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May 03, 2010
Restaurant’s Tip Pooling at Center of FLSA Case
Many restaurants require restaurant servers to participate in "tip pools" that distribute a portion of their tips to kitchen staff. The Ninth Circuit Court of Appeals (which covers California) has just ruled that such arrangements are legal, but employers need to watch out for a few potential pitfalls.

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Servers Sue over Tip-Pooling Arrangement

"Christie" was a server at the Vita Café in Portland, Oregon. She and other servers earned $2.10 an hour more than the federal minimum wage. They were required to contribute their tips to a tip pool that distributed 55 percent to 70 percent of the money to kitchen staff, including cooks and dishwashers. The remainder of the money was split among the waitstaff in proportion to hours worked.

Christie and other servers filed a class action lawsuit against the café, alleging that the tip-pooling arrangement violated the minimum wage provisions of the federal Fair Labor Standards Act (FLSA). She argued that the FLSA requires employees to keep all their tips, except in cases in which a tip pool rewards employees who are "customarily and regularly tipped employees"—this would not include kitchen staff, who are generally not tipped.

Christie also argued that her forced participation in the tip pool violated federal regulations that required she be paid her wages "free and clear" of any kickback to her employer. The money diverted into the tip pooling, she argued, was an indirect kickback to the kitchen staff for the café's benefit.

Finally, she argued that the restaurant was using the tip pool as a "tip credit," which allows an employer to pay tipped employees an hourly wage of $2.13 as long as the employer makes up the difference whenever an employee's hourly pay (wages plus tips) falls short of the federal minimum wage. Tip credit arrangements are permitted by the FLSA but illegal in Oregon.

The café, on the other hand, argued that this was not a tip credit arrangement because Christie and the other servers were already being paid more than minimum wage even before tips were taken into account. Accordingly, the FLSA's prohibition against sharing tips with employees who were not regularly tipped (such as the kitchen staff) did not apply.

The Ninth Circuit sided with the café, noting that Christie was receiving "a wage that was far greater than the minimum wage plus a substantial portion of her tips." Only the tips redistributed to Christie from the pool ever really belonged to her, and her pool contributions did not reduce her wages below the statutory minimum. The court affirmed the judgment of a lower court in favor of the café.

Considerations for California Employers

So what does this case mean for restaurant employers in California? Like Oregon, California prohibits tip credit arrangements. This means you cannot use tips to reduce your obligation to pay employees the applicable minimum wage. Additionally, California Labor Code Section 351 provides that a gratuity is the “sole property of the employee or employees to whom it was paid, given, or left for” and cannot be taken or shared by an “employer or agent.”

If you're considering a tip-pooling policy, it's important to consider both the law and your staff-management goals. On the legal side, do not include managers or other employees who could be considered their agents in the tip pool.

You may, however, include kitchen staff and bartenders in the tip pool—this can encourage employees who do not participate in direct table service to provide a better level of service, as they will share in the financial rewards left by satisfied customers. But if the percentage going to the kitchen staff is too large, it can create dissatisfaction among your waitstaff. Cumbie v. Woo, Inc., 9th Cir. Court of Appeals, No. 08-35718, (2010)

Practice Tip
Consider both the law and your staff-management goals if you're deciding whether to implement a tip-pooling policy.

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