April 23, 2018

“Back of House” Tip Pooling Could Land California Employers in Hot Water

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As mentioned in our blog post on the Department of Labor’s (“Department”) new opinion letters clarifying aspects of the Fair Labor Standards Act (“FLSA”), April has seen a lot of changes and clarifications to the FLSA. One topic that has been discussed at length is the practice of tip pooling – which is common in customer-service industries where employees receive tips, such as restaurants and carwashes. The practice of tip pooling requires employees who have the most customer interaction, and typically receive tips, to share a portion of those tips with employees who have less direct interaction with customers, but still contribute to providing the customer’s service.

2011 Regulations and 2017/2018 Response

In December 2017, the Department of Labor (“Department”) raised a public furor after it released a proposed rule to rescind 2011 regulations.  At their most basic, the 2011 regulations forbade employers from taking employee tips. Those regulations also prohibited employers from including back of the house employees – such as dishwashers, line cooks, and other kitchen staff – in tip pools, unless the employer paid at least the full minimum wage.

In response to the 2017 proposed rule, employee advocates claimed that rescinding the 2011 regulations would allow employers to steal employee tips, which raised a public outcry.  In a surprising show of bipartisan cooperation, Congress responded to public pressure by including a modification to the Fair Labor Standards Act (“FLSA”) in the Consolidated Appropriations Act – the 2018 budget bill – stating that an “employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”  Although the language of the amendment is brief, it packs a lot of punch!

Back of the House is Back in the Game!

Here is where we stand now: guidance issued by the Department on April 6, 2018, clarified that the 2018 amendment gives the 2011 regulations “no further force or effect.”  In practical effect, this means that the FLSA once-again allows tip pooling with back of the house staff. However, for such a tip pool to be lawful, all employees must be paid the full minimum wage – the higher under either federal or state law – and no employer, “supervisor,” or “manager” may be included. Employers may not take a federal tip credit for any employees included in the pool.  Also, any pooling arrangement should be proportionate with the amount of direct interaction each employee has with the public. In sum, where no state-specific guidance applies to tip pooling, employers may now include back of the house employees in tip pools.

Supervisor and Manager are Narrowly Defined

The April 6 guidance also explains that “managers” and “supervisors” should be determined using the same criteria used to determine if an employee qualifies as an “exempt executive;” that is, if the employee qualifies for the “executive employee” exception to the FLSA’s overtime requirements. Thus, a supervisor or manager must: (1) engage primarily in management of the “enterprise;” (2) “customarily and regularly” direct the work of two or more employees; and (3) have the authority to hire, fire, or promote employees. Because the exception for managers and supervisors is narrow – the test was written for an overtime exemption, after all – it is likely that most employees will not be considered managers or supervisors, regardless of job titles that imply managerial/supervisorial authority, such as “lead waitstaff” or “head cook”.

Penalties and Further Guidance

Finally, the April 6 guidance explains that the penalty for violating this amended provision of the FLSA is repayment of improperly taken tips, as well as a civil penalty of up to $1,100 per violation – if the violation is determined to be willful or repeated.  Further guidance is on the horizon, as the bulletin notes that the Department’s Wage and Hour Division “expects to proceed with rulemaking in the near future to fully address the impact of the 2018 amendments.” Employers should continue to be vigilant for additional guidance.

California Employers Still Benched

Despite changes to the FLSA – and the buzz surrounding them – tip pools that include back of the house staff are still unlawful in California. California law is clear that employers must pay employees the state minimum wage, and may not offset the employees’ wages with tips received. The law is also clear that tips belong to the “employee(s)” they were left for, not the employer, but allows for mandatory tip pooling with other employees in the “chain of service” to the customer. See Labor Code § 351. However, under a California Department of Labor Standards Enforcement letter from 2005, back of the house workers are not explicitly included in the “chain of service.” That guidance states that “employees who contribute to the service provided to a patron might conceivably include persons such as . . .  waitpersons, buspersons, bartenders, hostesses, wine stewards and ‘front room’ chefs in the restaurant industry.” Until further guidance is issued by the DLSE, employers should not assume that the DLSE’s position has changed, and that including back of house staff in tip pools is appropriate.

Finally, California is also subject to Ninth Circuit caselaw on this subject.  In 2009, a California Appellate court ruled that kitchen staff were included within the “chain of service” and eligible for tip pooling under Section 351. Similarly, in 2010, the Ninth Circuit itself held that back of the house staff could participate in tip pools, as long as the employer did not claim a tip credit. But, the Ninth Circuit’s 2016 ruling in Oregon Restaurant negated the effect of both prior precedents, holding that, under the Department’s 2011 regulations, kitchen and back of house staff may not be included in tip pools.  However, that decision is currently under appeal to the U.S. Supreme Court and may be reversed – potentially paving the way for back of house tip pooling in California.  While this area of law is rapidly evolving, California employers are cautioned not to include back of the house staff in any tip pool until consulting with counsel.

–Stefanie Renaud