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Earlier this summer, the Oregon District Court invalidated Labor Department regulations that prohibited employers from collecting and redistributing employee tips among all employees, including traditionally non-tipped employees, even when the employer does not claim a tip credit under the Fair Labor Standards Act. An understanding of the FLSA鈥檚 requirements for compensating tipped employees is paramount to fully understand the ramifications of the court鈥檚 ruling.

The FLSA requires all employers to pay their employees at least minimum wage. However, the FLSA has an exception for tipped employees. The FLSA provides that the minimum wage requirement for tipped employees in most states 鈥� but not Oregon 鈥� can be met through what is called a 鈥渢ip credit.鈥�

A tip credit allows the tipped employee to be paid $2.13 per hour (rather than the full minimum wage rate) plus the additional amount the employee earns in tips, such that his or her total compensation is equal to or exceeds the federal minimum wage rate. If the tips are not enough to cover the difference between the lower $2.13 wage and federal minimum wage, the employer must supplement the wages so that the tipped employee makes at least the minimum wage.

Oregon, however, explicitly prohibits tip credits. Therefore, tipped employees in Oregon must be paid minimum wage, regardless of the amount of tips they receive.

The tip credit provision of the FLSA also provides that all tips received by an employee must be retained by that employee, unless that employee participates in a tip pooling agreement with other employees who customarily and regularly receive tips whereby the tips received by those employees are pooled together than divided amongst them.

Such customarily tipped employees include servers, bartenders, and bussers. Under this provision of the FLSA, tip pool agreements that also include kitchen staff 鈥� the so-called 鈥渂ack of the house employees,鈥� such as cooks, dishwashers and janitors 鈥� are prohibited when the employer also claims a tip credit.

So, what about tip pooling agreements when no tip credit is claimed by the employer?

In 2010, in a case out of Portland, the Ninth Circuit addressed tip pooling agreements among all employees when a tip credit is not claimed by the employer. In that case, Cumbie v. Woody Woo Inc., the Portland employer paid its waitresses minimum wage and did not take a tip credit (consistent with Oregon law).

The employer maintained a policy that required its employees to pool tips and divided them among all employees, including dishwashers and kitchen staff. The plaintiff, a waitress, took umbrage with the policy and sued for the ability to keep 100 percent of her tips. The Ninth Circuit upheld the restaurant鈥檚 tip pooling agreement, holding that the FLSA limitation on tip pooling 鈥� that is, that only those employees who customarily and regularly receive tips may participate in tip pools 鈥� applies only if the employer is taking the tip credit toward minimum wage.

In 2011, following the Woody Woo decision, the DOL issued updated regulations concerning tip pooling under the FLSA. In those regulations, the DOL attempted to counter the decision in Woody Woo. The Ninth Circuit had determined that the FLSA did not impose any restriction on the use of employees鈥� tips when no tip credit is taken.

The DOL decided to fill the gap left in the statutory scheme by the Legislature鈥檚 鈥渟ilence鈥� on that issue. The DOL therefore issued regulations stating that 鈥渢ips are the property of the employee whether or not the employer has taken a tip credit.鈥�

The regulations further provided that tip pools can only include those employees who customarily and regularly receive tips, even if a tip credit is not used. Several restaurant and lodging associations and other interested parties (including a server) filed suit in the District of Oregon to challenge the validity of those regulations.

In Oregon Restaurant Lodging Association, et al. v. Hilda Solis, et al., the Oregon District Court held that the FLSA does not impose any restrictions on an employer鈥檚 use of tips when the employer is not taking a tip credit. Rather, the FLSA only imposes limitations on those employers who take a tip credit.

In cases where tip credits are taken, tips belong to the employee who received them absent a valid tip-pooling agreement only among those employees who customarily and regularly receive tips. In reaching its decision, the court determined that the Woody Woo case and the plain language of the FLSA left no room for DOL discretion in attempting to expand the reach of the FLSA through its regulations.

So, where does this leave employers whose employees receive tips?

Even though tip credits, which are permitted under federal law, are expressly prohibited by Oregon law entirely, Oregon law does permit tip pooling. This recent decision allows Oregon employers (as well as other employers who do not use tip credits) to enter into agreements with their employees to combine all tips received into a pool that is redistributed among all of the employee, even those who are not customarily tipped. Employers must be sure that all tip-pooling agreements are in writing and prominently posted in the workplace.

聽Sean Ray is an attorney with Barran Liebman LLP, where he advises and represents employers, including restaurants, in labor and employment matters and disputes. Contact him at 503-276-2135 or [email protected].