Tip Pooling Limited to Chain of Service

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.

Etheridge v. Reins International California, Inc. (2009) 172 Cal.App.4th 908, 922

This seems obvious, no? And this reasoning was presented only after the Court had painstakingly performed a “real world” analysis about the dining experience. Only then did they reach the above conclusion that kitchen staff can share in a tip pool under California Labor Code, § 351. And based on this reasoning, 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.

And the Ninth Circuit Court of Appeals in Cumbie v. Woody Woo, Inc., (9th Cir. 2010) 596 F.3d 577 , 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 held that since section 203(m) under the Fair Labor Standards Act was silent in restricting employers in states that do not take tip credits and the U.S. Department of Labor ("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.  

Thus. 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.

Yet, unfortunately, the matter was not closed. 

Chain of Service Limitation

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.) 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.

The rule was challenged by restaurant associations from Oregon and Washington. Furthermore, the rule was used by workers in Nevada to prevent Wynn casino from sharing tips with non-service staff. The restaurant associations and Wynn lost. Both trial court decisions were appealed.

On February 23, 2016, a sharply divided panel of the Ninth Circuit Court of Appeals (which covers the states of California, Nevada, Oregon, Washington, Arizona, Alaska, Idaho, Montana and Hawaii) ignored its prior precedent issued in 2010 and upheld the 2011 DOL rule change. The majority concluded that the Fair Labor Standards Act’s (FLSA) “clear silence as to employers who do not take a tip credit has left room for the DOL to promulgate the 2011 rule and rejected the notion that the appeals court itself had foreclosed the agency’s ability to do so by virtue of its 2010 decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). This decision means that even in states where no tip credit exists that employers can no longer mandate a tip pool distribution that includes employees who are not in the chain of service or have direct contact with customers i. e. cooks, dishwashers. These employees are by this decision are prohibited under the regulation from being part of a mandatory tip pool.  Oregon Restaurant and Lodging Association v. Perez, 816 F.3d 1080 (9th Cir. 2016)).

A petition for rehearing en banc before the full panel of Ninth Circuit judges, rather than the usual three, was requested. On September 6, 2016, the Ninth Circuit denied the petition.

Take this Matter to the Supreme Court!

Ten of the judges from the full panel of the Ninth Circuit joined in a sharply worded dissent. In it, they laid out a path for a potential appeal to the U.S. Supreme Court. Specifically, the Oregon Restaurant decision is directly at odds with a similar decision in the Fourth Circuit Court of Appeals (Trejo v. Ryman Hospitality Props.,Inc., (4th Cir. 2015) 795 F.3d 442.) Due to this “circuit split”, the National Restaurant Association, the National Federation of Independent Business and other hospitality groups filed briefs to join the Wynn’s prior petition for writ of certiorari to the U.S. Supreme Court. Presently, the U.S. Supreme Court is waiting on a response from the DOL, due by May 20.

Ultimately, it will be up to the U.S. Supreme Court to decide on whether to take up the petition. If so, they will decide whether the DOL acted within its statutory authority when it barred restaurants from including kitchen staff in tip pools. 

Practical guidelines for compliance 

Presently, a company located in the jurisdiction of the Ninth Circuit, which includes California, is no longer allowed to impose a tip pool that allows employees who are not directly in the line of service to be a part of a tip pool arrangement. “Back of the house” employees like cooks, kitchen staff, and dishwashers who have no contact with the customer going forward are barred from sharing in a tip pool even in a state where the tip credit does not apply. The pending appeal before the U.S. Supreme Court may change this law but for now, mandatory tip pools cannot include members of the team without any direct contact with the customer.

As a result, going forward, employers should take the following steps to limit liability on tip pooling claims:

  1. Only include employees who actually contribute to the chain of service and per industry custom regularly are subject to receiving tips. Such individuals typically include those who provide direct service to the customer. However, the chain of service industry custom and case law does support employees with even limited direct customer contact to receive a smaller percentage of the tip pool as the industry custom has evolved to a recognition of these employees being essential to the chain of service. For example, cooks who prepare food in front of the customers or dishwashers who also serve as food runners might be allowed to be part of the mandatory tip pool.
  2. Rely more on what the employee actually does in his/her job versus their job title. For example, an employee carrying the title of “waitress” whose only job is to prepare food outside the view of patrons or without personal contact with patrons will likely not be in a tip pool. Also an employee who has greater contact with the customer should receive a greater percentage of the tip pool than employees who have less direct interaction with the patron.
  3. Do not distribute any portion of a mandatory tip pool to any manager or supervisor, even if that manager or supervisor provides direct table service and/or the tip was left by the patron specifically for that individual.
  4. Make sure that the tip pool is distributed to participating employees in a reasonable manner, proportionate with the employees’ direct interaction with the customers.
  5. Review your current tip pooling arrangement and revise it as needed to comply with this new decision.

Possible Alternatives

While best practices dictates either toeing-the-line on tip-pooling, as stated above, or abandoning the practice altogether until the U.S. Supreme Court provides some clarity, there are some potential work arounds. Specifically, an enterprising restauranteur could alter their receipts to add a line item allowing the patron to designate who the tip is for. Or, the restauranteur could have multiple tip lines – one for service and one for kitchen.

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 § 203(m), or the DOL rule.

However, this has not been litigated. Furthermore, patrons at the restaurant 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.  

Please keep in mind that eliminating tips in place of a "service charge" is not a clean alternative. A 2012 IRS rule indicated that a “service charge” is taxable revenue event for the restaurant. Any money paid from the “service charge” collected by the restaurant must be taxed, including employer payroll taxes, at the time of distribution to the employee. Moreover, there are local ordinances that likely dictate how a “service charge” must be distributed.  

For more specific questions, as to prevention and allowable tip pooling policies, it is important to consult competent legal counsel who understands both the hospitality industry and wage and hour issues and can analyze those issues given your specific circumstances and policies.