On February 23, 2016, the United States Court of Appeals for the Ninth Circuit endorsed a rule promulgated by the United States Department of Labor (DOL), which prohibits tip pool policies that allow kitchen staff and dishwashers to participate in tips. (Oregon Restaurant and Lodging Association v. Dept. of Labor, No. 13-35765 and Cesarz v. Wynn Las Vegas, No. 14-15243).
Given this opinion, under Federal Labor Standards Act (FLSA), employers are prohibited from having a tip pool that allows the participation of employees who do NOT “customarily and regularly receive tips.” This overturns two previous cases endorsing tip policies that share tips with kitchen staff. Employers in California, Alaska, Minnesota, Montana, Nevada, Oregon and Washington are advised to review and revise any tip policy which allows kitchen staff to participate in tip pools.
Background
In 2009, a California Appellate Court decision in Etheridge v. Reins International California, Inc. 172 Cal.App.4th 908 (2009) painstakingly performed a “real world” analysis about the dining experience and reached the conclusion that kitchen staff can share in a tip pool under California Labor Code § 351. The Etheridge Court noted,
If the plates on which the food is served are not clean, the food received is not hot, or is not as ordered, the patron may be inclined to leave a smaller tip even when the services of the servers and bussers were satisfactory. Likewise, when the meal is delicious, the presentation on the plates beautiful, and special food requests have been satisfied, the patron may be inclined to leave a generous tip, even when the servers and bussers might not have delivered exceptional service. In short, a patron tips on all of the service received, not simply the service received by employees the patron can see.
Id. at 922. Based on this reasoning and on the premise of fairness, protecting the public and promoting peace and harmony among employees, the court held that waiters and bussers cannot maintain a cause of action against an employer with a mandatory tip-pooling policy that tips any employee who “contribute(s) to the patron’s service, even if not providing direct table service,” (Id. at 923), which includes kitchen staff, as long as the percentage has some rational basis to the overall level of service.
Primarily on the strength of this case, California restaurants who allowed kitchen staff to participate in tip pools grew confident that its tip pools were valid and other restaurants started to implement similar policies to allow kitchen staff to participate in tips. To some employers, this policy promoted harmony among employees in their restaurants. Kitchen staff weren’t resentful that they were not allowed to receive tips even though they participated in the chain of service to the patron.
In 2010, under the FLSA, the Ninth Circuit Court of Appeals in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010) , provided seemingly even more certainty in allowing kitchen staff to participate in tip pools in states that pay minimum wage plus tips and do not take a tip credit. The Cumbie Court first stated that in states that allow tip credits (reducing the minimum wage by the amount of tips) tip pools are only valid if exclusively comprised of employees who are “customarily and regularly” tipped. However, the Cumbie Court held that since section 203(m) was silent in restricting employers in states that do not take tip credits and the DOL had not promulgated any rules with respect to states that do not take tip credits, tip pool policies in those states were permissible even if they included kitchen staff or other staff that are not “customarily and regularly” tipped. This was another victory for employers in states that do not take tip credits against minimum wage and who wanted to share tips with Kitchen staff.
However, in 2008 while the Cumbie and Etheridge cases were being decided, the DOL published a notice of proposed rulemaking regarding sections that governed tipped employees. 7 Fed.Reg at 43,659.[1] In 2011, the DOL promulgated a formal rule, which expressly prohibited the use of a tip pool that tips employees who are not “customarily and regularly” tipped, regardless of whether an employer uses a tip credit. 29 C.F.R § 531.52. This rule called into question both Cumbie in Federal Court and by application of Federal Law in California called into question Etheridge.
DOL Rule Challenged
Given this uncertainty, in Oregon and Alaska, restaurant associations attacked the rule by suing the DOL to stop the DOL from claiming that tip pools that shared tips with kitchen staff were illegal. Meanwhile in Nevada, a casino dealers association sued to prevent Wynn Las Vegas from forcing its dealers to share tips with employees who are not “customarily and regularly” tipped. At the trial level, both courts held that the Cumbie opinion foreclosed the DOL’s ability to promulgate the rule and that the DOL rule was invalid.
The DOL and the Casino Dealers Association appealed arguing that the DOL rule was enforceable. The Ninth Circuit agreed and reversed the trial courts. In doing so, the Court effectively overturned the conclusion of Cumbie that tip pools sharing with kitchen staff were valid.
So what gives? Why did the Court at first endorse tip pools that share with kitchen staff and then reverse itself?
The Ninth Circuit explained that Cumbie did not in fact endorse such tip pools and hold that the DOL cannot regulate tip pooling practices in states that do not allow tip credits. Cumbie just held that there was nothing in the text of Section 203 (m) of the FLSA that prohibited the practice and the DOL had not yet promulgated any rule against the tip policy of sharing tips with kitchen staff to which it needed to show deference. Given this, the tip pool that tipped kitchen staff was neither implicitly nor explicitly disallowed by the FLSA or the DOL and therefore at least back in 2010 was permissible.
However, what had changed from Cumbie (decided in 2010) was that in 2011 the DOL had promulgated a rule which prohibited such tip policies. This meant the Court had to conduct an additional analysis to determine whether the DOL’s prohibition was reasonable. In the Court’s new additional analysis, the Ninth Circuit held that the rule prohibiting tip pools that allow employees who are not “customarily and regularly” tipped to share in tips was reasonable. It came to this conclusion by primarily relying upon 1974 and 1977 legislative history of the FLSA without any discussion of how it is reasonable in the restaurant context or why kitchen staff should not be allowed to participate in tip pools. Ultimately, its decision now means that servers can sue in Federal Court under the FLSA to prohibit employers from mandating that kitchen staff get to participate in a tip pool, regardless of California law.
Practical Implications
Any current tip pool that allows staff who are not “customarily and regularly” tipped should be discontinued. This is clear. The Ninth Circuit’s decision is bit frustrating as it is devoid of any discussion regarding the realities of current restaurant service. It simply relies upon the DOL’s rules and to some degree assumes that there was a rational basis for the DOL to promulgate the rule. It is unfortunate that the Court doesn’t take into consideration, as Etheridge did, that kitchen staff do provide “service” and their participation to some degree most likely influences how much a patron tips.
In fact, some would say there is no rational basis to exclude kitchen staff from getting tips, apart from comments that the chef assistants and dishwasher should be paid higher than minimum wage. While paying the kitchen staff a higher wage might certainly help, the kitchen staff will not be rewarded on the days when the kitchen and floor are acting in perfect harmony, the service is fabulous and the tips generously high. Certainly a tip policy that provides the kitchen staff with a small percentage of the overall tips would go a long way to helping the kitchen staff feel like they are part of the service experience of the consumer, even if they are paid a higher hourly wage.
Recently, there has been a trend to eliminate tips and charge a “service charge.” This could be a possible solution to resolving any perceived conflict between servers and kitchen staff. However, there are economic considerations to be considered in this regard. A 2012 IRS rule indicated that a “service charge” is taxable revenue event and any money paid from the “service charge” to the employee is similarly taxed, including employer payroll taxes. Additionally, there are local ordinances that dictate how a “service charge” must be distributed. Before changing to a “service charge” restaurant, you should consult your attorney and tax accountant.
Another controversial and untested option is to add a line item on the invoice allowing the patron to provide a tip for the kitchen staff and the server staff. Under the FLSA and California Labor Code, the tip is the property of the employee for whom it is left. If a patron leaves a tip for the kitchen staff directly, there doesn’t seems to be any logical reason why this would run afoul of California Labor Code §351, FLSA Section 203(m), or the DOL rule. However, this has not been litigated. Moreover, patrons at restaurants might be confused, and even offended, if they interpret the new “kitchen tip” line as suggesting they should leave a larger tip than they normally leave. Or the patron might get angry that they now need to decide how much to leave to the kitchen as opposed to the server staff. Am I a low tipper to the kitchen because I only give them 5%? Will the waiter and busser be offended when they only get 15%? Why shouldn’t I be able to tip the kitchen something? For the math challenged patron, it also sets up as a nightmare. Needless to say, any implementation of this new line item will certainly take a good marketing campaign to clearly inform the patron as to expectations and perhaps even suggested amounts.
What is clear as of today is that if you have a tip pool policy that tips kitchen staff, you should consult with your attorney to revise the tip policy.
[1] For the uninitiated, the rulemaking process is a lengthy process but if a rule is formally promulgated, the rule is entitled to controlling decisional weight with Courts unless the rule is arbitrary, capricious, or manifestly contrary to the statute.