The U.S. Supreme Court may soon decide whether employers can collect workers’ tips and redistribute them to nontipped employees. Federal regulations currently prohibit this practice but industry groups say the Obama administration overstepped its authority with that rule.

The regulation in question is, according to the National Restaurant Association, an example of the government failing to understand how an industry actually works. “Think about it—kitchen staff works just as hard as servers, bartenders, and other restaurant staff in the front of the house. Why should they be denied tips just because government bureaucrats have decided they don’t deserve them?” said Angelo Amador, executive director of the association’s Restaurant Law Center, announcing the group’s plan to petition the Supreme Court.

Background

The U.S. Department of Labor (DOL) issued its “tip pool” regulation in 2011, prohibiting employers from forcing tipped employees to share gratuities with nontipped employees. The rule was aimed at closing a loophole that allowed employers to operate such a pool as long as it also paid the employees involved minimum wage, as opposed to taking a tip credit against their wages.

Stakeholders challenged the rule in court but the 9th U.S. Circuit Court of Appeals upheld it, finding that nothing in the Fair Labor Standards Act (FLSA) prevents the DOL from adopting such a rule (Oregon Restaurant and Lodging Association v. Perez (816 F.3d 1080 (9th Cir. 2016)).

The plaintiffs asked the full 9th Circuit to reconsider the three-judge panel’s ruling, but the court denied the petition. In a scathing dissent joined by nine other judges, Judge Diarmuid F. O’Scannlain took issue with the majority’s “startling conclusion” that the DOL can prohibit any workplace practice that Congress has not protected.

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, 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.’”

An answer to this question is particularly important for employers because of the liability involved in running an illegal tip pool. The DOL only allows employers to take a tip credit against the minimum wage if any tip pool involved is valid. If a pool is eventually deemed invalid, the employer can owe back minimum wage and overtime pay to all workers involved, in addition to the incorrectly distributed tips. Add double damages to that and it adds up quickly; see Small Tip Pool Violation Creates Big Headache for Employer.

SCOUTS Petition

Now, the Restaurant Law Center has asked the Supreme Court to review the 9th Circuit’s ruling. In its January 19 petition, it requested that the Court answer two questions:

1. Whether the FLSA imposes restrictions on tip-pooling arrangements by employers who pay employees the full minimum wage and do not rely on the tip credit; and
2. Whether a federal agency purporting to implement a statute may through regulation create rights and obligations that the statute does not, so long as the statute does not expressly prohibit the agency’s regulation.

The organization said that O’Scannlain’s dissent, combined with the circuit split, could convince the high court to consider the case.

Amador also said he is hopeful that the Trump administration will have a better understanding of how to work with businesses. “But it will take years to undo the damage done by [the] DOL and [the National Labor Relations Board] in recent years, and we can expect labor unions and other activists to challenge any pro-business policies,” he said.

But even if the Trump administration reverses the DOL’s tip pool position on its own, Amador told BLR® that action from the high court still may be preferable. “A Supreme Court ruling endorsing the decisions from the District Courts in Nevada and Oregon would go much further than any decision by [the] DOL,” he said.

The DOL’s response is due February 23 but parties can, and often do, request extensions, Amador noted.