As a former waiter I hated tip pooling. Tip pooling is the practice followed by many restaurants in California and elsewhere where a customer’s tip is shared with all the employees that helped make the restaurant experience enjoyable. Usually it used to include just the front of the house – waiters, bartenders, buss staff. Then someone – likely a cook – decided it would be a great idea to include the back of the house? Hello? Does the prep cook have to deal with Ms. Johnson and her 50 complaints over her salad fork not being “chilled enough” for a fine dining experience? No. Does he get stiffed when her Château Lafite-Rothschild has a random cork shard floating? No. You see my point. Either way, the practice has taken over many restaurants and other tipped establishments (casinos, etc.).
In the Oregon Restuarant case the Ninth Circuit panel upheld a 2011 Department of Labor (“DOL”) rule that prohibits businesses from requiring employees to share their tips, even if the tipped employees are paid minimum wage. Under the federal Fair Labor Standards Act (“FLSA”), employers can use a limited amount of employees’ tips as a credit against minimum wage obligations. For example, as it used to be in Virginia Beach, VA, where I’m from, if an employee earns $4.12 an hour in tips, a restaurant is allowed to pay the employee a measly $3.13 an hour in cash wages to meet the $7.25 federal minimum wage. However, in California and most other states, state law prohibits employers from making tip credits. Restaurants in those states are required to pay employees cash wages at minimum wage levels, regardless of the tips they receive. Instead of paying higher hourly wages to the non-servers who were not traditionally getting a piece of the tip, tip pooling was a way to incentivize everyone.
Oregon Restaurant’s holding is a bit confusing without some history. In 2010, the Ninth Circuit rejected a wait staff member’s lawsuit against a restaurant in which she claimed that the restaurant’s mandatory tip pool policy violated the FLSA. Cumbie v. Woody Woo Inc., 596 F.3d 577. The Cumbie court said the FLSA permitted tip-pooling so long as the employer did not take tip credits against employees’ wages, and stated that the FLSA is silent as to who may participate in a tip pool if the employer does not take a tip credit. The Cumbie decision was interpreted by many to mean that it was legal to have mandatory tip pools so long as managers and the bar owners did not dilute the pool.
In response to Cumbie the DOL issued a rule in 2011, stating that tips are the sole property of the tipped employee and cannot be used in a pool to share with back-of-the-house employees, like kitchen staff and dishwashers. Logical, right? The DOL’s position was that an employer cannot use an employee’s tips except where possible to do so as a credit against minimum wage (an arrangement unavailable to employers in many Western states). Then, in February 2012, the DOL issued a directive to its field agents to begin enforcement of its new rule.
In July 2012, a group of restaurant and lodging associations from Washington, Oregon and Alaska brought the lawsuit against the DOL that the Ninth Circuit decided last month. The group argued that the DOL exceeded its authority by issuing that regulation and had ignored the precedent set in Cumbie. Around the same time, two casino dealers working for Wynn Las Vegas brought a wage and hour lawsuit against the casino in the Cesarz case. In Cesarz the employees alleged the Wynn Las Vegas required dealers and other tipped employees to participate in a tip-pooling plan, and the dealers claimed the casino was unlawfully taking their tips to share with other workers.
In 2013, a federal district judge in Portland, OR, ruling on the Oregon Restaurant case invalidated the DOL’s new tip-pooling regulations. Shortly after that, another federal district judge ruled in the casino’s favor in the Cesarz case – also allowing tip pooling with all employees. On appeal, the Ninth Circuit consolidated the cases.
The Ninth Circuit said the DOL’s 2011 rule was reasonable. It said the rule was consistent with the FLSA’s mandate that tips stayed with the employees who received them. This decision effectively reverses the 2010 Cumbie decision and could soon be controlling in the Ninth Circuit, which includes sunny California. The restaurant associations involved in Oregon Restaurant announced they will seek review of this decision by an en banc panel of the court.
Unless overturned by the panel or taken up by the US Supreme Court, tip pooling with all employees is going to be unlawful. Restaurants using a tip pool will need to verify the back-of-the-house staff do not share in the tip pool. as a result, here are five “tips” about tip pooling in California.
1. Tips are the Employee’s Property Under California Law
Labor Code section 350 states unequivocally that “Every gratuity is hereby declared to be the sole property of the employee or employees for whom it was paid, given or left for.” In addition, Labor Code section 351, as explained by the DLSE clearly states that “[n]o employer or agent shall collect, take, or receive any gratuity or a part thereof that is paid, given to, or left for an employee by a patron, or deduct any amount from wages due an employee on account of a gratuity, or require an employee to credit the amount, or any part thereof, of a gratuity against and as a part of the wages due the employee from the employer.”
2. Tips Left on Credit Cards Must be Paid Next Regular Payday
Payment of a gratuity made by a customer using a credit card must be paid to the employee not later than the next regular payday following the date the customer authorized the payment.
3. Mandatory tip pools May No longer be Permissible under California law
Labor Code section 351 clearly sets forth that tips are the sole property of the employee. Reliance on the California case Leighton v. Old Heidelberg, Ltd., (1990) 219 Cal.App.3d 1062, where the court authorized tip pooling, is now in question. Best bet? Keep it with front of the house staff and those who are in contact with the customers.
4. There is a Difference between a Tip and a Mandatory Service Charge
Mandatory service charges are not tips and are not covered by Labor Code section 351. Mandatory service charges are charges imposed by an establishment for specific reason, such as for parties larger than eight people. Unlike tips, these charges may be received by the employer and distributed, if at all, as the employer sees fit. So tip your waiter or ask where it goes!
5. There is No Tip Credit Allowed to Offset Wages Under California law.
Tips earned by an employee cannot be counted towards the minimum wage under California law, like my Virginia Beach example above. In addition, employers may not deduct the costs of any credit card processing fees or any other charges form the employee’s tips or wages.
If you have any questions about the case or have similar claims for tip pooling issues, company charges to your wages, business expenses, off the clock work, or unpaid wages or issues with your pay at your current employer, please feel free to contact: