The Ninth Circuit Court of Appeals recently overruled itself and held that employers are no longer able to require their tipped employees to pool and share their earnings with non-tipped employees, even if the employer does not take a tip credit.
Tip pooling is the practice of requiring tipped employees, like restaurant servers or bartenders, to pool their tips together. These tips are then divided out, and each member of the tip pool receives a share. When employers engage in tip pooling, they must still make sure that their employees receive at least the minimum wage. To do this, employees keep the amount of tips needed to reach the hourly wage for however long he or she worked, and then combine any tips in excess of that amount with the tips of the other employees.
Under the federal Fair Labor Standards Act (FLSA), employers can pay tipped employees less than minimum wage by taking a tip credit. The tip credit means that the employee’s tips are used to make up the full minimum wage. For instance, an employer taking a tip credit may pay a bartender only $2.13 an hour, the federal minimum wage for tipped employees. As long as the employee’s tips add up to at least $7.25 an hour, which is the full federal minimum wage, then the employer is in compliance with federal law. If these tips do not add up to the state and federal minimum wage, then the employer must make up the difference.
If a worker does not earn the full minimum wage, FLSA mandates that he or she keeps all of the tips and tip pooling is not allowed. Tip pooling can only happen if the employer does not take a tip credit. In California, employers are not allowed to take a tip credit at all, and all employees must earn more than the California and federal minimum wage. As a result, tip pooling is generally allowed in California and in other places where tipped employees are paid the full minimum wage.
However, in the case of Oregon Restaurant & Lodging Ass’n v. Perez, the Ninth Circuit Court of Appeals put restrictions on this rule. The case turned on whether employers who paid the full minimum wage to tipped employees could require these employees to share their tips with workers who were not customarily tipped. In other words, could a restaurant which pays servers the full minimum wage require these servers to share their tips with kitchen employees who are not normally tipped?
Previously, the Ninth Circuit had held that this type of arrangement was legal so long as the employer did not take a tip credit. However, shortly after the previous cases were decided, Congress changed the language of the FLSA. The new restrictions on tip pooling were extended to all employers, whether or not they took a tip credit.
As a result, the Ninth Circuit held that changes in the language of the FLSA meant that all employers, regardless of how much they paid their tipped employees, cannot require their servers, bartenders, or other tipped workers to pool and share their income with non-tipped employees.
As stated above, California state law requires tipped employees to be paid the full minimum wage and employers are not allowed to take a tip credit. However, Section 351 of the California Labor Code had previously been interpreted to allow reasonable tip pooling arrangements that benefitted non-tipped staff. After the Ninth Circuit’s ruling, it is likely that these types of arrangements will no longer be legal throughout the state.
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