U.S. Appellate Court Permits Practice of Tip-Pooling

In a decision that will be well-received by hospitality and tourism employers, the U.S. Court of Appeals for the Ninth Circuit has held that employers that do not take a tip credit against the federal minimum wage when paying their employees can lawfully implement tip-pooling arrangements.  In Cumbie v. Woody Woo, Inc. (pdf), No. 08-25718 (Feb. 23, 2010), the appellate court rejected the argument that a restaurant's use of a tip pool that redistributed a portion of its wait staffs' tips to kitchen employees violated the Fair Labor Standards Act (FLSA).  The FLSA requires an employer to pay its employees a certain minimum wage, but recognizes in its definition of "wage" that under certain circumstances, employers of "tipped employees" may include part of such employees' tips as wage payments.  An employer must pay a tipped employee a cash wage of at least $2.13 per hour, but if the cash wage is less than the federal minimum wage (currently $7.25), the employer can make up the difference with the amount an employee receives as tips, often referred to as the "tip credit."

The plaintiff in Cumbie had argued that the employer was in violation of section 203(m) of the FLSA, which provides that an employer may not take a tip credit unless the employer informs employees of the FLSA's tip credit provisions and allows the employee to retain all tips earned, except where the employee participates in a tip pool with other customarily tipped employees.  The employer had instituted a tip-pooling arrangement by which servers combined their tips, a portion of which was then distributed to other hourly employees who did not receive tips.  The remaining portion was then paid to the servers in proportion to their hours worked.  Because the employer shared the tips with kitchen staff, the plaintiff claimed that the employer was in violation of the FLSA.

The employer in Cumbie, however, did not take a tip credit, and paid its servers at or above the state's minimum wage, which was more than the federal minimum wage.  The Ninth Circuit held that the FLSA does not restrict tip pooling when no tip credit is taken.  The court further noted that an employment practice does not violate the FLSA unless the FLSA expressly prohibits it.  Since "nothing in the FLSA purports to restrict employee tip-pooling arrangements," the employer's practice was deemed lawful.

For more information on this case and suggestions for employers that choose to implement tip-pool arrangements, continue reading The Ninth Circuit Clears the Way for Tip-Pooling Arrangements by Laurent R.G. Badoux and Jennifer L. Mora.