Oregonpic.gifAuthored by Steve Shardonofsky

A federal judge in Oregon recently gave the Secretary of Labor a very important tip:  Just because the FLSA appears to be silent on a particular issue does not give the U.S. Department of Labor authority to fill the gap with regulations.  In a June 7, 2013 opinion [here], a district court ruled that the DOL’s April 2011 amended tip-pool regulations were invalid because they conflicted with the clear intent of Congress in the FLSA, even though the FLSA is silent regarding the use of tip pools when an employer does not take a tip credit.

In a “tip pool,” employees contribute a portion of their tips to a general fund that is later distributed and shared with other employees.  Although the FLSA permits the use of tip pools, the statute and its regulations limit the types of employees who can participate in a tip-pool to those who “customarily and regularly” receive tips like waiters, bartenders, busboys, bellhops, and other front-of-the-house employees.  But, if the employer does not take a tip credit (that is, if the employer does not pay less than the federal minimum wage to tipped employees), employers and employees can agree to include non-tipped employees like dishwashers and cooks in the tip pool.  At least this was the general consensus before April 2011, as illustrated by the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc.  In Woody Woo, the Ninth Circuit found that under the clear and unambiguous text of Section 3(m) of the FLSA, Congress intended only to limit the use of tips by employees when the employer claims a tip credit.  If the employer does not take a tip credit and restaurant employees thus receive wages at or above minimum wage, then federal minimum wage law does not regulate the tip pool.

In April 2011, however, the DOL expressly rejected Woody Woo and revised its regulations (29 C.F.R. §§ 531.52 and 531.54) to state that tips are the property of the employee whether or not the employer has taken a tip credit and that a valid tip pool may only include “those employees who customarily and regularly receive tips”—without exception.  As we discussed previously [here], the DOL issued a Field Assistance Bulletin (an internal document explaining its enforcement position to DOL personnel) in February 2012 in which the Wage Hour Division outlined its intent to actively enforce the revised regulations on a nationwide basis.  And enforce it they did.  Since 2012, the DOL has challenged tip pools in the hospitality industry, particularly in the western United States.

Some employers and industry groups have fought back, however, by suing the DOL and challenging the validity of the revised regulations in court.  The DOL’s Wage and Hour Division is authorized to enforce the FLSA’s minimum wage and overtime provisions.  Thus, many practitioners argue that the DOL lacked authority to issue the revised regulation and lacks authority enforce the regulation unless an employee’s tips are being used in violation of one of those provisions.  The district court in Oregon agreed, holding that the amended regulations were invalid because the clear intent of Section 3(m) of the FLSA was “only to limit the use of tips by employers when a tip credit is taken” and because “an employment practice does not violate the FLSA unless the FLSA prohibits it.”

Although Section 3(m) is silent regarding the use of tip pools when an employer does not take a tip credit, the court chastised the DOL’s practice of trying to fill this apparent gap with the revised regulations:

To express its intention that certain activities be left free from regulation, Congress need not lace the United States Code with the phrase, ‘You shall not pass!” . . .  For the DOL, silence is always an implicit gap to be filled by regulation.  The DOL’s position seems to be that Congressional silence regarding an area of economic activity is never a considered decision to let the economic actors make their own choices.  . . .  The Court’s ability to discern Congressional intent is no so limited.

Ultimately, the court concluded that it would “not alter the text of a statute in order to satisfy the policy preferences of the Secretary of Labor.”

Although this decision is significant for restaurants and other business in the hospitality industry, the court’s reasoning will have broader implications when the DOL or other federal agencies overstep their regulatory authority.  This much is sure: Just because the FLSA appears to be silent on a particular issue does not give the DOL authority to fill the gap with regulations.