not change anything until the Oregon litigation has run its course. By the same token, I would also not suggest opening up a front-of-the-house-only tip pool to include back-of-the-house employees now. In my opinion, the best approach is to stay the course (assuming current compliance in all other respects) until the Oregon litigation is done, including any appeal.

The Coyote Ugly ruling is consistent with many federal cases that have examined positions beyond the standard server, bartender, host, and busser roles to determine which employees may be part of a tip pool also involving workers in those traditionally tipped jobs. Courts have, by and large, considered whether these roles, such as security guards, captains, food runners, maître d's and baristas have more than de minimis customer interaction and whether they have formal supervisory authority over other employees. The court's ruling suggests that the security personnel at Coyote Ugly have significant customer interaction and do not supervise other employees, so it is not at all surprising that the court approved of the employer's practice of including those employees in the tip pool with servers.

As a matter of basic fairness, these types of tip pools recognize that it is often much more than the work of the server alone that determines the tip a customer leaves. In reality, all aspects of the customer's experience at an establishment, including the initial greeting at the door (or even outside the door), the cleanliness and atmosphere of the operation, the friendliness and efficiency of the service, and the quality of the food and beverages, among other things, affect how a customer tips. Rewarding employees who have a role in influencing tips with a share of those tips provides a strong incentive for workers to deliver an excellent customer experience, thereby maximizing tips for everyone involved. Of course, as with any tip pool issue and any wage and hour issue more generally, it is important to ensure compliance with not only federal law but state law as well.

For more information on tip pooling generally, see Practice Note, Tipped Employees under the FLSA.