Employment Law Daily DOL had authority to promulgate 2011 tip-pool rule change
Thursday, February 25, 2016

DOL had authority to promulgate 2011 tip-pool rule change

By Lisa Milam-Perez, J.D. Reversing a federal district court’s order invalidating 2011 revisions to the DOL’s tip-pool regulation, a divided Ninth Circuit held the agency acted within its authority when it promulgated the rule change. As revised, the tip pool regulation prohibits an employer from including non-tipped staff in tip pools even when it does not take the tip credit, but instead pays the full statutory minimum wage. The FLSA’s “clear silence as to employers who do not take a tip credit has left room for the DOL to promulgate the 2011 rule,” the majority concluded, rejecting the notion that the appeals court itself had foreclosed the agency’s ability to do so by virtue of its 2010 decision in Cumbie v. Woody Woo. Judge Smith dissented (Oregon Restaurant and Lodging Association v. Perez, February 23, 2016, Pregerson, H.). Tip pool restriction. FLSA Section 203(m) allows employers to institute a tip pool among workers who “customarily and regularly” receive customer tips for their efforts. A tip pool that includes employees who do not customarily and regularly receive tips is invalid. However, in Cumbie, the Ninth Circuit held an employer that did not take the tip credit against its obligation to pay the statutory minimum wage was entitled to utilize a tip pool comprised of both tipped and non-tipped employees. Reasoning that Section 203(m) was silent as to employers that do not take the tip credit, the appeals court found such a tip pool permissible under these circumstances. However, shortly thereafter, the DOL revised its tip-pool regulation so that the restriction now applied to all employers, regardless of whether they take a tip credit. It did so despite the holding in Cumbie, and notwithstanding comments that the agency received in response to a 2008 notice of proposed rulemaking and comment request on this very issue, which suggested that section 203(m)’s tip pooling restrictions could only be construed to apply only to employers that take the tip credit. A restaurant trade group and Wynn Las Vegas challenged the 2011 rule change in separate cases, seeking to enjoin its enforcement. (The plaintiff employers all required their employees to participate in a tip pool that included both tipped and non-tipped employees, and they did not take a tip credit against the minimum wage.) Both district courts below concluded that the DOL lacked authority to make the rule change as a result of Cumbie and, moreover, that the substance of the DOL’s revision contradicted Congress’ clear intent. The Ninth Circuit reversed, rejecting the lower courts’ application of Cumbie as well as their Chevron analyses of the agency’s action. Scaling back Cumbie. At issue here, as the Ninth Circuit framed it, is whether the DOL has authority to regulate the tip pools of employers that do not take the tip credit. While the employers contended that the question had been asked and answered in Cumbie, the appeals court disagreed. Its task in that case was merely to decide whether a particular restaurant’s tip pool violated Section 203(m), it explained. “We did not hold that the FLSA unambiguously and categorically protects the practice in question.” The majority tracked the Supreme Court’s reasoning in Christensen v. Harris Cty, an FLSA case involving compensatory time, which it had cited in Cumbie. That 2000 High Court decision “illustrates the crucial distinction between statutory language that affirmatively protects or prohibits a practice and statutory language that is silent about that practice,” the appeals court noted. In that case, the Supreme Court construed the FLSA’s silence on the matter in favor of the employer, but it did not preclude the agency from enacting regulations in the future that would prohibit the policy at issue. Likewise, as for the Ninth Circuit in Cumbie. The district courts (along with the employers, and the dissent here) argued that the outcome in this case was controlled instead by Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs. (Brand X), a 2005 Supreme Court decision. There, the Court held that a prior judicial construction of a statute trumps an agency construction that would otherwise be granted Chevron deference “only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.” But as the majority pointed out, “there is a distinction between court decisions that interpret statutory commands and court decisions that interpret statutory silence.” And Cumbie fell squarely into the latter category—the DOL had yet to promulgate the challenged rule change—so Christensen was the applicable precedent. A reasonable construction. Continuing in its Chevron analysis, the appeals court also held the DOL’s interpretation of Section 203(m) was a reasonable one. The agency saw a “loophole” in the law as written, one that was being unfairly exploited as a result of statutory silence; moreover, the AFL-CIO, National Employment Lawyers Association, and Chamber of Commerce all agreed (in public comments) that the statutory provision was “confusing” or “misleading.” Consequently, “[i]t was certainly reasonable to conclude that clarification by the DOL was needed.” And the legislative history of the Act supported the agency’s interpretation in making the clarification, despite the employers’ assertions to the contrary. “There is no convincing evidence that Congress’s silence, in this context, means anything other than a refusal to tie the agency’s hands. In exercising its discretion to regulate, the DOL promulgated a rule that is consistent with the FLSA’s language, legislative history, and purpose,” the majority concluded. As a result, the appeals court reversed both district court judgments below. Dissent. “Colleagues, even if you don’t like circuit precedent, you must follow it,” Judge Smith admonished in dissent. “Afterwards, you call the case en banc. You cannot create your own contrary precedent.” According to Smith, the case before them “is nothing more than Cumbie II,” identical to its predecessor. “The DOL’s promulgation of this new rule changes nothing,” and the matter should have been resolved by a memorandum disposition. Moreover, as a matter of administrative law, the majority’s take on Christensen “turns Chevron on its head,” Smith argued further. “Instead of requiring that administrative rulemaking be rooted in a congressional delegation of authority, the majority claims that, where a statute is ‘silent,’ administrative regulation is not prohibited. In other words, the majority suggests an agency may regulate wherever that statute does not forbid it to regulate. This suggestion has no validity.” “After losing in Cumbie,” as the dissent saw it, the DOL “decided to go through the backdoor by promulgating a new rule codifying its argument in Cumbie and its preferred interpretation of section 203(m)… [But] Chevron deference does not work that way. Regardless of how much the DOL dislikes the interpretation, it must follow it.” However, the Ninth Circuit majority allowed the DOL to do otherwise.

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