Federal Court Strikes Down DOL Rule Change That Classified Tips as Property of Employees
By Lawrence E. Dubé
A federal district court in Oregon June 7 held that a Labor Department regulation prohibiting an employer from taking or distributing employee tips even when the employer does not claim a tip credit under the Fair Labor Standards Act is inconsistent with the federal wage and hour law and is therefore invalid (Oregon Rest. & Lodging Ass’n v. Solis, D. Or., No. 12-cv-1261, 6/7/13).
Granting summary judgment to the Oregon Restaurant and Lodging Association, the National Restaurant Association, and several associations and businesses that challenged provisions of a 2011 amendment to DOL regulations, Judge Michael W. Mosman of the U.S. District Court for the District of Oregon found that Section 3(m) of the FLSA, which covers compensation of tipped employees, “imposes conditions on employers that take a tip credit but does not impose a freestanding requirement pertaining to all tipped employees.”
Mosman said the DOL rule change, which would prohibit an employer from using tips even if it paid employees at or above the statutory minimum wage, is inconsistent with the text of the FLSA and a 2010 interpretation of the law by the U.S. Court of Appeals for the Ninth Circuit.
Validity of 2011 Rule Changes at Issue
The court said until 2011, employers could agree with tipped employees to combine them with nontipped workers in a single “tip pool” that would share tips collected from customers or patrons. The practice, the court wrote, “allowed employers to set up employment arrangements that incentivized and rewarded the whole line of service, including employees, like cooks and dishwashers, who were not customarily or regularly tipped.”
“Tips are the property of the employee whether or not the employer has taken a tip credit under section 3(m) of the FLSA. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in section 3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.”
The rule changes also added language (29 C.F.R. § 531.34) that mandatory tip pools can only include employees who regularly and customarily received tips, and said “an employer … may not retain any of the employees’ tips for any other purpose.”
In amending its FLSA regulations, DOL exercised a “general conferral of rulemaking authority within its substantive field,” Mosman said. But he found that under Chevron USA Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), the first question for a court examining the validity of the agency action is whether Congress has “directly spoken to the precise question at issue.”
Ninth Circuit Earlier Examined FLSA Tip Provision
“Fortuitously,” the court said, the Ninth Circuit already considered the statutory provision on tips and examined “the very question presented herein.”
In Cumbie v. Woody Woo Inc., 596 F.3d 577, 15 WH Cases 2d 1590 (9th Cir. 2010) (36 DLR A-7, 2/25/10), Mosman said, an employee argued that Section 3(m) of the act entitled her to retain all of her tips unless the employer had established a valid tip-pooling arrangement that included only tipped employees. The employee argued that she was entitled to retain her tips whether or not the employer elected to claim a tip credit against its minimum wage obligation under the FLSA.
The Ninth Circuit rejected the employee’s position, finding that the “clear” and “plain” language of Section 3(m) of the act “imposes conditions on taking a tip credit and does not state freestandingrequirements pertaining to all tipped employees.”
“A statute that provides that a person must do X in order to achieve Y does not mandate that a person must do X, period,” the Ninth Circuit said in Woody Woo.
Court Agrees DOL View Inconsistent With Act
DOL argued that under Woody Woo, Section 3(m) applies only to employers that take a tip credit. Contending that the court decision was silent concerning employers not taking a tip credit, the agency argued that Section 3(m) was at least ambiguous and DOL’s interpretation of the act was entitled to judicial deference.
Mosman said the Ninth Circuit “didn’t buy it,” and he said “Woody Woo leaves no room for agency discretion here.”
“[B]ased on the clear and unambiguous text of the statute, the Court found that Congress intended only to limit the use of tips by employers when a tip credit is taken,” Mosman wrote. “This is not silence. This is repudiation.”
Mosman said even if he were free to disregard the view of the Ninth Circuit, he would reach the same conclusion about the intent of Congress.
Calling Section 3(m) clear and unambiguous, he agreed with the view expressed in Woody Woo that if Congress wanted to provide that tips remain the property of an employee unless they are included in a valid tip pool, it could have made it clear without referring to the tip credit.
Employer Has Option If Not Claiming Tip Credit
Under the FLSA, Mosman observed, Section 6 of the act, 29 U.S.C. § 206, establishes an employer’s general obligation to pay the minimum wage, while Section 3(m) defines the term “wage” and then allows an employer to claim a tip credit in satisfying the minimum wage obligation.
“The relationship between these provisions implies that Congress has given employers a choice: either pay the full minimum wage free and clear of any conditions, or take a tip credit and comply with the conditions imposed by Section 3(m),” Mosman wrote, adding that “[u]nder either scenario, the employee’s right to the federal minimum wage is protected and the purposes of the FLSA are fulfilled.”
The court said the DOL amendments challenged by the restaurant and lodging association “prohibit the use of tips by an employer even when the employer does not take a tip credit–i.e., even when the employer pays at least the full minimum wage.”
Finding that “the new regulations do not protect covered workers from substandard wages or oppressive working hours, nor do they vindicate any of the FLSA’s specific statutory protections,” Mosman said “I presume that Congress intended not to add a new statutory protection guaranteeing a tipped employee who receives the full minimum wage the additional right to retain all tips, except where she participates in a ‘valid’ tip pool.”
Court Calls Congress Clear, Not Silent, on Issue
Finally, Mosman said, he was not persuaded by DOL’s argument that if Congress failed to explicitly address an employer’s use of tips when no tip credit is claimed, he should consider the silence of the legislature “the end of my inquiry.”
“The Court’s ability to discern Congressional intent is not so limited,” Mosman wrote. “Congressional silence often signifies unclear intent. But not here. Employing traditional tools of statutory construction, as I have done above, the intent of Congress in Section 3(m) is clear: Congress intended to impose conditions on employers that take a tip credit but did not intend to impose a freestanding requirement pertaining to all tipped employees.”
Concluding “the new regulations are invalid,” the court granted summary judgment in favor of the restaurant association and against DOL.
Nicholas M. Beermann and W. Robert Donovan of Jackson Lewis in Seattle, and Paul DeCamp in the firm’s Reston, Va., office, represented the Oregon Restaurant and Lodging Association and additional plaintiffs. Justice Department attorneys Tamra T. Moore in Washington, D.C., and Ronald K. Silver in Portland, Ore., represented DOL.
Text of the opinion is available at http://www.bloomberglaw.com/public/document/Oregon_Restaurant_and_Lodging_Association_et_al_v_United_States_D.