March 23, 2010
by William Pilgrim
The 9th U.S. Court of Appeals handed down a ruling on February 26 that could be a blow to tipped employees. In the case of Cumbie v. Woody Woo, Inc. the court ruled that tip-pooling is legal in Oregon as long as an employee is paid more than the federally prescribed minimum wage and the tips are not used as credit towards paying that wage.
Under federal regulations tip pools can only include “customarily tipped employees” generally excluding kitchen staff, like dishwashers or cooks, who do not normally receive gratuities from patrons.
Misty Cumbie was a waitress at the Portland restaurant the Vita Cafe. Woo forced his wait staff to pool their tips, 55-70% of which went to back-of-house staff like cooks and dishwashers. The rest was redistributed to the wait staff based on their proportion of hours worked. Cumbie, represented by labor attorney Jon Egan, argued that this tip-pooling arrangement was “invalid” because the bulk of a server’s tips went to non-tipped employees. The Secretary of Labor agrees.
The Secretary filed an amicus curiae brief on behalf of Cumbie. In the brief, the Secretary reaffirmed earlier precedent that “tips, as sums presented to tipped employees by a customer ‘as a gift or gratuity in recognition of some service performed’…are the property of the employee.”
At issue is the concept of a “tip credit.” Federally, and in 43 states, employers are allowed to apply a percentage of an employee’s tips towards the employer’s minimum wage obligation. An employee’s cash wage, plus the tips they earn, must meet or exceed the federally prescribed minimum.
Oregon does not allow employers to take a tip credit so Woo argued, successfully in this case, that federal tip pool rules do not apply.
The Secretary stated that, “if the tipped employees did not receive the full federal minimum wage plus all tips received, they cannot be deemed under federal law to have received the minimum wage `free and clear,’ and the money diverted into the invalid tip pool is an improper deduction from wages that violates section 6 of the [Fair Labor Standards] Act.” At the hearing, Maria Van Buren, United States Department of Labor, Washington, D.C., argued on behalf of the Secretary of Labor in support of Cumbie.
The court’s opinion, written by Judge Diarmuid F. O’Scannlain, rejected Cumbie and the Secretary’s argument outright, calling their “interpretation of the regulation as plainly erroneous and unworthy of any deference.” Woo was supported by amicus curiae brief from law firm of Davis Wright Tremaine LLP, Portland, Oregon, on behalf of the Oregon Restaurant Association, as well as an additional brief from the Nevada Restaurant Association.
O’Scannlain further noted that, “The FLSA does not restrict tip pooling when no tip credit is taken. Therefore, only the tips redistributed to Cumbie from the pool ever belonged to her,” contrary to the Secretary’s interpretation. The Court concluded that, ” the FLSA does not prohibit Woo’s tip-pooling arrangement does not thwart this purpose…Naturally, [Cumbie] would prefer to receive all of her tips, but the FLSA does not create such an entitlement where no tip credit is taken.”
The ruling was a “first impression” for the court, and sets a precedent that could potentially be applied in other states that don’t have a tip credit. As long as there is a consistently applied, preexisting arrangement between an employer and employee tip pools are valid. As a condition of being hired, an employer can require an employee to participate in a tip pool, either through a written agreement or as an expressed and consistently applied rule.
An employer cannot take the tips for himself, but can force employees to redistribute those tips and subsidize the wage of non-tipped employees or even managers. The Oregon Restaurant Association (ORA) is advising employers not to extend tip pools to management staff but notes the ruling “did not expressly prohibit the practice.”
The Oregonian reports that, ORA spokesman Bill Berry said he doubted the ruling would have much impact on Oregon restaurants. But we beg to differ.
As of now, your tips are not your tips until they are redistributed to you. Cumbie stresses that the issue is not whether tipped workers share their tips with other hard-working coworkers. The issue is that workers, and not owners, should be in control of the tips they receive.
Attorney Jon Egan is still pushing to have the case heard by a wider court. He says: “We are disappointed in the three-Judge Panel’s decision. In ruling that employers are free to confiscate and redistribute employees’ tips to back-of-the-house workers, the Panel went against over 35 years of consistent published Department of Labor tip pooling opinions that interpret the Fair Labor Standards Act (the federal law regulating minimum wages and overtime, originally passed by Congress in 1938 and amended many times since then).”
Cumbie’s last hope is to have the case judged en banc. Cumbie and Egan are currently petitioning, and “if a majority of judges vote to take the case up en banc, then a larger panel of 11 judges will be assigned to consider the case from scratch.”
The case may be in limbo, but the ORA notes, “The US Department of Labor does not have to apply the ruling of a District Court, but does have to apply the ruling of a Circuit Court.” We’ll have to wait to see the true impact.