U.S. DOL Suffers Set Back on Tip-Pooling Regulations

A federal district court recently invalidated regulations issued by the U.S. Department of Labor (DOL) that prohibit employees from including non-tipped employees in a tip pool in certain situations. In the case of Oregon Restaurants and Lodging v. Solis, the judge ruled that the DOL exceeded its rulemaking authority with regard to the tip-credit provisions of the Fair Labor Standards Act (FLSA) when it issued the provisions in 29 C.F.R. § 531.52, 531.54, and 531.59. These three provisions, which the DOL issued in 2011, prohibit employers that do not take a tip credit from contracting with their tipped employees to establish a tip pool that includes non-tipped employees. The court acknowledged that the FLSA did not explicitly address an employer’s ability to use employees’ tips when the employer does not take a tip credit. The court nevertheless rejected the DOL’s arguments that the FLSA was ambiguous or was silent and that its regulations addressed the implicit “gap” in the statute. In addressing this issue, the court stated:

Congressional silence often signifies unclear intent. But not here. Employing traditional tools of statutory construction . . . the intent of Congress is clear: Congress intended to impose conditions on employers that take a tip credit but did not intend to impose a freestanding requirement pertaining to all tipped employees.

In reaching its decision, the court relied upon the 2010 decision of the Ninth Circuit Court of Appeals in Cumbie v. Woody Woo, Inc. There, the appellate court ruled that a restaurant did not violate the FLSA by requiring its wait staff to participate in a tip pool from which kitchen staff received a portion of tips. The Ninth Circuit had rejected the same argument that the DOL made in the Oregon Restaurant case—that employees retain all their tips, regardless of whether the employer takes a tip credit, except in the limited situation in which a valid tip pool exists. In its 2011 final rule containing the tip-pool regulations, the DOL rejected the court’s reasoning in the Woody Woo case, stating that its interpretation of the FLSA filled the “gap” in the FLSA as to an employer’s ability to use an employee’s tips when the employer does not take a tip credit. However, the Oregon Restaurant court rejected the DOL’s position because the DOL exceeded its authority under the FLSA.

In the Oregon Restaurant case, the judge analyzed the DOL’s 2011 final tip-pooling rules to determine whether they were entitled to deference under the Supreme Court decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. First, the court acknowledged that the DOL had the general rulemaking authority to issue the challenged regulations. The court then turned to the question of whether Congress had addressed the precise question that the regulations were intended to answer, noting that if Congressional intent was clear, then the court and the DOL must effectuate the “unambiguously expressed intent of Congress.” Relying in part on the Woody Woo decision, the court analyzed the wording of the FLSA and found it to be clear and unambiguous. Congress intended for the FLSA to limit the use of tips by employers, it observed, only when the employer takes a tip credit such that an employee is allowed to retain all their tips except when there is a valid tip-pool arrangement. The court reasoned that, if Congress had wanted employees to retain all their tips, except where a valid tip pool is established, then it would not have needed to include the language about taking a tip credit.

Also, the court looked at the purpose of the tip-credit provisions in the FLSA, which gives employers a choice—either to pay a cash wage and take a tip credit to equal the minimum wage or to pay the full minimum wage. Under either option, an employee would receive the federal minimum wage. The court further reasoned that Congress did not intend to add the protection of guaranteeing an employee who is paid the minimum wage the right to retain all tips, except where a valid tip pool exists. Finally, the Oregon Restaurant court rejected the DOL’s argument that Congress left a “gap” or that it was “silent” and the regulations filled the gap or addressed the silence. The court stated that Congressional silence may suggest unclear intent, but not in this case. Rather, Congress clearly intended to limit an employer’s use of tips only as to employers that take a tip credit, but did not intend to impose such limitations on all tipped employees who are paid the minimum wage.

While this case may not be as far-reaching as some would like, it is an important decision. Notwithstanding efforts or claims by the DOL’s Wage and Hour Division to minimize its impact (since it is only one district court decision), the case is significant for employers that do business in states, such as Oregon and California, which prohibit an employer from taking a tip credit. The practice of sharing tips with non-tipped employees is reaffirmed as a legitimate business model to compensate and incentivize all employees to provide good service. More broadly, it indicates the willingness of the federal courts to act as a check-and-balance on the regulatory activities of agencies when they exceed their statutory authority. As agencies’ rulemaking activities grow, it is important that they exercise their power to regulate within their statutory authority and the intent of Congress. The case, as noted, also provides a good resource for arguments that Congressional “silence” is not necessarily an invitation to an agency to make rules; that is a useful tool for future litigation in other cases challenging an agency’s promulgation of rules.