The Fair Labor Standards Act now permits back-of house employees to participate in mandatory tip pools, provided no tip credit is taken against minimum wage. The Consolidated Appropriations Act, 2018 budget bill effectively amends the FLSA to clarify two important points: back of house employees MAY participate in certain tip pools however supervisor/manager/owners MAY NOT participate in tip pools.
How does that affect employers doing business in California?
Labor Code section 351 permits mandatory tip pooling for an employee who provides “direct table service” or who is in the “chain of service.” In 2009, the court in Etheridge v. Reins International California, Inc. (2009) 172 Cal.App.4th 908, 922 held that kitchen staff contribute to the “chain of service” and could receive tips under section 351.
In 2011, the DOL issued a regulation prohibiting back of house employees from participating in tip pools regardless of whether a tip credit was taken. There was litigation over whether the DOL had authority to issue such a regulation, however the Ninth Circuit in Oregon Restaurant and Lodging Association v. Perez, 816 F.3d 1080 (9th Cir. 2016) held that the DOL acted within the scope of their power, effectively invalidating Etheridge and Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010).
Now that the DOL regulations have been reversed by the recently passed budget bill and FLSA amendment, it seems as though the holdings of Etheridge and Woody Woo are back, clearing the way for back of house employee inclusion in tip pools.
But, we are exercising caution before advising clients to change their tip pools. Still pending is an appeal to the Supreme Court in the Oregon Restaurant and Lodging Association case as well as a still valid DLSE Opinion Letter from September 8, 2005 that does not include kitchen staff as part of the “chain of service.” Making changes to your California tip pool at this juncture seems premature as we don’t want you to be the test case.