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March 2010

Restaurant 'Tip Pool' That Gives Greater Proportion of Tips to Kitchen Staff is Valid When Employer Does Not Take Tip Credit

Cumbie v. Woody Woo, Inc.

The U.S. Court of Appeals for the Ninth Circuit recently provided guidance on whether it is valid under the Fair Labor Standards Act ("FLSA") for restaurants to require its servers to participate in a tip pool which redistributes some of the servers' tips to the kitchen staff.

In Cumbie v. Woody Woo, Inc., plaintiff Misty Cumbie was a waitress at the Vita Caf? (owned and operated by Woody Woo, Inc.) in Portland, Oregon. She earned a minimum wage (at or exceeding the federal minimum plus a portion of daily tips). Woo required its servers to contribute their tips to a "tip pool" that was redistributed to all restaurant employees (the largest portion of which was the kitchen staff, who are not customarily tipped in the restaurant industry). Managers and Woo did not participate in the tip pool.

Cumbie filed a putative collective and class action against Woo, alleging its tip-pooling arrangement violated the minimum-wage provisions of the FLSA, 29 U.S.C. § 201 et seq. The district court dismissed the complaint for failure to state a claim.

On appeal, Cumbie argued that because Woo's pool included employees who are not "customarily and regularly tipped employees," 29 U.S.C. § 203(m), it was "invalid" under the FLSA, and Woo was therefore required to pay her the minimum wage plus all of her tips. Woo argued that because it did not claim a "tip credit," the tip-pooling arrangement was permissible, so long as it paid Cumbie minimum wage, which it did.

The appellate court referred to Williams v Jacksonville Terminal Co., 315 U.S. 386 (1942), which established the default rule that an arrangement to turn over or redistribute tips is presumptively valid. The Williams case established the following rule: in the business where tipping is customary, the tips, in the absence of an explicit contrary understanding, belong to the recipient. Id. at 397. The appellate court also analyzed 29 U.S.C. § 203(m) of the FLSA, under which an employer may take a partial tip credit toward its minimum-wage obligations only if: (1) the employer informs the employee of the tip-credit provisions in § 203(m); and, (2) the employer allows the employee to keep all of her tips, except when the employee participates in a tip pool with other customarily tipped employees.

The Department of Labor requires minimum wage be "paid finally and unconditionally or 'free and clear,' and forbids any 'kick back'?to the employer or to another person for the employer's benefit the whole or part of the wage delivered to the employee." 29 C.F.R. § 531.35. Cumbie argued that her forced participation in the tip-pool was an indirect kick-back to the kitchen staff for Woo's benefit. The court noted that, whether a server owns her tips depends on whether there existed an agreement to redistribute her tips that was not barred by the FLSA. Here, there was an agreement to redistribute Cumbie's tips, by virtue of the tip-pooling arrangement. Thus, this was an "an explicit contrary understanding" to the rule that tips belong only to the recipient, as outlined in the Williams case. Only the tips redistributed to Cumbie from the pool belonged to her. The court expanded on this by noting that even assuming the tips belonged to her, they were not wages because Woo did not take a tip credit. The court concluded that the arrangement to redistribute the tips was not barred by the FLSA because Woo did not take a tip credit.

The court made it clear that an employment practice does not violate the FLSA unless the FLSA prohibits it, and nothing in the FLSA restricts employee tip-pooling arrangements when no tip credit is taken.

Employment Law

Tamar Karaguezian
Debra Ellwood Meppen

Employment Law