Federal Court Invalidates Department of Labor’s 2011 Tip Pooling Requirements

July 19, 2013

On June 7, 2013, the U.S. District Court of Oregon invalidated a U.S. Department of Labor (DOL) rule that prohibited employers who do not apply a tip credit against their minimum wage obligations from including nontipped employees in the tip pool. See Oregon Rest. & Lodging Assn. v. Solis, No. 3:12-cv-01261 (D. Or. June 7, 2013). An employer must pay a tipped employee a cash wage of at least $2.13 per hour, but if the cash wage is less than the federal minimum wage, the employer can make up the difference with the employee’s tips (known as a “tip credit”).

Tip pooling is the practice of collecting all tips from tipped employees for distribution among a group of both tipped and nontipped employees. Until recently, employers could contract with tipped employees to include nontipped employees (e.g., dishwashers and cooks) in the tip pool. See Cumbie v. Woody Woo, 596 F.3d 577, 583 (9th Cir. 2010) (holding that an employer could require servers to pool their tips with nontipped employees as long as a tip credit was not taken and the servers were paid minimum wage.). This allowed employers to set up employment arrangements that incentivized and rewarded the entire line of service.

In 2011 the DOL enacted a strict rule in direct conflict with the holding in Woody Woo. The DOL ruled that all tips received by employees must be retained by the individual employee or shared only among employees who were customarily tipped. As a result of this rule, employers could no longer require mandatory tip pooling with nontipped employees.

Many hospitality groups, including the Oregon Restaurant and Lodging Association, filed a lawsuit against the DOL challenging the agency’s regulations. See Oregon Rest. & Lodging Assn. v. Solis, No. 3:12-cv-01261 (D. Or. June 7, 2013). The lawsuit sought a declaration that the DOL regulations were unlawful and inapplicable to restaurants and hospitality groups that pay employees at least the federal or applicable state minimum wage with no tip credit.

The DOL argued that if there were no restrictions on an employer’s use of its employees’ tips when it does not utilize a tip credit, then an employer could require employees to turn over all their tips to pay the minimum wage or for any other purpose. The U.S. District Court of Oregon noted that although the DOL’s statement may be true, “[i]n an industry where tipping is the norm, employers who force tipped employees to surrender all of their tips would remove a major incentive for good service.” The court ultimately held the DOL’s rule invalid to the extent it purported to address tips where there was no tip credit being claimed.

The decision provides employers in the federal district of Oregon more flexibility in tip pooling arrangements. The decision, however, could have a wider impact on the tip pool discussion nationally, especially if employers in the hospitality industry continue to challenge the DOL’s regulations.

For more information about this and related matters, see our hospitality, hotel and leisure practice.