A New Threat to Tip Pooling

Robert Fried is a senior partner with Atkinson, Andelson, Loya, Ruud & Romo, with a state and national litigation and policy practice that serves the hospitality and natural products industries. Robert can be reached directly at 925-2515-8515 or rfried@aalrr.com.

On February 23, 2016, the Ninth Circuit Court of Appeals decided Oregon Restaurant and Lodging Association v. Perez (9th Cir. 2016) 2016 WL 706678. Stated simply, the Court held that United States Department of Labor’s expanded enforcement rules on tip pools applied regardless of whether the state jurisdiction had lawful tip credits.

Oregon has been widely reported as invalidating a wide range of expansive California tip pooling plans, as well as raising concerns about the many novel approaches to back of the house and front of the house compensation models that have been implemented in recent years. While the real impact of the decision is much more narrow because California law already follows the least restaurant friendly rules on tip pooling, there has been a lot of innovation in the industry as to front of the house back of the house compensation models that may face new litigation simply because of the incentives created by this new decision.

Summarizing my personal sense of the industry as a litigator, two primary questions stand out:

1) Does this decision mean that people should revisit their tip pooling policy now to ensure that back of the house staff is not included, and

2) If a meal receipt adds a second tip line for the kitchen/back of the house, does that pose a problem?

Answers so far:

(1) A tip pooling plan that is limited to employees in the “chain of service” remains lawful, as long as the plan itself is carefully written and enforced.

For example, a maître de or restaurant manager or chef is arguably, by definition, not in the chain of service where that is viewed as a narrowly defined chain of actual table service events.

The back of the house can be different. A busser who actively participates in setting or updating a table with ordered food and wine while the patron is seated is directly participating in service in concert with existing wait staff. In one example that is now much more likely to be challenged, a restaurant might choose to include the back of the house based on an older California case that said that a busser – or even a dishwasher – could be in a tip pool because they are in the overall process of providing the plate.

Houses have changed too. Today’s restaurant is influenced by customer service expectations fueled by the growth in the televised food industry. Restaurants regularly move the back of the house into the service area, whether in plating dishes, demonstration kitchens or salad or appetizer service.

There is no question that such whole house tip pools require close review by counsel now.

(2) Line item designation for front and back is also coming into use. Oregon does not address the point per se, but there is growing controversy concerning whether any designated tip splitting amounts to a facially unlawful tip pool, if the chain of service tests are not met. Putting that plainly, the label on check is helpful but not conclusive.

Summary

This is the time when turning to industry experienced wage and hour counsel is basic due diligence. In addition to the two primary questions posed, there is already growing litigation nationally concerning whether mandatory service charges are actually tips, rather than monies that belong to the house. The latter position is still federal law, and the California Labor Commissioner has followed it. However, legislative changes in New York and elsewhere, as well in banquet and cruise line service challenge that on the assumption that the test should be whether the worker thinks the service charge is theirs. Accordingly, to the extent that tip pools include such service charges, the natural mixture of front and back of the house in those situations, including chefs, servers and bussers, may be subject to renewed challenge on the same basis as other mixed staff tip pools.

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