9th Circuit Finds "Back of the House" Tip Pooling Does Not Violate FLSA

On Feb. 23, 2010, the U.S. Court of Appeals for the 9th Circuit, in a 3-0 panel decision, held that an agreed-to tip pool requiring sharing of tips with the “back of the house” does not violate the Fair Labor Standards Act (FLSA) where no tip credit against the minimum wage is claimed. Cumbie v. Woody Woo, Inc., ___ F.3d ___ .*

The court’s decision may be helpful to employers in the hospitality and restaurant industry that want to broaden their tip pools to back of the house employees, such as dishwashers and cooks.

In Cumbie, an Oregon employer required its wait staff to pool all tips and redistribute a majority of the tips to “back of the house” staff. Under Oregon law, the employer was prohibited from claiming a tip credit against the minimum wage, but was not prohibited from requiring an employee tip pool. The employer paid its servers in excess of Oregon’s minimum wage.

The 9th Circuit concluded that nothing in the text of the FLSA restricts employee tip pooling arrangements when no tip credit is taken, thus the employer’s tip pooling arrangement in this case did not violate the FLSA. The Cumbie decision makes clear that, as long as the employer does not attempt to take a tip credit and pays at least the minimum hourly wage, an employer may, without violating the FLSA, permissibly mandate tip pooling with employees who do not customarily and regularly receive tips.

Tip pooling considerations in light of Cumbie:

• An employer may require tip pooling only where no tip credit is taken to comply with federal minimum wage law. This means an employer must pay at least the minimum hourly wage in addition to any tip pooling.
• Employees who are not “customarily and regularly tipped employees,” such as cooks and dishwashers, can be included in a tip pooling arrangement, so long as the employer does not claim a tip credit and pays the minimum wage.
• Cumbie does not prevent a challenge to tip pooling arrangements under state law. In states that have specific tip pooling laws and regulations, employers must comply with both state and federal law. For example, California has state-specific tip pooling statutes that must be complied with. (Please see our previous advisory, “Starbucks Brews a Winning Cup: Tip Pooling in California Restaurants.”)
• The U.S. Department of Labor (DOL) previously took the position that tip pooling restrictions apply even if no tip credit is claimed by the employer. The DOL will now be bound by Cumbie when administering federal wage and hour laws in states in the 9th Circuit (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon and Washington).
• The 9th Circuit is the first U.S. Circuit Court of Appeals to address the permissibility of tip pooling absent tip crediting under federal law. Other federal district courts that have considered the issue, including the Western District of Pennsylvania, the Southern District of New York and the District of Oregon, all concluded that the language of the FLSA does not prohibit tip pooling where the employer does not claim a tip credit.
• The 9th Circuit’s decision did not discuss whether owners, managers or supervisory employees may participate in an employee tip pool, and this remains an open question.
• Cumbie reiterated that in a business where tipping is customary, the tips belong to the recipient, unless there is an “explicit contrary understanding.” Because the default rule is that tips belong to the recipient in the absence of a contrary agreement, employers engaged in tip pooling arrangements should put the terms of the arrangement in writing.