SAN FRANCISCO (Legal Newsline) -- In a win for tipped employees and a blow to businesses in the restaurant and hospitality industry, the U.S.Court of Appeals for the Ninth Circuit recently refused to rehear a case regarding a controversial tip-pooling regulation.

The U.S. Department of Labor’s (DOL) rule essentially prohibits businesses from requiring employees to share their tips even if the tipped employees are paid minimum wage. The panel of 10 circuit court judges dissented from the court’s decision not to take the case up on a full panel appeal. 

Those states that must continue to follow the rule include California, Nevada, Washington, Arizona, Oregon, Idaho, Montana, Hawaii and Alaska.

In 2011, the DOL stated that the Fair Labor Standards Act (FLSA) prohibits employers from allowing non-tipped employees from sharing in a tip pool. The Ninth Circuit said that the FLSA actually could permit tip pooling, since no employees were using the tip pool as a credit against minimum wage. 

That opinion prompted the Labor Department to revise its regulation to state that tips are the “sole property” of the tipped employee and cannot be used in a pool to share with back house staff.  

That revised regulation was challenged in Oregon Restaurant and Lodging Association v. Perez, but in that case, the Ninth Circuit upheld the DOL rule, backpedaling on its previous decision. 

That’s when the group of employers requested a full panel of Ninth Circuit judges revisit the decision. The rejection to rehear the case led Judge Diarmuid O’Scannlain to rebuff the decision.

According to the dissent, lower federal courts in Georgia, Utah and Maryland have violated the DOL regulation, a New York federal court also has strongly criticized it and the Ninth Circuit is alone in its decision to uphold the rule.  

Rochelle Nelson, an attorney with the Seattle office of Fisher Phillips, said it’s interesting and indicative of the deep divisions within the Ninth Circuit regarding how judges responded. Fisher Phillips is a national law firm specializing in labor and employment.

“Judge Dean Pregerson declined to give much more than a nod to another Ninth Circuit panel’s earlier decision in Cumbie,” Nelson told Legal Newsline

“He merely notes that Cumbie pointed out a silence within the FLSA and that the DOL properly exercised its authority in interpreting the FLSA when it created the 2011 regulation to fill that void. 

"Otherwise, the case was as simple as finding that the agency acted within its rulemaking authority in that its interpretation was reasonable, and therefore, should be accorded Chevron deference.”

Nelson said the dissent may prompt the U.S. Supreme Court to accept a request to review the issue.

“With such a significant number of dissenting judges joined by some legal heavyweights like Diarmuid O’Scannlain and Consuelo Callahan, the Supreme Court may very well be interested in taking this case,” she said. 

“It also creates a circuit split, deviating from the Fourth Circuit’s 2015 decision on the same issue. O’Scannlain wrote the Cumbie decision that the Perez decision ignores. 

"The ruling upsets the rule of orderliness. This rule is a version of stare decisis that binds the panels within the Ninth Circuit to honor earlier panel decisions, even where one panel happens to fiercely disagree with an earlier decision. 

"The rule is designed to maintain continuity within the circuit. From the dissenter’s perspective, the panel in Perez simply ignored the requirement.”

But unless the ruling is overturned by the Supreme Court, restaurants and hospitality businesses in the Ninth Circuit's jurisdiction will need to reconfigure how they distribute tips. If they continue to use a tip pool, they must ensure that other staff, including line cooks, busboys and dishwashers do not participate. 

One option is to charge customers a mandatory service fee and not use a tipping system. Nelson indicated there is a good chance the Supreme Court will hear it.

“The case involves not just FLSA interpretation but, on a broader level, it implicates basic constitutional and administrative law principles and creates a circuit court split,” she said. “It will be a tempting case for review.”

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