9th Cir.: Tip Pool That Required Tipped Employees To Share Tips With Non-Tipped Employees Did Not Violate FLSA, Because Restaurant Paid Tipped Employees Cash Wages In Excess Of Minimum Wage And Did Not Claim Tip Credit

Cumbie v. Woody Woo, Inc.

This case was before the Ninth Circuit to decide whether a restaurant violates the Fair Labor Standards Act, when, despite paying a cash wage greater than the minimum wage, it requires its wait staff to participate in a “tip pool” that redistributes some of their tips to the kitchen staff.  The Court ruled that such a tip sharing arrangement does not violate the FLSA.

Describing the tip pool at issue, the Court said, “[Plaintiff] worked as a waitress at the Vita Café in Portland, Oregon, which is owned and operated by Woody Woo, Inc., Woody Woo II, Inc., and Aaron Woo (collectively, “Woo”). Woo paid its servers a cash wage at or exceeding Oregon’s minimum wage, which at the time was $2.10 more than the federal minimum wage. In addition to this cash wage, the servers received a portion of their 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 the tip pool (between 55% and 70%) went to kitchen staff (e.g., dishwashers and cooks), who are not customarily tipped in the restaurant industry. The remainder (between 30% and 45%) was returned to the servers in proportion to their hours worked.”

The Court below dismissed Plaintiff’s Complaint on Defendant’s 12(b)(6) Motion, holding that Plaintiff failed to state a claim for minimum wages, because she acknowledges she was paid in excess of minimum wage, but challenged the legality of Defendant’s tip pool nonetheless.  This appeal ensued.

“On appeal, [Plaintiff] argue[d] that because Woo’s tip 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 argue[d] that Cumbie’s reading of the FLSA is correct only vis-à-vis employers who take a ‘tip credit’ toward their minimum-wage obligation. See id.”  Defendant, argued that, “[b]ecause [it] did not claim a ‘tip credit,’ it contends that the tip-pooling arrangement was permissible so long as it paid her the minimum wage, which it did.”

Affirming the lower Court’s decision, finding the pay policy at issue to be legal, the Ninth Circuit discussed the applicable law:

“Williams establishes the default rule that an arrangement to turn over or to redistribute tips is presumptively valid. Our task, therefore, is to determine whether the FLSA imposes any “statutory interference” that would invalidate Woo’s tip-pooling arrangement. The question presented is one of first impression in this court.

Under the FLSA, employers must pay their employees a minimum wage. See29 U.S.C. § 206(a). The FLSA’s definition of “wage” recognizes that under certain circumstances, employers of “tipped employees” may include part of such employees’ tips as wage payments. See id.§ 203(m). The FLSA provides in relevant part:

In determining the wage an employer is required to pay a tipped employee, the amount paid such employee by the employee’s employer shall be an amount equal to- (1) the cash wage paid such employee which for purposes of such determination shall be not less than the cash wage required to be paid such an employee on August 20, 1996; and (2) an additional amount on account of the tips received by such employee which amount is equal to the difference between the wage specified in paragraph (1) and the wage in effect under section 206(a)(1) of this title.

The additional amount on account of tips may not exceed the value of the tips actually received by an employee. The preceding 2 sentences shall not apply with respect to any tipped employee unless such employee has been informed by the employer of the provisions of this subsection, and all tips received by such employee have been retained by the employee, except that this subsection shall not be construed to prohibit the pooling of tips among employees who customarily and regularly receive tips. Id.

We shall unpack this dense statutory language sentence by sentence. The first sentence states that an employer must pay a tipped employee an amount equal to (1) a cash wage of at least $2.13, plus (2) an additional amount in tips equal to the federal minimum wage minus such cash wage.  That is, an employer must pay a tipped employee a cash wage of at least $2.13, but if the cash wage is less than the federal minimum wage, the employer can make up the difference with the employee’s tips (also known as a “tip credit”). The second sentence clarifies that the difference may not be greater than the actual tips received. Therefore, if the cash wage plus tips are not enough to meet the minimum wage, the employer must “top up” the cash wage. Collectively, these two sentences provide that an employer may take a partial tip credit toward its minimum-wage obligation.  See29 U.S.C. §§ 203(m), 206(a)(1) (1996).

The third sentence states that the preceding two sentences do not apply (i.e., the employer may not take a tip credit) unless two conditions are met. First, the employer must inform the employee of the tip-credit provisions in section 203(m). Second, the employer must allow the employee to keep all of her tips, except when the employee participates in a tip pool with other customarily tipped employees.

Cumbie argues that under section 203(m), an employee must be allowed to retain all of her tips-except in the case of a “valid” tip pool involving only customarily tipped employees-regardless of whether her employer claims a tip credit. Essentially, she argues that section 203(m) has overruled Williams, rendering tip-redistribution agreements presumptively invalid. However, we cannot reconcile this interpretation with the plain text of the third sentence, which imposes conditions on taking a tip credit and does not state freestanding requirements pertaining to all tipped employees. A statute that provides that a person must do X in order toachieve Y does not mandate that a person must do X, period.

If Congress wanted to articulate a general principle that tips are the property of the employee absent a “valid” tip pool, it could have done so without reference to the tip credit. “It is our duty to give effect, if possible, to every clause and word of a statute.” United States v. Menasche, 348 U.S. 528, 538-39 (1955) (internal quotation marks omitted). Therefore, we decline to read the third sentence in such a way as to render its reference to the tip credit, as well as its conditional language and structure, superfluous. 

Here, there is no question that Woo’s tip pool included non-customarily tipped employees, and that Cumbie did not retain all of her tips because of her participation in the pool. Accordingly, Woo was not entitled to take a tip credit, nor did it. See Richard v. Marriott Corp., 549 F.2d 303, 305 (4th Cir.1977) (“[I]f the employer does not follow the command of the statute, he gets no [tip] credit.”). Since Woo did not take a tip credit, we perceive no basis for concluding that Woo’s tippooling arrangement violated section 203(m).

Recognizing that section 203(m) is of no assistance to her, Cumbie disavowed reliance on it in her reply brief and at oral argument, claiming instead that “[t]he rule against forced transfer of tips actually originates in the minimum wage section of the FLSA, 29 U.S.C. § 206.” Section 206 provides that “[e]very employer shall pay to each of his employees … wages” at the prescribed minimum hourly rate. Id. § 206(a).

While section 206 does not mention tips, let alone tip pools, Cumbie maintains that a Department of Labor (“DOL”) regulation elucidates the meaning of the term “pay” in such a way as to prohibit Woo’s tip-pooling arrangement. She refers to the regulation which requires that the 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. The “free and clear” regulation provides as an example of a prohibited kick-back a requirement that an employee purchase tools for the job, where such purchase “cuts into the minimum or overtime wages required to be paid him under the Act.” Id.

According to Cumbie, her forced participation in the “invalid” tip pool constituted an indirect kick-back to the kitchen staff for Woo’s benefit, in violation of the free-and-clear regulation. As she sees it, the money she turned over to the tip pool brought her cash wage below the federal minimum in the same way as the tools in the regulation’s example. The Secretary of Labor agrees, asserting that “if the tipped employees did not receive the full federal minimum wage plus all tips received, they cannot be deemed under federal law to have received the minimum wage ‘free and clear,’ and the money diverted into the invalid tip pool is an improper deduction from wages that violates section [20]6 of the Act.”

Cumbie acknowledges that the applicability of the “free and clear” regulation hinges on “whether or not the tips belong to the servers to whom they are given.” This question brings us back to section 203(m), which we have already determined does not alter the default rule in Williams that tips belong to the servers to whom they are given only “in the absence of an explicit contrary understanding” that is not otherwise prohibited. 315 U.S. at 397. Hence, 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, such an agreement existed by virtue of the tippooling arrangement. The FLSA does not restrict tip pooling when no tip credit is taken. Therefore, only the tips redistributed to Cumbie from the pool ever belonged to her, and her contributions to the pool did not, and could not, reduce her wages below the statutory minimum. We reject Cumbie and the Secretary’s interpretation of the regulation as plainly erroneous and unworthy of any deference, see Auer v. Robbins, 519 U.S. 452, 461 (1997), and conclude that Woo did not violate section 206 by way of the “free and clear” regulation.

Finally, Cumbie argues against the result we reach because “[a]s a practical matter, it nullifies legislation passed by Congress.” Her argument, as we understand it, is that Woo is functionally taking a tip credit by using a tip-pooling arrangement to subsidize the wages of its non-tipped employees. The money saved in wage payments is more money in Woo’s pocket, which is financially equivalent to confiscating Cumbie’s tips via a section 203(m) tip credit (with the added benefit that this “de facto” tip credit allows Woo to bypass section 203(m)‘s conditions).

Even if Cumbie were correct, “we do not find [this] possibility … so absurd or glaringly unjust as to warrant a departure from the plain language of the statute.” Ingalls Shipbuilding, Inc. v. Dir., Office of Workers’ Comp. Programs, 519 U.S. 248, 261 (1997). The purpose of the FLSA is to protect workers from “substandard wages and oppressive working hours.” Barrentine v. Ark.-Best Freight Sys., Inc., 450 U.S. 728, 739 (1981) (citing 29 U.S.C. § 202(a)). Our conclusion that the FLSA does not prohibit Woo’s tip-pooling arrangement does not thwart this purpose. Cumbie received a wage that was far greater than the federally prescribed minimum, plus a substantial portion of her tips. Naturally, she would prefer to receive all of her tips, but the FLSA does not create such an entitlement where no tip credit is taken. Absent an ambiguity or an irreconcilable conflict with another statutory provision, “we will not alter the text in order to satisfy the policy preferences” of Cumbie and amici. Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438, 462 (2002).

The Supreme Court has made it clear that an employment practice does not violate the FLSA unless the FLSA prohibits it. Christensen v. Harris County, 529 U.S. 576, 588 (2000). Having concluded that nothing in the text of the FLSA purports to restrict employee tip-pooling arrangements when no tip credit is taken, we perceive no statutory impediment to Woo’s practice. Accordingly, the judgment of the district court is affirmed.”

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5 Comments

Filed under Tips

5 responses to “9th Cir.: Tip Pool That Required Tipped Employees To Share Tips With Non-Tipped Employees Did Not Violate FLSA, Because Restaurant Paid Tipped Employees Cash Wages In Excess Of Minimum Wage And Did Not Claim Tip Credit

  1. George

    The ninth circuit is corrupt, plain and simple. How in the world can they suggest that it is legal for an employer to steal the tips given an employee so that the employer can use the money to pay workers who didn’t directly receive tips from customers? The only thing the courts have achieved is they have created a means for employers to indirectly steal the financial benefit of the tips customers are giving some of their employees. By allowing employers an ability to distribute their worker’s tips to all hourly employees, employers have been allowed to treat their worker’s tips as if the tips belong to the employer and may be utilized by the employer to pay all hourly employees. Instead of the tips financially benefiting those to whom they were given, the customer’s tip is transformed into money which employers may utitilize to save themselves money and thus benefit themselves to.

    The ninth circuit’s reasoning that federal laws support the idea that it is legal for employers to confiscate and appropriate the customer’s tip is dishonest and corrupt. Tips are the customer’s private property. To suggest that it is legal for a business owner to confiscate what does not belong to him for the purpose of utilizing the property to pay his hourly workers is absurd and telling as to the intent of the ninth circuit. The ninth circuit obviously has no concern for the property rights of the customer or the property rights of those employees who receive tips directly from customers. All the ninth circuit is focused on is kissing the asses of business owners who desire an ability to steal the money customers are giving some of their workers.

    The ninth circuit has given the customer’s private property, his tip, over to business owners that they might use such private property to pay their staffing costs. This judge should be locked up in prison. Federal laws would not support such corruption. Clearly this judge is making up evidence that does not exist to support this corrrupt ruling.

    I listened to an audio file of this court case and what I heard was a judge making up his own evidence to substatiate his openly biased ruling. During the case the judge continually interupted the plaintiff’s lawyers and witnesses in an effort to proclaim that Woody Woos was not taking or confiscating the tips. The truth of the matter is Woody Woos was taking control of the customer’s tip as if the money belonged to Woody Woo. Woody Woo was deciding how the customer’s tip would be spent. What Woody Woo did was steal the tips customer presented his workers so that Woody Woo could use the money to pay his back of the house workers with the customer’s money instead of his own.

    The judge in this case should be brought up on charges of conspiracy to aid business owners in stealing the customer’s private property. Now businesses across the west can confiscate the customer’s tip and basically utilize it as part of their operating revenues to pay their staffing costs. No wonder the article suggested that business owners should be joyful about the Cumbie ruling, it just gave them a green light to steal the customer’s tip.

  2. George

    It has been stated that “Hence, whether a server owns her tips depends on whether there existed an agreement to redistribute her tips that was not barred by the FLSA”.

    What this means is that judges, rather than the customer, will now determine who the customer’s tip belongs to. Instead of the customer determining who his tip belongs to, this court has ruled that employers will have the right to force employees into an arrangement or so called agreement where employees must give up their
    right to their tips. Hence only the employer will have any authority to decide who the customer’s tip belongs to.

    It was further reasoned that Here, such an agreement existed by virtue of the tip pooling arrangement. The FLSA does not restrict tip pooling when no tip credit is taken. Therefore, only the tips redistributed to Cumbie from the pool ever belonged to her, and her contributions to the pool did not, and could not, reduce her wages below the statutory minimum.

    What this means is that it doesn’t matter who the customer gives his tip to. Employers will now be allowed to confiscate the customer’s tip and use it to pay workers of the employer’s choosing. Only if the employer gives the tips to the employee to whom it was it intended will such tips be viewed as property of the employee to whom the customer intended to tip.

    Is this ruling insane or is it just me?

    How can a judge rule that tips belong to whomever an employer wants to distribute the tips to when federal regulations state the following?

    CFR 531.52

    A tip is a sum presented by a customer as a gift or gratuity in recognition of some service performed for him. It is to be distinguished from payment of a charge, if any, made for the service. Whether a tip is to be given, and its amount, are matters determined solely by the customer, and generally he has the right to determine who shall be the recipient of his gratuity. 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. Only tips actually received by an employee as money belonging to him which he may use as he chooses FREE OF ANY CONTROL BY THE EMPLOYER, may be counted in determining whether he is a “tipped employee” within the meaning of the Act and in applying the provisions of section 3(m) which govern wage credits for tips.

    Please note that CFR 531.52 clearly contradicts the court’s ruling which instructs that tips belong to whomever the employer wants to distribute the customer’s tip to. What the Ninth circuit wants us to believe is that an employer who tells his workers that a tip pool will be in place is authorized to appropriate the customer’s property in any manner the employer wants to appropriate such money.

    In effect the court has ruled that tips belong to the employer. As such, federal laws which explain that it is the sole right of the customer to decide matters concerning his tips will be ignored and such rights from this day forward will fall on the employer rather than the customer. From this day forward, tips will be understood as an amount presented by an employer. Whether a tip is given and it’s amount will be determined solely by the employer rather than the customer. From this day forward tips will be considered the property of the employer BECAUSE………… a despot judge thinks he can simply steal the customer’s property and give it over to whom-ever he wants.

    In this case the judge has given over the public’s private property, their tips, to business owners who in my opionion must have paid off a few people to get such a corrupt ruling.

    The biggest problem I have with this ruling is that this judge obviously wants us to believe that Woody Woo’s forced tip pool was the equivalent of an “agreement to the contrary” as refered to in CFR 531.52.

    While the federal regulation states that 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, this judge wants us to believe that an agreement to the contrary between the recipient and a third party would include a situation where the employer, or third party, was intimidating, threatening or forcing a tip recipient into such an agreement.

    How can the judge suggest that Woody woo had an agreement with it’s workers concerning a tip pool. Woody Woo gave his employees no choice in the matter. Woody Woo mandated that their would be an agreement in place. I do not think that section 531.52 intended to allow for such an arrangement.

    What this judge actually ruled is that an agreement to the contrary, as refered to in CFR 531.52, existed because the judge says it existed. It doesn’t matter if there was actually an agreement between the recipient and a third party. It doesn’t matter if the recipient was opposed to such an arrangement. It only matters that the employer used his power and position of authority to insure that such an arrangement would exist.

    This case must be overturned. Clearly federal regulations contradict such an outragious interpretation of the FLSA. The customer’s tip is private property that no court is authorized to give over to greedy business owners.

  3. George

    How can I not speak out even more against this ruling? This ruling is a perfect example of judges using their power and authority to steal private property for special interests. In this case the special interests are business owners who want to steal their customer’s tips.

    In the Woody Woo case, the judge kept referencing an assumed fact that Woody Woo had an agreement with his employees concerning the tips customers presented. No written contract was produced or entered into evidence. The employees did not testify that they had entered into an agreement concerning their tips. My point is, the judge simply made up evidence and used it to support his ruling. While the judge suggested that tips could become the property of the employer if there was an agreement to such, no such agreement was actually substantiated other than by the judge’s proclamation that such an agreement existed. Obviously, the server who brought this case against Woody Woo, was not in agreement that her tips should belong to Woody Woo.

    I hope that people can begin to realize that our justice system is becoming a vehicle for corruption. Judges can blatantly lie and twist our laws to the point where corruption and injustice can thrive without fear of reprocussions. Business owners are now positioned to steal every penny customers attempt to present workers in the service industry and it’s all legal thanks to the likes of judges such as those who presided over the Woody Woo v. Cumbie hearings.

    While customers are presenting workers billions of dollars a year in tips, our judges are working hard to insure that business owners are able to steal your tips for themselves. Woody Woo v. Cumbie is the final nail in the coffin. Your goodwill and appreciation of the hard working little guy is now dead. Long live those with enough money to pay off our mighty judges.

  4. nameyname

    Hello George, what you fail to understand is the employees agreed upon this distribution, and if the employees do not like it, they should not agree. If you consider this agreement involuntary, well, would you also consider their employment involuntary? Because they are free to not agree just as much as they are free to not be employed in a workplace where they do not want to agree to the tip pool.

    If all employees but one agree to the tip pool, should there be no tip pool? That is something that the people involved need to decide upon; it is the freedom to contract at its finest.

    If you think Woody Woo is being so underhanded maybe they should form a union and collectively bargain in order to present a untied front against all the things you see wrong.

    The ruling didn’t give the judges any power, they were interpreting the legislature. If the interpretation is so horrible, the legislature can update the FLSA. That is the glory of the separation of powers.

    Good luck.

  5. George

    Nameyname, show me the contract. Why are you lying and suggesting that Mistie Cumbie agreed to this tip distribution? How can you say that the employees agreed to the distibution? Mistie Cumbie was in court challenging the contention that she agreed to let her employer share her tips with whom-ever her employer wanted to share her tips with.

    If one employee doesn’t want to participate in a tip pool, then that employee shouldn’t have to participate in the pool.

    What’s quite obvious is, you don’t know a damn thing about tip pools.
    You stated, If all employees but one agree to the tip pool, should there be no tip pool? That is something that the people involved need to decide upon.

    Which people? Don’t you get it? Only the customer should be deciding who his tip belongs to. There shouldn’t be this idea that certain people should be involved determining who the customer’s tip belongs to.

    The truth of the matter is, business owners are confiscating and controlling their worker’s tips and judges are lying and suggesting that the employees agree to it. The truth of the matter is, there was no contract produced as evidence in the Woody Woo case. The judge simply lied in court to suggest that there was evidence to support his ruling.
    As far as the glorious freedom to contract, it’s really not very glorious. Most states are right to work states. Most states are at-will employment. What this means is that they are no contracts for employees unless they unionize and negotiate a contract. So what’s so glorious about something most workers have no abiltiy to obtain. I guess it’s glorious for those of our society who want to exploit others for their own financial gains.

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