The U.S. Department of Labor’s (DOL’s) limits are tip pools are valid, the 9th U.S. Circuit Court of Appeals—which covers Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington—reaffirmed September 6, denying a request for it to reconsider its opinion on the issue.

An accompanying dissent, however, laid out a road map for the employer to seek U.S. Supreme Court review, according to one expert who says we haven’t seen the last of this case.

Background

The regulation in dispute prohibits employers from forcing tipped employees to share gratuities with untipped employees. DOL issued the rule in 2011 to close a loophole that allowed employers to arrange such a pool as long as it also paid the employees involved minimum wage. (The Fair Labor Standards Act (FLSA), under certain circumstances, permits employers to use workers’ tips as a credit against the minimum wage.)

In 2012, stakeholders challenged the regulation and two district courts found that it was invalid. DOL’s ability to issue the 2011 rule was foreclosed by the 9th Circuit’s prior ruling in Cumbie v. Woody Woo, Inc. (596 F.3d 577) that the FLSA’s limits on tip pools clearly only applied to employers taking a tip credit, the district courts explained.

The cases were consolidated and, on appeal, the 9th Circuit reversed the lower courts’ rulings. The Cumbie court “did not hold that the FLSA unambiguously and categorically protects the practice in question,” the appeals court said in OregonRestaurant and Lodging Association v. Perez (816 F.3d 1080 (9th Cir. 2016)) earlier this year. “Rather, we held that ‘nothing in the text purports to restrict’ the practice in question.”

Rehearing en banc

The Oregon Restaurant and Lodging Association requested a rehearing en banc—with the 9th Circuit’s full panel of judges, rather than the usual three.

The court denied the petition but Judge Diarmuid F. O'Scannlain dissented and nine other judges joined his dissent. O’Scannlain said that the majority equated the FLSA’s silence with an invitation for DOL to regulate. It reached the “startling conclusion” that DOL can prohibit any workplace practice that Congress has not protected, he said.

The FLSA “is ‘silent’ about whether employers who do not take a tip credit may require tip pooling, just like it is ‘silent’ about whether I can require my law clerks to wear business attire in chambers,” O’Scannlain wrote. “Does that mean the Department of Labor is free to prohibit them both? Of course not; obviously, the FLSA cannot serve as a source of authority to prohibit activities it does not cover[.]”

The 9th Circuit’s ruling arguably puts it at odds with the 4th Circuit (Trejo v. Ryman Hospitality Props.,Inc., 795 F.3d 442 (4th Cir. 2015)). But “circuit split” does not adequately describe the situation that the 9th Circuit created in Oregon Restaurant and Lodging, O’Scannlain continued. “It is more like we have spun out of the known legal universe and are now orbiting alone in some cold, dark corner of a far-off galaxy, where no one can hear the scream ‘separation of powers.’”

Employer takeaway

“I suspect we have not heard the last of this case,” Shlomo D. Katz told HR.BLR.com^®. “Ten judges joined a dissent from the Court's refusal to grant a rehearing, and their strong dissent provides a road map for the employer if it wishes to seek U.S. Supreme Court review.”

Katz, counsel at Brown Rudnick LLP and contributing editor of BLR’s FLSA publications, also noted the Supreme Court has been particularly receptive to arguments of DOL overreach in recent years. He pointed out, however, that a major critic of such DOL action—Antonin Scalia—is no longer on the court.