Tip Rules – A History of All You Need to Know

Tip Rules – A History of All You Need to Know

The Trump people proposed to rescind the 2011 Obama Administration Fair Labor Standards Act regulations that regulate tip-pooling arrangements. The Obama rules allowed the restaurant owner to pool tips but only among employees who customarily receive at least $30 a month in tips. Angry American Restaurant Association and other groups representing restaurant owners filed suit challenging the rules. While the litigation continued the Trump people proposed new regulations that help restaurant owners take tips from dining room help that normally receive tips to pay the wages of kitchen help that do not. In the process of working out a budget for 2018 Congress inserted new language as Title XII, Section 1201 into the budget resolution that changes the Fair Labor Standards Act. The new language intends to block the Trump proposal and appears to resolve the dispute over tips, but the matter is not entirely resolved as of now, April 2018.

The new language reads in part “An employer may not keep tips received by its employees for any purposes, including allowing managers or supervisors to keep any portion of employees’ tips, regardless of whether or not the employer takes a tip credit.”

To understand why restaurant owners favor the Trump tip pooling rule requires knowing procedures under the Fair Labor Standards Act of 1938, which excluded restaurant workers from employer minimum wage obligations until 1966. In 1966 they were finally included, but only at 50 percent of the minimum wage. Some of the restaurant owners complained they shouldn’t have to pay any wages because their waiters and waitresses earned plenty from their tips.

From 1966 to 1996 the tipped wage went up when Congress raised the minimum wage, but in 1996 and again in 2007 the restaurant industry lobbied Congress to leave the tipped minimum at $2.13 an hour. The Federal tipped minimum has remained at $2.13 an hour since 1991, which makes it only 29 percent of the present $7.25 an hour minimum wage.

First, recognize that the monthly minimum wage at $7.25 an hour is $1,160 a month at 40 hours a week and 4 weeks per month. However, the $2.13 an hour sub minimum wage for tipped employees is just $340.80 a month, which means a tipped employee needs an additional amount of $819.20 a month in tips to get up to the minimum wage, or $7.25 - $2.13 = $5.12 an hour.

Under federal rules governing the Fair Labor Standards Act employers who pay a sub minimum wage must verify the additional amount from tips are enough to bring an employee up to at least the minimum wage, a practice defined as taking the tip credit. If tips are not enough to equal the minimum wage then the employer is expected to make up the difference.

Notice though the additional amount in tips received up to $819.20 per month are in lieu of normal obligations to pay wages to employees. Even if tipped employees receive tips at or above $819.20 a month, wage costs drop from at least $7.25 an hour to as low as $2.13 an hour. Even when tips are less than $819.20 a month all of the tips recorded become a cost saving tip credit for their restaurant owners. The tip credit actually has its origin in a legal case from 1942 known as Williams v. Jacksonville Terminal Pickett.


Tips and the Courts - Williams v. Jacksonville Terminal Pickett

In the case Williams v. Jacksonville Terminal Pickett decided March 6, 1942 two Red Caps, Williams and Pickett, brought suit over minimum wage requirements under the new Fair Labor Standars Act(FLSA) against two railroad terminals, Jacksonville Terminal and Union Terminal in Dallas, Texas. In response to the Fair Labor Standards Act terminal managers insisted, in writing, that beginning on October 24, 1938 all red caps must report their tips, which management would offset against their minimum wage obligations. If tips were less than the minimum wage, then management would make up the difference, otherwise not. This arrangement was a new invention of railroad management, no where in the law.

Both Williams and Pickett protested on behalf of red caps that their tips could not be used in lieu of minimum wage obligations. The management demand that tips be reported in lieu of wages in what the court called an “accounting and guarantee system” but their system ended by July 1, 1940; instead both terminals instituted a fee for service charge on passenger luggage and then paid the minimum wage in cash. Since red caps believed FLSA required payment of the minimum wage without deduction of tips, they continued to work and filed suit in United States District Court for the recovery of unpaid minimum wages between October 24, 1938, and July 1, 1940. Both disputes went to the Supreme Court combined as the case of Williams v. Jacksonville Terminal Pickett, (315 U.S. 386) discussed here.

The Supreme Court wrote “We deal here only with the petitioners' [Red Caps] assertion that the wages Act [Fair Labor Standards Act of October 24, 1938] requires railroads to pay the red caps the minimum wage without regard to their earnings from tips.”

In making their decision the Supreme Court Justices decided the terminal management letters of written notice to the red caps and their willingness to continue working provided agreement for management to treat tips as wages. The court wrote “This employment of the red caps was at will and subject to the employers' conclusions as to the desirability of continuing their employment.” Since the red caps did not quit work after receiving written notice of the “accounting and guarantee system” the justices declared they accepted the agreement.

Then the court wrote “In businesses where tipping is customary, the tips, in the absence of an explicit contrary understanding, belong to the recipient. Where, however, an arrangement is made by which the employee agrees to turn over the tips to the employer, in the absence of statutory interference, no reason is perceived for its invalidity.” Notice here the false use of “employee agrees.” The court referenced letters dictated the terms of payment and were imposed by unilateral decision of management. As such the red caps did not and could not disagree or they would be fired.
In the next paragraph of the Jacksonville Terminal opinion, the majority justices wrote “The employer furnishes the facilities, supervises the work and may take the compensation paid by travelers for the service, whether paid as a fixed charge or as a tip.” Therefore, tips are the property and revenue of the employer.

The Justices decided the Jacksonville Terminal case by a vote of five to three with one abstention. Justice Black wrote a dissent in concurrence with the other two in the minority, Justice Douglas and Justice Murphy. Justice Black wrote in part
“I am unable to agree that tips given to red caps by travellers are 'wages' paid to the red caps by the railroad. … The tip paying public is entitled to know whom it tips, the red cap or the railroad. A plan like that before us, which covertly diverts tips from employees for whom the giver intended them to employers for whom the giver did not intend them and to whom any kind of tip doubtless would not have been voluntarily given, seems to me to contain an element of deception. And I think that an interpretation of the F.L.S.A. which permits employers to benefit from such a plan does not accord with the meaning of the language used by Congress.”

Go to 1966 when the restaurant association managed to use their influence and the Jacksonville Terminal Case to get Congress to agree to the sub-minimum wage for tipped employees devised by the railroads in 1938, but now giving it the official term: tip credit. Business devised the tip credit and five justices did business a favor back in 1942 by making tips the property of business, but there is more.

The restaurant association argued the tip credit rule could result in some waiters and waitresses having tips much higher than the minimum difference while other waiters and waitresses might have tips below the minimum difference. Suppose Alice and Anne earn $15.00 an hour with tips, while Bettie and Bonnie earn only $4.00. To meet minimum wage obligations the restaurant owner will need to pay all four people $7.25 an hour or a total of $29, but the four of them earn $38 dollars. Without tip pooling management would owe $3.25 an hour of tip credit to Bettie and Bonnie, or a total of $6.50. With a pooling system the management has $15.50 of extra tip money to take from Alice and Anne to make up the $6.50 of shortfall to Bettie and Bonnie. The disparity in tips could require the restaurant owner to incur a tip credit for some of their help while the total of tips could be big enough to pay the entire tip credit obligation. Tip pooling might reduce the tip credit to zero allowing the restaurant owner to save more on wage costs by forcing employees with high tips to pay the tip credit of employees with low tips.

Pooling for those who receive tips was the rule under FLSA and the practice until Aaron Woo, a Portland, Oregon owner of Woody Woo Café decided to ignore the practice in 2009. He reasoned that the FLSA rule 203(m) only applied to those restaurants that take the tip credit and so pay the sub minimum wage. Since he paid the full minimum wage, he took it upon himself to save wage costs by pooling tips from those who receive them to those who do not; like the kitchen help. A lawsuit followed known as Cumbie versus Woody Woo Inc; Cumbie is Misty Cumbie, one of the disgruntled employees.

The District Court in Oregon dismissed the case by summary judgement and appeal was taken to the Ninth Circuit Court in Oregon. On Appeal, Cumbie argued sharing tips with the kitchen help who are not “customarily and regularly tipped employees was invalid under 29 US Code section 203(m) and the Code of Federal Regulations 29 CFR 531.52-54 written for it. Woody Woo argued that since they did not take a tip credit and paid the full minimum wage, they could devise any tip pooling arrangement that suited them.

The court read the last sentence of the statute 29 US Code 203(m), which stated that tip credit rules “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.”

The majority ruled the Woody Woo tip credit claims irrelevant, but ruled in their favor for a different reason. They found the statute language too vague to define any specific tip pooling arrangement. Specifically they wrote “for an employer that meets its minimum wage obligation without taking a tip credit, section 203(m) is silent; therefore, there is no statutory interference.” In other words Mr. Woo could make any tip pooling arrangement he wanted and the Williams v. Jacksonville ruling remained.

The Woody Woo ruling came in 2009. In 2011, the Obama Administration revised the Code of Federal Regulations 29 CFR 351.52 to make it clear that tips are the property of the employee and that tip pools can only be made among employees who “customarily and regularly receive tips.”

Again restaurant owners were incensed and filed suit in the case Oregon Restaurant and Lodging Association versus Perez [Sec’y of Labor]. The Oregon District Court held that Cumbie left "no room" for the Department of Labor to make its 2011 rule and so granted Oregon Restaurant & Lodging's motion for summary judgment. Appeal was taken but now the same 9th Circuit Court disagreed with the District Court’s use of the Cumbie ruling.

In the new ruling the justices explained they did not hold the Fair Labor Standards Act unambiguously and categorically protects Mr. Woos tip pooling arrangement. Rather, they held that "nothing in the text purports to restrict" the practice in question.

In the new Oregon Restaurant case a majority of the justices relied on the wording of the 1974 FLSA amendments. In the 1974 amendments “Congress expressly delegated to the Department of Labor the broad authority 'to prescribe necessary rules, regulations, and orders' to implement the FLSA amendments of 1974.”

The minority justices argued “This case is nothing more than Cumbie II.” They insisted the court must follow precedent. The majority countered “We have no quarrel with Cumbie v. Woody Woo Inc. Our conclusion with respect to Cumbie is only that its holding was grounded in statutory silence.” Therefore “we find that Cumbie does not foreclose the DOL's ability to regulate tip pooling practices of employers who do not take a tip credit.” ... “In exercising its discretion to regulate, the DOL promulgated a rule that is consistent with the FLSA's language, legislative history, and purpose.”

Justice O’Scannlain wrote a dissent for the minority, which was used as the basis for a Writ of Certiorari to have the U.S. Supreme Court hear the case. The Writ was filed January 19, 2017. Looking at the Proceedings and Orders on the U.S. Supreme Court website shows the case National Restaurant Association, et al., v. Department of Labor, et al. Has many motions to extend the time to file a response, which have been granted repeatedly and last time I checked on April 16, 2018 the time was extended until May 9, 2018, but might well be extended again.

However, to complicate matters Congress intervened with new language as mentioned above, which makes employees the owners of their tips. The Congressional action in this long dreary episode of tips does not really resolve the matter for tipped employees, especially restaurant employees. As long as U.S. employees work “at will” and can be fired at any time for any reason, or no reason, tipped employees can be pressured to give up tips to their employer. Few restaurant employees have the wherewithal to pursue legal enforcement and Republican administrations are famous for not enforcing labor law.

Tip rules give a good illustration how courts will interpret legislation to favor and subsidize business. The tip rules that remain in force, and the tip credit that still remains, originated 76 years ago when the five Supreme Court justices seized on the Red Cap’s decision to continue working while claims in dispute worked through the courts. When some members of Congress tried to get restaurant employees included in the minimum wage requirements of FSLA in 1966 the Restaurant Association was right there demanding to codify their subsidy.

After successfully keeping the sub minimum wage for tipped employees fixed at $2.13 an hour for 27 years, restaurants and the Restaurant Association realized it was so low that they often had to pay $7.25 an hour just to get dining room help. That made the tip credit useless and their subsidy ended. That’s why Mr. Woo became a test case to demand expanding tip pooling to non tipped employees and restore their subsidy.

Once more Trump showed us who he is by joining corporate America to help them cheat tipped employees.

I will keep an eye on future legal developments and update them here. Or you can do it yourself. Docket files at the Supreme Court are No. 16-920, the Writ was docketed on January 24, 2017 No. 16A529