The Ninth Circuit recently reinvigorated a 2011 tip-pooling rule, allowing the regulations of employers who use the practice despite steering clear of the FLSA’s “tip credit” provisions.

FLSA, “Tip Credit,” and Tip Pooling

The Fair Labor Standards Act of 1938 is one of the most complex and little understood federal laws governing the various aspects of labor in this country. One of the provisions nestled in the language of the Act (added in 1974) allows employers to fulfill their hourly minimum wage obligations by using an employee’s tips. This practice is known as the “tip credit” and is generally allowable — with limitations.

One of the limitations requires that the employer inform the employees that it intends to engage in tip crediting. Another requirement is that the affected employees must all agree to throw all of their tips together to be shared among all the “traditionally tipped employees.”

Unlawful Tip Crediting

As can be expected, unscrupulous employers have attempted to bend the law at the edges. One of the more common ways of doing so was to include typically non-tipped employees, such as cooks. The DOL and FLSA have traditionally prohibited this practice.

Ninth Circuit’s Expansion of Applicable Law

Less clear, up till this point, was the DOL’s jurisdiction over those employers who opted out of taking a credit, paid a full minimum wage, but which forced their employees into tip pools that also included cooks and other typically non-tipped employees.

In a rather meandering opinion, the Ninth Circuit ruled 2-3 to overturn the previous court decision in Nevada and Oregon that said “no” to the above legal issue. Such pooling arrangements directly contravene the intended purpose of Congress. “We find that the purpose of the FLSA … [doesn’t] support the view that Congress [wanted] employer’s who didn’t take a credit to do whatever they wish with their employee’s tips,” Judge Harry Pregerson wrote for the majority.

The circuit also expanded the Department’s authority. In the view of the Ninth Circuit, DOL may regulate tip pools who do not take tip credits to backhandedly lower their minimum wage obligations.

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