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DOL May Promulgate New Regulations, FLSA Section 203(m) Regarding Tip Pooling Extended to Employers Who Do Not Take a Tip Credit.

Oregon Rest. & Lodging Ass’n v. Perez, 816 F.3d 1080 (9th Cir. Feb. 23, 2016)

Under Section 203(m) of the Fair Labor Standards Act of 1938 (FLSA), an employer may take a tip credit against minimum wage by (1) giving notice to employees, and (2) instituting a valid tip pool. A tip pool is valid if it only includes employees who are “customarily and regularly” tipped.

In 2010, the Ninth Circuit Court of Appeals held in Cumbie v. Woody Woo, Inc. 596 F.3d 577, 583 (9th Cir. 2010) that Section 203(m) did not restrict the tip pooling ability of employers who did not take a tip credit against minimum wage because the statute was silent as to that issue. (The employees in Cumbie complained that the employer’s tip pool included employees who were not customarily tipped.) In 2011, the U.S. Department of Labor (DOL) revised 29 C.F.R. § 531.52, in compliance with the Administrative Procedure Act (APA), changing it from:

In the absence of an agreement to the contrary between the recipient and a third party, a tip becomes the property of the person in recognition of whose service it is presented by the customer.

To read:

Tips are the property of the employee whether or not the employer has taken a tip credit under section [20]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 [20]3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.

The Oregon Restaurant panel reviewed the 2011 regulation under the two-step analysis in Chevron, U.S.A., Inc. v. Nat. Res. Def. Counsel, Inc., 467 U.S. 837, 842-44 (1984): (1) did Congress directly address the issue set forth in the regulation, and if not, (2) did the agency’s rule comply with “a permissible construction of the statute,” so long as it was not “arbitrary, capricious, or manifestly contrary to the statute,” and concluded the 2011 rule was valid. Under step one of the analysis, the Oregon Restaurant court repudiated the employer’s argument that the Cumbie decision stood for the proposition that the DOL could not regulate the tip pooling practices of employers who did not take tip credits.[i] Rather, the Ninth Circuit acknowledged that the authority upon which it had relied in Cumbie did not preclude the DOL from enacting future regulations,[ii] subject to Chevron deference, and now that the CFR language had changed, employers who did not claim a tip credit could be bound by Section 203(m) of the FLSA.

Under Chevron step two, the Ninth Circuit found that the 2011 rule was not “arbitrary, capricious, or manifestly contrary to the statute,” that the DOL had considered the Cumbie decision during the APA-mandated comment period, and that the legislative history of the FLSA supported the language of the agency’s new rule and complied with Congressional intent behind the purpose of the statute, or, at the very least, the DOL’s statutory construction was reasonable.

Because the 2011 rule withstands Chevron review, Section 203(m) may now apply even to employers who do not claim a tip credit against minimum wage.

[i] See also Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs. (“Brand X”), 545 U.S. 967, 980-82 (2005); Oregon Restaurant drew a distinction between the Brand X holding that a prior court’s construction of a statute “trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion,” and the issue in this case, finding that Cumbie had been decided because the Court of Appeals found the pre-2011 Section 203(m) was silent as to employers who did not take a tip credit, and that therefore there was room for the DOL to promulgate a new regulation.

[ii] Christensen v. Harris Cty, 529 U.S. 576, 588 (2000).