The Supreme Court Might Get to Decide If Tip-Pooling Is Legal

Late last week, the National Restaurant Association (often called “the other NRA”) petitioned the U.S. Supreme Court to hear a case to decide if employee tips may be collected by the employer and redistributed or pooled among tipped and/or non-tipped employees. In 2011, in response to a court ruling, the Department of Labor amended the Fair Labor Standards Act (FLSA) to specifically outlaw the practice of sharing tips between tipped employees and non-tipped employees, arguing that employers could use that leniency to pay its traditionally-non-tipped employees a lower minimum wage. In its recent petition, the NRA — which wants tipped and non-tipped employees to be able to share tips — is questioning the DOL’s authority to make changes to those laws.

How does tip pooling work?

Tipped employees in a restaurant setting include front-of-house staff: servers, captains, bussers, bartenders, and runners. Non-tipped employees refer to all back-of-house workers, including chefs, cooks, dishwashers, and porters.

In some states, there is a universal minimum wage; in others, there is a minimum wage and a separate tipped minimum wage. The controversial tipped minimum wage allows employers to pay tipped employees as little as $2.13 per hour, with the understanding that all or a portion of their tips will make up the difference between their sub-minimum wage and the regular state or federal minimum. In order to do this, employers must notify employees of how their wages and tips will be calculated, and claim what is known in the industry as a “tip credit.”

Where this becomes complicated is when a restaurant wants to pool its servers’ tips and redistribute them among the staff. On this topic, the Fair Labor Standards Act currently reads:

Tips are the property of the employee. The employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (“tip credit”) or in furtherance of a valid tip pool.

Meanwhile, the FLSA on tip pools, and what constitutes a valid tip pool:

The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.

Why and how did tip pooling end up in the courts?

The NRA’s petition stems from a 2010 case, Cumbie v. Woody Woo Inc., in which a server in Oregon (where the minimum wage was $8.40 per hour at the time of the case; there is no tipped minimum wage in Oregon) sued her employer because her tips were being pooled between front (tipped) and back-of-house (non-tipped) staff. In that case, the server’s tips were being distributed thusly, as described in the appeal: “The largest portion of the tip pool (between 55 percent and 70 percent) went to kitchen staff (e.g., dishwashers and cooks), who are not customarily tipped in the restaurant industry. The remainder (between 30 percent and 45 percent) was returned to the servers in proportion to their hours worked.”

Cumbie’s argument was straightforward: The FLSA states (29 U.S.C. §§ 203(m)) that tip pooling is valid only when (a) an employer claims a tip credit; (b) an employer tells employees in advance that they will be pooling tips; and crucially (c) tips are shared amongst tipped employees only (i.e. front-of-house staff and not back-of-house staff).

The initial case was dismissed. In the appeal, the court sided with the defendant, Woody Woo Inc. It argued that because (a) Cumbie was paid at least the minimum wage; and (b) knew upon the start of her employment that she would be sharing tips with back-of-house staff, the tip pooling arrangement set forth by Woo Inc. was valid. (That court’s decision was later overturned; more on that below.)

What else is at stake?

But the bigger argument Woody Woo Inc. successfully made — and the one the NRA wants upheld according to its petition — is that Congress did not grant a specific statute under which the Department of Labor can make such rules or amendments to the law: In other words, who gave the DOL the authority to make these rules, anyway? Various cases related to other parts of the FLSA have fixated on what powers the regulators at the DOL do or do not have; this argument isn’t a new one. But the petition does give the Supreme Court a reason to reassess the laws and pertinent cases and make a final call, which, if it happens, could in theory upend judgements in dozens of legacy cases.

In the Cumbie v. Woody Woo Inc. case, the Department of Labor — under then–Secretary of Labor Thomas Perez — disagreed with the appeal, writing in 2011 that “if there are no restrictions on an employer’s use of its employees’ tips... the employer can... mandate that employees turn over all of their tips and use those tips to pay the minimum wage or for any other purpose.” In other words, according to the DOL’s reading of the Cumbie v. Woody Woo Inc. ruling, a restaurant could pay a cook — a non-tipped employee — less than minimum wage, collect tips from a server and, as long as the server made minimum wage, use a portion of those tips to make up the pay to the cook. The DOL specifically sought to prevent employers from withholding and redistributing employee tips for the purposes of making up the wages of non-tipped employees.

DeCamp and the Restaurant Law Center’s executive director Angelo Amador clarified in an email that in their current argument to the Ninth Circuit, “not a single one of the plaintiffs in this case advocates restaurants keeping tips... We stated very clearly... during oral argument that if the only thing DOL did here was to ban restaurants from keeping some or all of the employee tips, we would not have filed the case. This case is, and always has been, purely about restaurants being able to have tip pools that also include kitchen staff. That's it.”

But the court’s ruling is in fact so open to interpretation, according to the DOL’s notes on updating the FLSA, that it could be argued that an employer may collect tips from tipped employees — as long as it paid them minimum wage, did not claim a tip credit, and informed them of the practice in advance — and tip out the chef, or even management. Reached by phone, Paul DeCamp — council of record for the Restaurant Law Center, a legal division of the NRA — said assuming the prerequisites were in order, an employer could even keep a portion of the tips “for the house itself.” Though this isn’t the intent of the NRA’s petition, this under-publicized loophole remains.

How does this fit in with the current tipping conversation?

In 2011, the DOL further amended the rule to specify “valid mandatory tip pools... can only include those employees who customarily and regularly receive tips,” and that “an employer must notify its employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each employee ultimately receives, and may not retain any of the employee’s tips for any other purpose.” In February 2016, the Ninth Circuit Court overturned the Cumbie ruling, officially referring to the DOL’s version of its tipping regulation: It is illegal to pool tips with non-tipped employees.

But Cumbie v. Woody Woo Inc. is not the first or only lawsuit that has sought to clarify or overturn these rules, which is why DeCamp believes the Supreme Court petition for his case may just have a chance. Restaurants have been trying to side-step the labor department’s rules for years, mostly in good faith and for the purposes of sharing front-of-house wealth with the hard-working and highly-skilled back-of-house. A couple of years ago, LA-based chef Zach Pollack added a kitchen tip line to every check, thereby giving diners an opportunity to bump up the take-home pay of cooks and dishwashers.

Most notably, NYC-based restaurateur and Shake Shack mastermind Danny Meyer announced in 2014 that he would be eliminating gratuity from his restaurants altogether by raising menu prices and paying front- and back-of-house staff salaries that compensated them based on merit, not the arbitrary generosity of individual guests. In a recent interview, Meyer explained his reasoning for evolving his business out of its dependence on tips in blunter terms:

What is a tip? It’s a multiplier of menu pricing and as menu prices have gone up, so too has the multiplier over the course of my career which is now 30, 31 years. Tipped employees, happily for them, are making about 300 percent of what they were 31 years ago. During that same period, everyone in the kitchen — the dishwasher, non-tip eligible employees — have seen their hourly income go up about 20 percent.

With minimum wages on the rise across the country, the topic has become a hot-button issue for restaurants. In 2015, the National Restaurant Association came out against raises for fast-food workers and the Fight for $15, a grassroots movement that seeks to raise the wages of workers in several industries, including hospitality. One reading of the NRA’s recent petition could be that it’s hoping a relaxing of FLSA regulations will make it easier for the industry to meet increasing labor costs by giving restaurateurs more options for how to manage tips and meet wage obligations.

But what if the new administration under (proposed) incoming Secretary of Labor Andrew Puzder, a Republican in favor of deregulation, seeks to relax those rules — referencing the same statutes the DOL did in its 2011 revisions — without waiting for a Supreme Court interpretation? Now, that would be interesting.

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