Rest v. Solis

• Decision Date: 07 June 2013
• Docket Number: No. 3:12–cv–01261–MO.,3:12–cv–01261–MO.
• Citation: 948 F.Supp.2d 1217
• Parties: OREGON RESTAURANT AND LODGING, et al., Plaintiffs, v. Hilda L. SOLIS, et al., Defendants.
• Court: U.S. District Court — District of Oregon

948 F.Supp.2d 1217

OREGON RESTAURANT AND LODGING, et al., Plaintiffs,

v.Hilda L. SOLIS, et al., Defendants.

No. 3:12–cv–01261–MO.

United States District Court, D. Oregon.

June 7, 2013.

Held Invalid

29 C.F.R. §§ 531.52, 531.54, 531.59

Nicholas M. Beermann, Peter H. Nohle, W. Robert Donovan, Jr., Jackson Lewis LLP, Seattle, WA, Paul DeCamp, Jackson Lewis LLP, Reston, VA, Scott Oberg Oborne, Jackson Lewis, LLP, Portland, OR, for Plaintiffs.

Tamra T. Moore, U.S. Department of Justice, Washington, DC, Ronald K. Silver, United States Attorneys Office, Portland, OR, for Defendants.

OPINION AND ORDER

MOSMAN, District Judge.

Tip pooling is the practice of collecting all tips from tipped employees so that they can be redistributed among a group. Until recently, employers could contract with their tipped employees to include non-tipped employees in the tip pool. This allowed employers to set up employment arrangements that incentivized and rewarded the whole line of service, including employees, like cooks and dishwashers, who were not customarily or regularly tipped.

In 2011, the Department of Labor (“DOL”) issued regulations that target the use of tips by the employers of tipped employees. The new regulations prohibit employers from contracting with their tipped employees to include non-tipped employees in the tip pool. The central question before the Court is whether these regulations are valid under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), and its progeny. Because I find that Congress has directly spoken to the precise question at issue, defendants' motion for summary judgment [25] is DENIED and plaintiffs' cross-motion for summary judgment [26] is GRANTED.

BACKGROUND

I. The Fair Labor Standards Act

The Fair Labor Standards Act (“FLSA”) was enacted “to protect all covered workers form substandard wages and oppressive working hours.” Barrentine v. Ark.-Best Freight Sys. Inc., 450 U.S. 728, 739, 101 S.Ct. 1437, 67 L.Ed.2d 641 (1981). Under the FLSA, employers must pay their employees a minimum wage. See29 U.S.C. § 206(a) (“Section 6(a)”). The FLSA's definition of the term “wage,” in turn, recognizes that under certain circumstances, an employer of tipped employees may credit a portion of its employees' tips against its minimum wage obligation, a practice commonly referred to as taking a “tip credit.” See id. § 203(m) (“Section 3(m)”). Section 3(m) provides in relevant part:

In determining the wage an employer is required to pay a tipped employee, the amount paid such employee by the employee's employer shall be an amount equal to—

(1) the cash wage paid such employee which for purposes of such determination shall be not less than the cash wage required to be paid such an employee on August 20, 1996; and

(2) an additional amount on account of the tips received by such employee which amount is equal to the difference between the wage specified in paragraph (1) and the wage in effect under section 206(a)(1) of this title.

The additional amount on account of tips may not exceed the value of the tips actually received by an employee. The preceding 2 sentences 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.

Id.

Each sentence of Section 3(m) contributes an essential piece to its overall meaning. The first sentence requires an employer to pay a tipped employee an amount equal to (1) a cash wage of at least $2.13,¹ plus (2) an additional amount in tips equal to the federal minimum wage minus such cash wage.² The second sentence clarifies that the difference between the federal minimum wage and the cash wage may not be greater than the value of tips actually received. Therefore, if the cash wage plus the value of tips actually received does not meet the federal minimum wage, the employer must supplement the cash wage. The third sentence states that the preceding two sentences shall not apply—i.e., the employer may not take a tip credit—unless two conditions are satisfied: (1) the employer must inform the employee of the tip-credit provisions of Section 3(m), and (2) the employee must be allowed to retain all tips, except where the employee participates in a tip pool with other customarily and regularly tipped employees. See Cumbie v. Woody Woo, Inc., 596 F.3d 577, 579–80 (9th Cir.2010)

II. Woody Woo

In Cumbie v. Woody Woo, Inc., the Ninth Circuit carefully analyzed Section 3(m) and found that it was plain and clear. The question presented in Woody Woo was whether a restaurant violated the FLSA when, despite paying a cash wage above the minimum wage, it required its wait staff to participate in a tip pool that redistributed a portion of their tips to the kitchen staff. Id. at 578. The district court dismissed the plaintiff's suit based on the plain meaning of Section 3(m), and the Ninth Circuit affirmed the district court on appeal.

The Court began its analysis by underscoring an important background principle: “In business where tipping is customary, the tips, in the absence of an explicit contrary understanding, belong to the recipient. Where, however, [such] an arrangement is made ..., in the absence of statutory interference, no reason is perceived for its invalidity.” Id. at 579 (quoting Williams v. Jacksonville Terminal Co., 315 U.S. 386, 397, 62 S.Ct. 659, 86 L.Ed. 914 (1942) (internal citations omitted)).

The Court then rejected the plaintiff's argument that “an employee must be allowed to retain all of her tips—except in the case of a ‘valid’ tip pool involving only customarily tipped employees—regardless of whether her employer claims a tip credit.” Id. at 580. “[W]e cannot reconcile this interpretation with the plain text of the third sentence, which imposes conditions on taking a tip credit and does not state freestanding requirements pertaining to all tipped employees.” Id. at 581 (emphasis in original). As the Court observed, “[a] statute that provides that a person must do X in order to achieve Y does not mandate that a person must do X, period” Id. (emphasis in original).

The Court found support for its holding in the text of Section 3(m) for two additional reasons. First, “[i]f Congress wanted to articulate a general principle that tips are the property of the employee absent a ‘valid’ tip pool, it could have done so without reference to the tip credit.” Id. Second, noting the obligation to give effect, if possible, to every clause and word of a statute, the Court “decline[d] to read the third sentence in such a way as to render its reference to the tip credit, as well as its conditional language and structure, superfluous.” Id. For these reasons, the Court refused to “resort to legislative history to cloud [the] statutory text.” Id. at 581 n. 11 (quoting Ratzlaf v. United States, 510 U.S. 135, 147–48, 114 S.Ct. 655, 126 L.Ed.2d 615 (1994)).

III. The Challenged Regulations

In 1974, Congress passed amendments to the FLSA, including a substantive amendment to Section 3(m). At that time, Congress also granted the Secretary of Labor the authority “to prescribe necessary rules, regulations, and orders” to implement the 1974 amendments. Pub. L. No. 93–259, § 29(b), 88 Stat. 55, 76 (1974).

Section 3(m) has remained essentially unchanged since 1974, and for several decades, the Secretary of Labor did not initiateany rulemakings with regard to the tip credit. That period of inactivity ended in 2008, when the DOL issued a Notice of Proposed Rulemaking, proposing changes to several DOL regulations that interpret the FLSA. See73 Fed.Reg. 43,654 (July 28, 2008) (the “2008 NPR”). The purpose of the proposed rule was to update the regulations to incorporate amendments to the FLSA, the legislative history, subsequent court decisions, and the DOL's interpretations. Id. at 43,654, 43,659. In discussing the changes to Section 3(m), the DOL explained that:

Section 3(m) provides the only method by which an employer may use tips received by an employee to satisfy the employer's minimum wage obligation. An employer's only options under section 3(m) are to take a credit against the employee's tips of up to the statutory differential, or to pay the entire minimum wage directly....

...

The proposed rule updates the regulations to incorporate the 1974 amendments, the legislative history, subsequent court decisions, and the Department's interpretations. Sections 531.52, 531.55(a), 531.55(b), and 531.59 eliminate references to employment agreements providing either that tips are the property of the employer or that employees will turn tips over to their employers, and clarify that the availability of the tip credit provided by section 3(m) requires that all tips received must be paid out to tipped employees in accordance with the 1974 amendments.

Id. at 43,659–60. To that end, the proposed rule stated in relevant part that

Where an employee is being paid wages no more than the minimum wage, the employer is prohibited from using an employee's tips for any reason other than to make up the difference between the required cash wage paid and the minimum wage or in furtherance of a valid tip pool.

Id. at 43,667.

On April 5, 2011, the DOL issued new regulations based on the 2008 NPR. See76 Fed.Reg. 18,832 (Apr. 5, 2011). The preamble to these regulations addresses the Ninth Circuit's opinion in Woody Woo, which was decided after the publication of the 2008 NPR but before the publication of the final regulations. The DOL stated that it “respectfully believe[d] that Woody Woo was incorrectly decided” and that “[t]he Ninth Circuit's ‘plain meaning’ construction [was] unsupportable.” Id. at 18,841–42. The DOL also staked out its current position: “The...