Cumbie No Bar to DOL Extending Tip Pool Restrictions to Employers That Do Not Take a Tip Credit: Ninth Circuit

Practical Law Legal Update w-001-4664 (Approx. 8 pages)

Cumbie No Bar to DOL Extending Tip Pool Restrictions to Employers That Do Not Take a Tip Credit: Ninth Circuit

by Practical Law Labor & Employment

Background

In an earlier Ninth Circuit case, the court held that Congress intended only to limit the use of tips by employees when the employer claims a tip credit under the FLSA (29 U.S.C. 203(m); Cumbie v. Woody Woo, 596 F.3d 577, 583 (9th Cir. 2010)).

The DOL's 2011 rule expressly rejected Cumbie, stating that:

Tips are employees' property, regardless of whether the employer takes a tip credit.
A valid tip pool may only include "those employees who customarily and regularly receive tips."

(29 C.F.R. § 531.52 (2011).)

The DOL's 2011 revisions became the subject of two lawsuits before the Ninth Circuit. The Oregon Restaurant and Lodging Association (Association) challenged the DOL's 2011 rule that prohibits all employers (whether or not they take a tip credit against the FLSA's minimum wage requirements) from using a tip pool that violates section 203(m) of the FLSA. The employers represented by the Association did not take a tip credit and used tip pools that, contrary to section 203(m)'s requirements, required customarily tipped employees to share tips with non-customarily tipped employees. The Association sought to enjoin enforcement of the DOL rule.

Separately, a group of casino dealers sued Wynn Las Vegas, LLC, claiming that Wynn's tip pooling practices violated the DOL's 2011 rule.

Both district courts ruled for the employers, holding that:

The Ninth Circuit's 2010 decision in Cumbie precluded the DOL from promulgating the 2011 rule extending the FLSA's tip pooling restrictions to all employers, regardless of whether they took a tip credit.
The DOL's 2011 rule was invalid under Chevron because it was contrary to Congress's clear intent.

The DOL and the casino dealers appealed.

Outcome

A Ninth Circuit panel reversed both decisions, holding 2-1 that:

Its decision in Cumbie did not preclude the DOL from promulgating the 2011 rule extending the FLSA's tip pooling restrictions to employers that do not take a tip credit.
The DOL's rule withstood Chevron review and was valid because:
- FLSA Section 203(m)'s silence regarding employers that do not take a tip credit gave the DOL prerogative to promulgate the rule; and
- The DOL's interpretation of Section 203(m) in the rule was reasonable.
(See Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984).)

The Ninth Circuit remanded both cases, noting that:

FLSA Section 203(m) provides that:
- employers may satisfy their minimum wage obligations to tipped employees by including an employee's tips (known as taking a tip credit);
- employers seeking to take a tip credit must give notice to employees and allow them to retain all of their tips, unless the employees take part in a valid tip pool; and
- a valid tip pool must be comprised only of employees who are "customarily and regularly tipped."
(29 U.S.C. § 203(m).)
The court held in Cumbie v. Woody Woo, Inc. that a tip pooling arrangement comprised of both tipped and non-tipped employees was valid and did not violate Section 203(m) because:
- the employer did not take a tip credit; and
- Section 203(m) was silent about employers that do not take a tip credit.
(596 F.3d 577, 583 (9th Cir. 2010).)
In 2011, after Cumbie was decided, the DOL promulgated a formal rule extending Section 203(m)'s tip pooling restrictions to all employers, not just employers that take a tip credit. Therefore, the new rule prohibited even those employers that do not take a tip credit from using a tip pool that violates Section 203(m) by including both tipped and non-tipped employees. (29 C.F.R. § 531.52.)
The district courts held that Cumbie left "no room" for the DOL to promulgate the 2011 rule, and that the rule was invalid under Chevron.

The Ninth Circuit held that the 2011 DOL rule was valid under Chevron because:

Despite the district courts' position, Cumbie did not address whether the DOL can regulate tip pooling practices of employers that do not take a tip credit. The decision only addressed the text of Section 203(m).
Section 203(m)'s silence on whether tip pooling restrictions apply to employers that do not take a tip credit:
- gave the DOL leeway to promulgate a rule extending Section 203(m)'s requirements to employers that do not take a tip credit; and
- did not amount to a repudiation of such a future rule.
The DOL's interpretation of Section 203(m) was reasonable. The DOL viewed:
- Section 203(m) as containing a "loophole" that allowed employers not taking a tip credit to elude the FLSA's tip pooling requirements; and
- its 2011 rule as a "clarification" to the loophole in Section 203(m).

The dissenting circuit judge noted that:

This case is identical to Cumbie and the court should have followed its earlier holding that Section 203(m) does not impose tip pooling requirements on employers that do not take a tip credit.
Section 203(m) is not silent on the issue and the DOL's rule is merely an attempt to "codify" its failed argument from Cumbie.

Practical Implications

The Ninth Circuit's decision in Oregon Restaurant and Lodging Association reversed two district court decisions, holding that the DOL's 2011 rule extended the FLSA's tip pooling requirements and restrictions to employers that do not take a tip credit. Employers in the Ninth Circuit should be aware of this decision and ensure that tip pools comply with Section 203(m) by not including employees who do not customarily and regularly receive tips.

UPDATE: On September 6, 2016, a divided Ninth Circuit denied the employers' petitions for rehearing by the panel and rehearing en banc (Oregon Rest. & Lodging Ass'n v. Perez, (9th Cir. Sept. 6, 2016)). The employers have also petitioned the US Supreme Court to review the Ninth Circuit's February 2016 decision (Petition for Certiorari, No. 16-163, filed Aug. 1, 2016).

Cumbie No Bar to DOL Extending Tip Pool Restrictions to Employers That Do Not Take a Tip Credit: Ninth Circuit | Practical Law