Federal Department of Labor regulations have long prohibited employers from requiring that servers, hostesses and bartenders pool a portion of their tips to share with other restaurant employees such as bussers and cooks. For years, the hospitality industry assumed that this restriction was tied to the employer’s use of the tip credit in order to pay the reduced minimum wage applicable to tipped employees. In response, some restaurants abandoned the tip credit, paying employees the full minimum wage, but then requiring that they share tips with employees restricted under the DOL rules.

In 2011, DOL adopted new regulations that applied its tip pooling restrictions to all employees, whether or not the employer claims the tip credit. Last week, the Ninth Circuit Court of Appeals upheld this rule in a 2-1 decision, reversing two lower court decisions in favor of the employers. In Oregon Rest. & Lodging Ass’n v. Perez, the court concluded that DOL has the statutory authority to restrict tip pooling regardless of whether the employer claims the tip credit. The FLSA is silent on this point, and therefore DOL has the authority to interpret the statute to protect employees. The dissenting judge stated that the relevant portion of the FLSA and prior precedent tied the tip pooling rule to the optional tip credit election.

If followed by other appellate courts, this decision would foreclose employers’ ability to supplement the wages of ineligible employees through a portion of customers’ tips. A number of states restrict tip pooling, and these requirements are unaffected by the federal litigation. The Supreme Court recently agreed to review another Ninth Circuit decision that upheld DOL rules under the FLSA (this time in the automobile dealers industry) that appear at odds with longstanding interpretation of the statute. This decision could prompt the Court to conduct a similar review of this latest Ninth Circuit opinion.