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Tip Pooling by Restaurant Owners-Remains in Flux

Restaurant owners with tipped employees should take note of several recent court cases which may affect their ability to cause restaurant employees to participate in “tip pooling,” particularly in instances where back-of-house employees are included in such tip pooling arrangements.

The Fair Labor Standards Act (FLSA) allows employers to fulfill part of their federal minimum hourly wage obligation to a tipped employee with tips received by such employees. Therefore, an employer may elect, rather than paying a tipped employee a minimum wage of $7.25 per hour, to pay such tipped employee a minimum wage of $2.13 per hour, with the balance of such employee’s minimum hourly wage covered by the tips received by such employee. This practice is known as taking a “tip credit.” The FLSA requires employers who take a tip credit (i) to give notice of such election to its employees, and (ii) to allow its tipped employees to retain all tips they receive, unless such employees participate in a valid tip pool. Under the FLSA, a tip pool is considered valid if it is comprised exclusively of employees who are “customarily and regularly” tipped, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers and service bartenders. An employer who avails itself of the tip credit, therefore, cannot include back-of-house employees who are not “customarily and regularly” tipped (such as dishwashers, cooks, chefs and janitors) in a tip pool.

In the last few years, however, a question has arisen with respect to whether the FLSA imposes restrictions on tip-pooling when an employer does not take a tip credit. Specifically, whether an employer who pays its tipped employees at least $7.25 per hour can impose a tip pooling scheme that includes back-of house employees who are not customarily and regularly tipped. In 2010, the Ninth Circuit Court of Appeals ruled that under the FLSA it was acceptable for an employer that did not take the tip credit (i.e., an employer that paid its tipped employees the full federal minimum hourly wage) to require tipped employees to pool their tips with non-tipped employees because the relevant section of the FLSA is silent as to employers who do not take a tip credit (only expressly imposing the “customarily and regularly” tipped requirement on employers who did take the tip credit).

In response to the 2010 Ninth Circuit ruling, the Department of Labor instituted regulations extending the “customarily and regularly” tipped requirement for tip pooling to instances where an employer does not take the tip credit, thus making it so that no employers, including those that do not take the tip credit, can include back-of-house employees in their tip pooling arrangements. Soon thereafter, several district courts held such new regulations to be invalid, finding that the relevant language of the FLSA imposed a condition on taking a tip credit (that if the tip credit was taken, tip pooling could only include customarily and regularly tipped employees) rather than a freestanding requirement pertaining to all tipped employees. Then, in a split decision that surprised many observers, the Ninth Circuit reversed the district court decisions, holding that the fact that the FLSA was silent on tip pooling restrictions when an employer does not take the tip credit did not foreclose the Department of Labor from promulgating reasonable regulations with respect thereto.

A writ of Certiorari with respect to the Ninth Circuit decision has been filed with the Supreme Court. Until such time as the Supreme Court decides whether to hear the case, restaurant owners may want to exercise caution before extending tip pooling arrangements to include back-of-house employees who are not customarily and regularly tipped.

Related topics: Restaurants, Retail