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Just when it seemed that service charges were all the rage, tip pooling has reemerged to grab the headlines.  Making the rounds from courts to agencies, and now Congress, the issue appears to have been settled by Congress that employers can impose mandatory tip pooling to include certain non-tipped employees.

Can Non-Tipped Employees Participate in the Mandatory Tip Pool?

Water question markUnder the Fair Labor Standards Act (the “FLSA”), employees who are customarily and regularly tipped can be required to participate in a mandatory tip pool.  Under a tip pooling approach, the employer directs tipped employees to combine their tips, and the employer determines a structure for redistributing the tips among the employees in the tip pool. As we have reviewed previously in this blog, employees in tipped positions have challenged mandatory tip pools that include non-tipped employees, such as dishwashers and cooks, asserting that they violate the FLSA. Because those employees are not customarily and regularly tipped, the argument was not without merit as the law has always made clear that tips are the property of the employees to whom customers given them.  However, the law also provided that tip pools may be imposed by employers.  The FLSA further allowed that employers may claim a tip credit against the federal minimum wage. 

If you had asked me one month ago to predict the winner of the presidential election, I would have been wrong. Therefore, rather than make my own [ill-fated] predictions of the changes that await employers when PEOTUS takes office, I consulted my trusty Magic 8 Ball. Here’s what it predicted:

Will the overtime rule ever become law?     

MY SOURCES SAY NO.

We all have heard by now that the Department of Labor (DOL) rules extending eligibility for time-and-a-half overtime pay to some 4.2 million additional workers (including many employees in the hospitality industry) are on hold thanks to an injunction by a federal court judge in Texas.  So what now?  The DOL under the Obama administration was expected to appeal the ruling to the US Court of Appeals for the 5th Circuit, but the Trump administration has different priorities and may decide not to pursue an appeal after all.

On Tuesday, November 22nd, a United States District judge in Texas issued a preliminary injunction that blocks the U.S. Department of Labor (DOL) from implementing a controversial rule that would have expanded overtime protections from going into effect, at least for now.  The pending regulations were scheduled to go into effect on December 1, 2016 and would have more than doubled the salary level required for employees classified as exempt under the “White Collar” exemptions.  The Department of Labor estimated if the new regulations went in to effect more than 4 million workers would now be eligible for overtime.  The salary level is currently $455 per week or $23,660 per year.  The new regulations would have increased that amount to $913 per week or $47,476 per year.

When we last visited this topic, the proposed regulations revising the overtime exemptions were still very new.  The regulations are due to go into effect on December 1 of this year.  There has been legislation introduced to stop them from being implemented and court cases are pending.  This article will remind you of the obligations, answer some additional questions that keep coming up and will bring you up to date on the efforts to stop the regulations from going into effect.

Tip money with coffeeIn the latest of a series of twists and turns regarding the legality of certain tip pools in Western states, on February 23, 2016, a divided three judge panel of the Ninth Circuit Court of Appeals validated regulations by the Department of Labor (“DOL”) that significantly limit employers’ ability to have tip pools that include more than “customarily and regularly tipped” employees. This development means that employers operating in states or territories in the Ninth Circuit (covering Washington, Oregon, Alaska, Idaho, Montana, Nevada, California, Arizona, Hawaii, Guam, and the Northern Mariana Islands) cannot include in their tip pools “back of the house” employees (such as cooks or dishwashers) or other employees who are not customarily tipped. We examine the impact of and history behind this decision below.

Those of you following the challenge to the Department of Labor (“DOL”) tip pooling regulations interpreting the Fair Labor Standards Act (“FLSA”) may recall the events below. You may also want to view our past updates and insights on the tip pooling topic in the following articles: DOL RestrictionsTip Pooling Remains a Hot TopicTip Pooling - UpdateTip Pooling in Oregon and Washington.

  • In 2010, in a case called Cumbie v. Woody Woo 596 F.3d 577 (9th Cir. 2010), the Ninth Circuit (with jurisdiction over Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington) ruled that the FLSA did not prohibit employer-mandated tip-pooling arrangements if the employer did not take a tip credit.  This meant it was lawful for employers in the Ninth Circuit to require that their tipped employees share tips with non-tipped employees (bussers, dishwashers and cooks, for example), just so long as all employees got paid minimum wage and the restaurant did not take a tip credit.  (Seven states – Alaska, California, Minnesota, Montana, Nevada, Oregon and Washington – do not allow a tip credit.)

  • The DOL then issued regulations in April 2011 addressing ownership of employee tips, in conflict with the ruling of Cumbie v. Woody Woo.  The regulations created legal uncertainty for any employers who were engaging in mandatory tip-pooling with back-of-the-house employees.

  • In February 2012, the DOL issued a field assistance bulletin to its staff, declaring ”the employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit …” and the DOL would “enforce nationwide the 2011 final rule explaining that a tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit[.]”  The field assistance made clear on no uncertain terms that that the DOL considered it a violation of the FLSA for an employer to institute a tip pool that required sharing tips with back-of-the-house employees, even if the employer did not take a tip credit.

  • In July 2012, restaurant industry associations and others filed a lawsuit in Oregon federal court, contending that the DOL regulations unlawfully prohibit back-of-the-house kitchen workers from sharing in tips left by customers when the employer does not take a tip credit against minimum wage.  See Oregon Restaurant and Lodging Association v. Solis et al., Case No. 3:12-cv-01261 (D. Or.).

Money on a restaurant table

Just when it seems that businesses spend more time ensuring employment law compliance than they do on actual business, the Department of Labor (DOL) has announced they intend to increase the frequency of their FMLA audits while also increasing the number of site visits during these audits.  What, you may ask, is a FMLA audit and why should I care?

For employers who qualify for the Family Medical Leave Act (“FMLA”) (over 50 employees within a 75 mile radius) the required paperwork is an administrative process and the tracking is done by the Human Resources Department.  It is a formality that also provides certain job protections, but it really isn’t that big a deal once the processes are in place.  Right?  The short answer is, no.  The FMLA is form driven and form dependant – but it takes more than the forms to make sure you are complying with the law.  Audits of an employer’s FMLA practices are not something new – at least in theory.  The DOL has always had the right to conduct audits, but it is not a right often exercised.  It has not been unusual to see the EEOC investigating employee claims under the FMLA, but rarely has the DOL investigated.  That is about to change.

DOL Branch Chief for FMLA, Diane Dawson, recently announced that the DOL’s national office has instructed the regional offices to identify occasions when an audit would include an on-site visit.  These visits could be announced or unannounced.  The investigations may be triggered by an employee complaint they were not given all their rights under the FMLA, that they were about to lose their job (or had recently lost their job) due to exercising their rights under the FMLA, or because DOL is seeing a pattern of FMLA issues within the target company.  Violating the FMLA can be costly.  The employee can sue you and the government can fine you.  The DOL is opting to increase the on-site investigations because the actual visit can reduce the time an audit may take.  The investigators have ready access to the records, policies and files.  More importantly, they have ready access to the employees for a face-to-face discussion while reviewing the forms.

Bookshelf for filed documents

So, what can an employer do to prepare?  First and foremost, an employer should be proactive and review their current processes and forms.  The DOL forms were updated recently and all employers should be using the updated forms. The current poster should also be placed in the appropriate locations.  It is important to note that the poster must be able to be seen by both employees and applicants.

One of the most important things to do is to review (or develop) your FMLA policy.  The DOL will start with a review of the policy (and the forms) to ensure the March 2013 regulations are incorporated.  So, make sure your policy is up to date.  At a minimum, the policy must incorporate issues such as the leave year calculation (calendar, rolling backward, rolling forward), eligibility requirements for leave, the reasons for leave, your call-in procedures, substitution of paid leave, the employee’s obligations in the FMLA process, medical certification process, explanation of intermittent leave and that the employee is responsible for telling you when an absence is covered under approved intermittent leave, benefit rights under leave, fitness for duty requirements and any outside work during FMLA prohibitions.

A recent Field Assistance Bulletin issued by the U.S. Department of Labor (DOL) on February 29, 2012, announced a substantial change of the DOL’s enforcement position regarding mandatory tip pooling with back-of-the-house employees. 

As we have discussed in this blog previously tip pooling is the practice by which the tips of regularly tipped employees are pooled together and then redistributed among employees, including, on occasion, employees who do not customarily receive tips.  Employees may voluntarily participate, or they can be required to participate by the employer.

In 2010, the U.S. Court of Appeals for the Ninth Circuit issued a decision, Cumbie v. Woody Woo, Inc. (596 F.3d 577 (9th Cir. 2010), which held that DOL limitations on an employer's use of the employee's tips did not apply when the employer does not take a tip credit.  In states like Oregon and Washington, where the employer must pay a tipped employee the full minimum wage and is prohibited by state law from taking a tip credit, the employer is permitted to impose a mandatory tip-pooling arrangement and insist that tipped employees share their tips with back-of-the-house employees, not just with employees who customarily receive tips.  The court's ruling was a significant win for employers in the Ninth Circuit; the employer was represented by Garvey Schubert Barer (my partner, Eric Lindenauer, gets full credit), amicus briefs were filed by Oregon Restaurant and Lodging Association and others, and the DOL even submitted a brief and argued part of the case for the employee -- and lost.   

As many of you will recall, I dedicated two posts earlier this year to tip pooling and Oregon and Washington restaurant owners' ability to share tips with traditionally non-tipped employees - Tip Pooling in Oregon and Washington, Tip Pooling Update.  With the amount of attention that tip pooling continues to receive, I thought it time to enlist my Portland, Oregon partner, Eric A. Lindenauer, the lawyer who actually represented the Portland restaurant owner in the seminal Cumbie v. Woody Woo, Inc. decision, to provide a brief summary of the Woody Woo decision and recent developments in the ongoing tip pooling saga.

Thank you Eric for updating all of us.

The extent to which an employer can require employees to share tips with non-tipped employees remains a hot topic, especially in the federal Ninth Circuit, which encompasses Alaska, Washington, Montana, Idaho, Oregon, Nevada, California, Arizona and Hawaii.

Under the Fair Labor Standards Act (“FLSA”) where an employer claims “tip credit” toward the federal minimum wage, the employer may only require that employees pool tips with other employees who “customarily and regularly receive tips.” Assuming an employee is informed of the intent to take tip credit and other requirements are met, an employer can use an employee’s tips to offset all but $2.13 of the federal minimum wage.

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Greg Duff, Editor
Greg Duff founded and chairs GSB’s national Hospitality, Travel & Tourism group. His practice largely focuses on operations-oriented matters faced by hospitality industry members, including sales and marketing, distribution and e-commerce, procurement and technology. Greg also serves as counsel and legal advisor to many of the hospitality industry’s associations and trade groups, including AH&LA, HFTP and HSMAI.

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