L-R Alden Parker and Katherine Sandberg, Fisher & Phillips.

Eat it Up: Trump Administration Scraps Obama-era Regulations

The Trump administration's Labor Department announced its intention in December to make tip pooling a legal practice. In essence, the administration stated that it will revoke the Obama administration's rule and allow restaurants to pool tips as they see fit. The change will directly impact employers in California who pay tipped employees the full federal minimum wage.

Background

In general, tips are regarded as the property of the tipped employee, and regulators restrict what employers can and cannot do with tip proceeds as a result. In California, employers may not take any deductions from tips or otherwise use tips as a substitute for hourly wages.

However, tip pooling is a permitted practice in California, although it is subject to restrictions. In the hospitality industry, tip pooling is a common practice whereby tip proceeds are collected from servers and redistributed among other employees, such as bussers and hosts. The Fair Labor Standards Act (FLSA) limits tip pool participation to employees who “customarily and regularly receive tips.” Additionally, California's Division of Labor Standards Enforcement (DLSE) has stated that tip pooling must be “fair and reasonable,” and should be limited to employees who provide “direct table service” or who are in the “chain of service” provided to the customer.

Legal Framework

Under earlier Department of Labor (USDOL) and courts interpretations, these tip pooling restrictions only applied to employers located within tip credit states. California employers assumed that the FLSA tip-pooling restrictions did not apply to them. However, the U.S. Court of Appeals for the Ninth Circuit issued its decision in Oregon Restaurant and Lodging v. Perez, which reinforced the USDOL's 2011 amended regulation that applied tip pooling restrictions to employers who pay their employees the regular minimum wage. The 2011 regulation prohibited tip pooling with nontraditionally tipped employees, including where the employer did not take “tip credits.” The fallout from the 2011 regulation was significant: In fact, multiple restaurant associations sued the USDOL in federal court arguing that the USDOL had exceeded its authority by overturning prior court precedent. The Supreme Court is still deciding whether to review these challenges to the tip-pooling ban.

Courts differed on their treatment of tip pooling after the 2011 regulation was issued. Ultimately, the Ninth Circuit held that the FLSA was silent on employers who do not take the tip credit and that this silence left a gap for the USDOL to fill. The court further stated that the amended regulation expressly prohibited all tip pooling except with employees who “customarily and regularly receive tips.” Thus, the court upheld the 2011 regulation because it was not contrary to, nor an unreasonable interpretation of, the FLSA. Consequently, employers in the Ninth Circuit have been prohibited from pooling tips with employees who do not “customarily and regularly receive tips,” regardless of whether tip credits are taken against minimum wage.

Tipping Under Trump

On Dec. 4, 2017, the DOL issued a Notice of Proposed Rule Making (NPRM), which rescinds the portion of the 2011 regulation that requires employers to adhere to tip-pooling requirements even if they pay employees at or above minimum wage. Although the NPRM can be construed as allowing employers to keep tips, that practice is strictly prohibited in California, and the NPRM states that it does not attempt to interpret state law. Rather, employers will have the ability to share tips among more employees, but must continue complying with California law. Public comment will close on Feb. 5.

Alden Parker is the regional managing partner of the Fisher Phillips Sacramento office. He can be reached at [email protected].

Katherine Sandberg is an associate in the Sacramento office of the firm. She can be reached at [email protected].