Ninth Circuit Court Limits Tip Pooling

Volume 15, Issue 4
March 21, 2016

Many Nevada employers require tipped employees to share tips via a tip pool. Nevada law allows tip pools as long as the employer does not keep any of the tips. Nevada employers are also permitted to decide which employees will participate in a tip pool. Tip pools are addressed under federal law in the Fair Labor Standards Act's (FLSA) tip credit provision. That provision allows an employer to credit a tipped employee's tips toward part of the employer's hourly minimum wage obligation to the employee. The FLSA allows tip credits if the employer gives notice to its employees and allows its employees to retain all the tips they receive, which includes the employees' participation in a valid tip pool. A tip pool is valid under the FLSA if it is comprised exclusively of employees who are "customarily and regularly" tipped.

Nevada law prohibits tip credits by an employer. As such, the FLSA's definition of a "valid tip pool" has seemingly little application to a Nevada employer. Indeed, in 2010 the Ninth Circuit Court of Appeals ruled in Cumbie v. Woody Woo, Inc. that the FLSA's definition of a "valid tip pool" only applies if the employer takes a tip credit. Therefore, an employer who does not use tip credits retained its discretion to choose which employees participate in tip pooling.

In 2011, however, the U.S. Department of Labor (DOL) issued a revised regulation extending the FLSA's definition of a "valid tip pool" to all employers, even those who do not take a tip credit. The 2011 DOL regulation prohibits all employers from using "mixed tip pools" - i.e., tip pools that require traditionally tipped employees to share tips with traditionally non-tipped employees. Under this new regulation, restaurant employees in Oregon and casino employees in Nevada filed lawsuits arguing that their employers' tip pools amongst restaurant servers and kitchen staff (in Oregon) and amongst casino dealers and floor supervisors (in Nevada) violated the FLSA. The local federal courts in Oregon and Nevada disagreed with the employees and found that the 2011 DOL regulation was invalid in light of the Cumbie ruling.

The Oregon and Nevada cases were consolidated and presented to the Ninth Circuit Court on appeal. On February 23, 2016, the Ninth Circuit Court decided that the DOL's regulation was valid, effectively overruling Cumbie. This decision now restricts a Nevada employer's discretion to decide how to structure its tip pools to best facilitate its operational goals. The Nevada employer - Wynn Las Vegas, LLC - has requested a rehearing of this matter.

We will keep you posted on the progress of this case, Oregon Restaurant & Lodging Ass'n v. Perez. In the meantime, if your company uses tip pools, please consider contacting a KZA attorney to discuss how you should proceed.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.