Client Alert: Amendment to Fair Labor Standards Act Finally Ends Controversy About Including Kitchen Staff in Tip Pools in California

by Beth A. Schroeder

As anyone working in hospitality or following the firestorm on social media knows, there has been a long and often misunderstood path leading up to the final conclusion to this story.

Yes, Virginia, you can now include kitchen workers in your tip pool system.

Nevertheless, as no wage and hour answer is ever quite that definitive, there are qualifiers to that statement. But as this is such a thorny and complicated issue, this article will lay out the complex cobweb of state and federal legislation and case law that has delivered us to this doorstep.

First, Including Kitchen Workers in Tip Pools Under California Law...

Sometimes people forget that California actually IS in the United States, which means that as employers, we need to comply with both state AND federal wage and hour laws. Most of the time, California law is the gnarly one, bringing us such favorites as premium wages for meal and rest breaks, split shift pay, daily overtime and the like. However, California actually cleared the way for including kitchen workers in tip pools first.

California Labor Code Section 351 is the Code Section that controls the area of tips in California, and it decries loud and clear that tips are the property of the employee and may not be touched by the employer. Even with that seemingly unambiguous language, starting with a California appellate case in 1990 called Leighton v Old Heidelberg, the California courts have essentially upheld “reasonable” employer sponsored tip pooling and tip out systems, so long as the employer does not participate in the pool or retain any portion of the tips.

The Old Heidelberg case spelled out the rough formula that courts have used for years about what is considered a “reasonable” tip pool, pointing to certain percentages of the server’s tips and focusing on which other employees can be included. Those employees were defined as those workers who also “touched the table,” since it was presumed that when a patron left a gratuity, it would be left for someone with whom that guest had contact during the dining experience. This group usually included hosts, bussers, and perhaps bar staff.

Over the next few decades, the California appellate courts issued a series of decisions including the Five Feet Restaurant case, providing more guidance on how employees with management duties may not share in a tip out program, and the Chau v Starbucks case, which distinguishes the situation where a shift supervisor is directly tipped by guests, rather than tipped out by other employees.

And then came the Etheridge v Reins International case in 2008, when California decided the issue of including back of the house workers in a tip pool for the first time. The court in Etheridge essentially held that the Leighton test of limiting the tip pool to only those employees who actually touched the table defied common sense. The Etheridge court reasoned that all employees contribute to the guest experience, whether or not they were actually seen by the guest. When the California Supreme Court specifically declined to rule on this case, they essentially blessed the decision as good law. Ten years later, Etheridge remains the law of the land as far as the California Labor Code goes.

Then, Including Kitchen Workers in Tip Pools Under Federal Law...

So as the cases about tip pooling were unfolding in California, federal law was having its own little tip pooling party. But because most wage and hour lawyers in California choose to sue under plaintiff-friendly California law, most of the fun in the Ninth Circuit (the federal circuit governing California) was going on in states like Oregon and Nevada.

The issue of who may or may not be included in a tip pool under federal law, that is, the Fair Labor Standards Act (FLSA), turns in great part on whether or not the employer is taking a tip credit. As California employers are painfully aware, we do not have a tip credit in California, nor do they in states like Oregon or Nevada.

In 2010, the Ninth Circuit court in Cumbie v Woody Woo ruled, in a case out of Oregon, that as long as an employer did not take a tip credit, kitchen employees may be included in a tip pool.

In 2011, the Department of Labor (DOL), under the Obama Administration, swiftly responded by issuing a rule saying expressly that tips are the property of employees only, and that tips may only be shared amongst traditionally tipped employees (front of the house), regardless of tip credit status.

The Oregon Restaurant Association fired back and challenged the ruling, and back to the Ninth Circuit they all went. Finally, in May 2016, we received the Ninth Circuit’s decision that indeed, the DOL’s rule was upheld and tip pools including kitchen workers would not be permitted under the FLSA, regardless of the tip credit.

Enter the Trump Administration, in response to the outcry of restaurant owners who wished to tip out their back of house employees. So now, under the new DOL regime, the Trump administration proposed rolling back the Obama DOL rule to the pre-2011 status, which allowed kitchen workers to participate in a tip pool where there was no tip credit. However, in erasing the Obama Administration 2011 rule, now there was no longer an express statement confirming that the tips belonged solely to the employees. This had been a common sense part of the 2011 rule, and of course, something already mandated by California law under Section 351.

This is what sparked the huge social media outcry that Trump and the DOL were conspiring to allow employers to steal tips. So in a wise move, the DOL put BACK into the proposed rule that part of the rule that confirmed that tips belong solely to employees, but still allowed kitchen workers to participate in a tip pool, so long as the employees receive full minimum wage (no tip credit).

That revised DOL rule was finally made part of the omnibus budget bill passed by Congress and signed by President Trump on March 23, 2018, and has officially amended the FLSA.

As a result, we are now good under California law AND federal law to include kitchen workers in a legitimate tip pool.

SO, What Does all That Mean to You -- Can You Now REALLY Include Kitchen Employees in your Tip Pool?

In a word, a qualified yes. Qualified, because you still need to ensure that your tip pool meets those other tests under law discussed above, for example, that no management personnel participate in the pool, the percentages are “reasonable,” the other personnel who participate are appropriate, and those other factors that the California cases have examined since Old Heidelberg.

Also remember that changing a tip pool to include new workers means that others are not making the same money they once did. There are morale issues that will ensue every time you mess with someone’s take home pay. Don’t treat that lightly. There are already enough tensions between management and staff. Use care when making any kind of changes like these and think through the politics and messaging.

Can the Restaurant Retain any Portion of the Tip Pool?

ABSOLUTELY NOT! This was NEVER allowed under California law, as is explained above, and to the extent this door was arguably left open under the proposed DOL rule, it was closed and locked under the final rule.

Can the Restaurant Implement a Service Charge or Surcharge and Retain a Portion of THAT Money?

Probably yes, as a service charge or surcharge is money that is assessed by the operator and added to the bill, so in theory, it SHOULD belong to the restaurant. HOWEVER, in some locales, like Santa Monica, there are ordinances that dictate what you must do with this money and that all of it must be paid to staff, along with other particulars. There have also been a number of lawsuits brought by both consumers and employees about misleading language or insufficient notice regarding service charges and surcharges, and there are tax implications as well. This article is already too long, so we will leave that discussion for another day. Contact us to discuss this issue if you have any questions.

This was a very long article, and as long as it was, it was still not intended as legal advice. It was really just a general overview of a very complicated subject. If you want legal advice, which we highly recommend, regarding tip pools, tip outs, service or surcharges, wage and hour questions, the Packer offseason moves, or any related issues, please feel free to contact me or any one of my colleagues at Raines Feldman.

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