U.S. Regulation of Tip Pooling Upheld by Court

PORTLAND, Ore. (CN) - The U.S. Department of Labor can regulate tip-pooling for employers who don't take tip credits, the Ninth Circuit ruled Tuesday.

The decision stems from two different lawsuits in Oregon and Nevada involving the validity of a Labor Department rule that extended restrictions on tip pools to all employers, not only employers who take tip credits.

In 2011, the Oregon Restaurant and Lodging Association sought an injunction against the department in Federal Court, claiming the 2011 rule was invalid. A group of casino dealers from Wynn La Vegas made similar claims in Nevada Federal Court.

In both of the cases, employers required workers to share tips with employees who are not usually tipped, such as kitchen staff.

Federal judges in both Oregon and Nevada found the rule to be invalid and contrary to Congress' intent, citing the Ninth Circuit's 2010 decision in Cumbie v. Woody Woo Inc.

In that case, a circuit panel held that sort of tip pooling did not violate a section of the Fair Labor Standards Act, because the section did not mention anything about employers that don't take tip credits.

The following year, the Labor Department adopted a revised rule that formally extended restrictions to all employers.

"Tips are the property of the employee whether or not the employer has taken a tip credit," the department wrote in its revision.

This week, a Ninth Circuit panel reversed both courts' decisions, disagreeing with how the judges characterized the circuit's decision in Cumbie.

Writing for the three-judge panel, Circuit Judge Harry Pregerson noted that the Cumbie decision was a case "grounded in statutory silence" that was made before the Labor Department adopted its 2011 rule.

"Whereas the restaurants, casinos, and the district courts equate this silence concerning employers who do not take a tip credit to 'repudiation' of future regulation of such employers, we decline to make that great leap without more persuasive evidence," Pregerson wrote.

The panel's majority also concluded that Congress did not clearly intend to permanently allow employers that don't take tip credits "to do whatever they wish with their employees' tips."

"The district courts' reading that the Fair Labor Standards Act provides 'specific statutory protections' related only to 'substandard wages and oppressive working hours' is too narrow," Pregerson wrote for the panel. "The Fair Labor Standards Act is a broad and remedial act that Congress has frequently expanded and extended."

In a dissenting opinion, Circuit Judge N. Randy Smith called the case "nothing more than Cumbie II" and admonished his fellow circuit judges for not following circuit precedent.

Smith argued that the Labor Department's 2011 rule did not change anything, and the court did not have to defer to the department's interpretation of the disputed statute.

"After losing in Cumbie, the Department of Labor has decided to go through the back door by promulgating a new rule codifying its argument in Cumbie and its preferred interpretation of [the disputed section]," Smith wrote.

Circuit Judge John B. Owens also sat on the panel.

Attorney Paul DeCamp, who argued for the Oregon plaintiffs, said Smith's dissent "correctly calls out the majority for giving short shrift to binding circuit precedent."

But attorney Leon Greenberg, who represented the casino dealers in Nevada, called the decision "correct" and "very sensible."

"Our clients, in an economic sense, were being required to work for nothing, as the tips taken from them and given to non-tipped employees was greater than their hourly wage," Greenberg told Courthouse News in an email. "The Fair Labor Standards Act is intended to create a true minimum wage obligation, not allow such a sleight-of-hand arrangement as exists at the Wynn Casino."

The Justice Department declined to comment on the case.

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