The rule relating to tip pooling practices has varied depending on the state and federal circuit where the tip pooling practice has been implemented. Employers and employees alike have sought clarity on if, and how, mandatory tip pooling practices can be implemented.
Section 203(m) of the Fair Labor Standards Act, 29 U.S.C. § 201 et seq. (“FLSA), regulates tip crediting in connection with tip pooling practices. “Tip crediting” is the practice by which an employer fulfills part of its hourly minimum wage obligation to a tipped employee by using the employee’s tips. Section 203(m) of the FLSA provides that if an employer takes a tip credit, it must (a) provide notice to its employees and (b) allow its employees to retain all of the tips they receive, unless the employees participate in a valid tip pool. Section 203(m) further provides that a tip pool is valid if it is comprised exclusively of employees who are customarily amd regularly tipped.
Employers have argued, based upon the express language of Section 203(m), that the FLSA limits only employer-mandated tip pooling practices when linked to a tip credit or sub-minimum wage. For instance, in a 2010 Ninth Circuit opinion, Cumbie v. Woody Woo, Inc., the Ninth Circuit held that the FLSA does not expressly prohibit an employer from requiring its employees to participate in tip pooling agreements when the employer does not take a tip credit. Stated differently, the Ninth Circuit read Section 203(m) to apply only to employers who took a tip credit and found that the statute was silent with respect to employers who require employees to participate in tip pooling without taking a tip credit.
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