Hands Off My Money! Ninth Circuit Rules Employers Can't Force Employees to Share Tips with Non-Tipped Employees


By: Brad Adler and Amanda Hall

We have discussed tip-pooling programs in the past.  Generally speaking, the Fair Labor Standards Act (“FLSA”) permits an employer to fulfill part of its hourly minimum wage obligation to tipped employees using the employees’ tips.  This practice is known as taking the “tip credit.”  When an employer takes the tip credit, they must (1) give notice to their employees and (2) allow the employees to retain all of the tips they receive unless the employees participate in a valid “tip pool.”  A “tip pool” is typically only valid if it is comprised exclusively of employees who are “customarily and regularly” tipped.  In other words, the tip pool cannot extend to non-tipped employees, such as back-of-the-house employees (e.g., cooks or dishwashers).

Many businesses, however, do not take the tip credit – either as a result of internal practice or pursuant to state law.  These employers pay their employees minimum wage regardless of the tips they earn.  Although a 2011 Department of Labor regulation says that tips are the sole property of the tipped employee and may not be shared in a pool with non-tipped employees even if the employer does not take the tip credit, the Ninth Circuit Court of Appeals and several lower courts out West (where the tip credit is generally not permitted under state law) had previously held this practice to be permissible. 

On February 23, 2016, however, the Ninth Circuit reversed course (and precedent) and upheld the 2011 Department of Labor regulation and concluded that even employers who do not take the tip credit must follow the tip-pooling rules set forth in the FLSA.  Oregon Rest. & Lodging Assoc. v. Perez, ___F.3d ___, 2016 WL 706678 (9th Cir. Feb. 23, 2016).  Accordingly, employees who receive tips generally cannot be required to share their tips with non-tipped employees even if their employer pays them minimum wage.  Although the decision is expected to be challenged, unless it is overturned, employers within the Ninth Circuit (which includes the states of California, Nevada, Washington, Arizona, Oregon, Idaho, Montana, Hawaii, and Alaska) may need to re-examine their tip-pooling practices. 

Further, although the Ninth Circuit opinion is not binding precedent on other states, employers in other areas who do not take the tip credit should carefully review their tip-pooling procedures to make sure they are compliant with the FLSA.