The recent Ninth Circuit decision in Oregon Rest. & Lodging Ass’n v. Perez^[1] (“Oregon Restaurant”) benefits all waiters, waitresses, card dealers, and other tipped employees working within the jurisdiction of the Ninth Circuit. Prior to the decision, employers sometimes forced tipped employees to share their tips in a tip pool with non-tipped employees, such as busboys, bar backs, and floor managers.^[2] This seemed unfair to many tipped employees who work tirelessly for their tips, only to have to turn them over to non-tipped employees who did not earn the tips.^[3] For example, a waitress who earns a majority of her salary based on her customer service and how attentive she is to her customers could have to pool her hard earned tips with a hostess who is not customarily tipped. To many, this seems unfair.^[4] The Ninth Circuit viewed this tip pooling with customarily non-tipped employees as violating the Department of Labor’s (“DOL”) interpretation of the Fair Labor Standards Act (“FLSA”), and therefore ended the unfair practice.^[5]

In Oregon Restaurant,^[6] the Ninth Circuit upheld the Department of Labor’s (“DOL”) rule regarding the shared-tip section of the FLSA just six years after refusing to accept an appellant’s same interpretation. The difference? Six years ago, when the Ninth Circuit heard the appellant’s interpretation, the agency had yet to promulgate any rules on the topic.^[7] The Ninth Circuit was correct in upholding the DOL’s rule, which states that tip pooling between customarily tipped and non-tipped employees is illegal, for three reasons.^[8] First, Congress gave the DOL exclusive authority to prescribe rules on the matter, second, the Ninth Circuit did not previously hold that the FLSA prohibited the appellant’s interpretation, and third, the DOL’s rule does not violate the intent of the FLSA.^[9]

   Part II of this Comment tracks the history of the FLSA. Part III of this Comment details the facts of Oregon Restaurant. Part IV provides the reasoning behind the Ninth Circuit’s decision to uphold the DOL’s interpretation of the FLSA. Part V analyzes the Ninth Circuit’s ruling in light of the dissent of the denial for a rehearing en banc, and finally, Part VI concludes that the Ninth Circuit majority was correct.

HISTORICAL BACKGROUND OF THE FLSA

In 1938, one year after President Franklin Delano Roosevelt challenged Congress “to devise ways and means of insuring to all our able-bodied working men and women a fair day’s pay for a fair day’s work,”^[10] Congress passed the FLSA.^[11]

FLSA Amendments: Tip Credit

In 1966, Congress amended the FLSA and expressly delegated authority to the DOL “to prescribe necessary rules, regulations, and orders” to implement amendments.^[12] Congress amended the FLSA by extending the federal minimum wage coverage to hotel and restaurant employees.^[13] To alleviate the new minimum wage obligations on restaurant and hotel employers, the amendments “provided for the first time, within section [203(m)]’s definition of a ‘wage,’ that an employer could utilize a limited amount of its employees’ tips as a credit against its minimum wage obligations...through a so-called ‘tip credit.’”^[14]

In other words, as amended, § 203(m) of the FLSA enables an employer to fulfill part of its hourly minimum wage obligation to an employee with the employee’s tips, a practice known as taking a “tip credit.”^[15] Section 203(m) also requires employers who take a tip credit to (1) give notice to its employees, and (2) allow its employees to retain all the tips they receive, unless such employees participate in a valid tip pool.^[16]

A tip pool exists where an employer forces employees to put their tips in a single pool and then splits those tips equally among employees.^[17] In theory, tip pooling ensures a fairer distribution of tips and thus, promotes harmony among employees.^[18] However, in practice, a waiter with a great personality who regularly receives a lot of tips would most likely be frustrated with having to pool his tips with employees who regularly receive fewer tips, since he would walk away with less money.^[19]

Under § 203(m), a valid tip pool must be comprised solely of employees who are “customarily and regularly” tipped.^[20] The Department of Labor Wage and Hour Division has defined “customarily and regularly” as a “frequency which must be greater than occasional, but which may be less than constant.”^[21] Employees who only sometimes earn more than $20 in tips per month do not fall within this categorization.^[22] Accordingly, § 203(m) rids the FLSA of any potential concerns that waiters and other regularly tipped employees would take home fewer tips as a result of having to split their tips with non-regularly tipped employees, such as busboys. However, as it reads, this tipped-employee protection only applies in situations where the employer takes a tip credit.^[23]

Cumbie v. Woody Woo, Inc.

In 2010, in Cumbie v. Woody Woo, Inc.,^[24] the Ninth Circuit addressed the question of whether employers who do not take a tip credit can force their employees into a tip pool comprised of both regularly tipped employees and non-regularly tipped employees.^[25] In Cumbie, a restaurant employer paid his regularly tipped employees well over the federal minimum wage but made them pool their tips with non-regularly tipped employees, such as kitchen staff.^[26] The employee-appellants argued that the FLSA’s definition of a valid tip pool applies even in instances where an employer does not take a tip credit.^[27] However, the Ninth Circuit disagreed, concluding that, “nothing in the text of the FLSA purports to restrict employee tip-pooling arrangements when no tip credit is taken.”^[28]

The DOL’s New Rule

One year later, in 2011, acting under the power given to it by Congress, the DOL promulgated a new rule stating that,

tips are the property of the employee whether or not the employer has taken a tip credit under § [203(m)] of the FLSA. The employer is prohibited from using an employee’s tips, whether or not it has taken a tip credit, for any reason other than that which is statutorily permitted in § [20]3(m): As a credit against its minimum wage obligations to the employee, or in furtherance of a valid tip pool.^[29]

In sum, this 2011 rule unambiguously prohibits the use of a tip pool that violates § 203(m) regardless of whether an employer uses a tip credit.^[30] This rule is the subject of Oregon Restaurant.

STATEMENT OF THE CASE

Oregon Restaurant marks the first time that the Ninth Circuit has analyzed whether employers who do not take a tip credit can force their employees into a tip pool comprised of both regularly and non-regularly tipped employees since the DOL’s newly promulgated 2011 rule.^[31]Oregon Restaurant consolidates two cases.^[32] In the first case, The Oregon Restaurant and Lodging Association brought suit against the DOL, challenging the validity of the 2011 rule.^[33] In the second case, a group of casino dealers alleged their employer’s (Wynn Las Vegas, LLC) tip pooling practice violated the 2011 rule.^[34]

In both cases, the employers paid the employees at least the federal minimum wage, did not take a tip credit, and instituted tip pools in which customarily tipped employees were required to share tips with non-customarily tipped employees, like kitchen staff and casino floor supervisors.^[35] Both district courts held that this practice did not violate the DOL’s 2011 rule, relying heavily on the Ninth Circuit’s holding in Cumbie.^[36] The DOL and the casino dealers appealed.^[37]

In 2016, the Ninth Circuit reversed both of the district courts’ judgments and remanded for proceedings consistent with its opinion.^[38]

REASONING OF THE COURT

In Oregon Restaurant, the Ninth Circuit upheld the DOL’s 2011 rule regarding § 203(m) of the FLSA.^[39] In order to determine the validity of the rule, the court answered three questions: First, whether the Ninth Circuit previously ruled in Cumbie that § 203(m) of the FLSA was clear and unambiguous, second, whether Congress has directly spoken to whether tip pooling is limited to when an employer is taking a tip credit, and third, whether the DOL’s rule is based on a permissible construction of § 203(m).^[40] The dissent conceded that “to the extent Congress’s intent is unclear with regard to a particular statute, the DOL may engage in statutory interpretation and issue rules.”^[41] Therefore, the dispute centered around whether the DOL’s rule was appropriate in light of the Ninth Circuit’s previous ruling in Cumbie as well as Congress’s intent.^[42]

Brand X and the Ninth Circuit’s Ruling in Cumbie

In Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs. (“Brand X”),^[43] the Supreme Court held that a court’s prior interpretation of a statute automatically trumps an agency’s statute rule if the prior court decision followed from the unambiguous terms of the statute.^[44] In other words, a court need not do further analysis to determine the validity of an agency’s statute rule if the court previously held that the statute leaves no room for that kind of interpretation.^[45] Therefore, the Ninth Circuit began its analysis in Oregon Restaurant by determining whether it previously ruled in Cumbie that § 203(m) of the FLSA was clear and unambiguous.^[46]

This issue is at the heart of the contention between the majority and the dissent in Oregon Restaurant.^[47] The dissent’s central claim is that the Ninth Circuit concluded in Cumbie that § 203(m) clearly and unambiguously limits the definition of valid tip pools to solely when an employer takes a tip credit.^[48] Therefore, the dissent argues that the DOL’s 2011 rule is irrelevant, without needing to analyze any further.^[49]

However, the majority in Oregon Restaurant held that, in Cumbie, the Ninth Circuit found that § 203(m) is silent as to whether the tip pool definition applies when an employer does not take a tip credit.^[50] The majority supports its position by noting, “in Cumbie, we found that ‘nothing in the text of the FLSA purports to restrict employee tip-pooling arrangements when no tip credit is taken’…we conclude that section 203(m)’s clear silence…has left room for the DOL to promulgate the 2011 rule.”^[51]  The majority reasoned that there is a difference between a statute being unambiguous regarding a particular matter and it being silent on a particular issue.^[52] Thus, the Ninth Circuit, in Oregon Restaurant, found that Brand X does not prohibit the DOL’s 2011 rule.^[53]

Chevron and its Application

The next step for the court in determining the validity of the DOL’s rule was to view it in light of Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.^[54]Chevron is a Supreme Court case that lays out the two-step framework for courts deciding whether an agency’s regulatory interpretation of a statute is valid.^[55] The first step is to ask, “has [Congress] directly spoken to the precise question at issue.”^[56] If Congress’s intent is clear, then that is the end of the court’s inquiry, but if “the statute is silent or ambiguous with respect to the specific issue,” the court proceeds to step two and asks whether the agency’s action is “based on a permissible construction of the statute.”^[57]

1. Chevron Step One

In analyzing the validity of the DOL’s 2011 rule under Chevron, the first step for the court in Oregon Restaurant was to determine whether Congress has spoken to whether tip pools must be comprised exclusively of regularly tipped employees even when the employer does not take a tip credit. The majority held that Congress was silent on this issue.^[58]

The Ninth Circuit relied on Christensen v. Harris Cty.^[59] to distinguish between statutory language that affirmatively protects or prohibits a practice and statutory language that is silent about a practice.^[60] In Christensen, defendant-employer avoided paying its employees overtime compensation required by the FLSA by enacting a policy around the FLSA.^[61] The Supreme Court held that the employer’s policy did not violate the FLSA because nothing in the FLSA specifically prohibited the employer’s policy, reasoning that “[b]ecause the statute is silent on this issue and because [defendant]’s policy is entirely compatible with [the statute],” there was no violation.^[62] Therefore, the Ninth Circuit reasoned that there is a difference between a statute that affirmatively protects or prohibits a practice and silent statutory language.^[63] Thus, because the court decided in Cumbie that “nothing in the text of the FLSA purports to restrict employee tip-pooling arrangements when no tip credit is taken,”^[64] the Ninth Circuit held that step one of Chevron was satisfied.^[65]

2. Chevron Step Two

The next step for the court was to ask whether the DOL’s 2011 rule is “based on a permissible construction of the statute.”^[66] This is an easy standard to meet, requiring deference to the agency’s rule “even if the agency’s reading differs from what the court believes is the best statutory interpretation.”^[67] A court may reject an agency’s construction only if it is arbitrary, capricious, or manifestly contrary to the statute.^[68] To determine whether an agency’s interpretation is reasonable, the Ninth Circuit “look[s] to the plain and sensible meaning of the statute, the statutory provision in the context of the whole statute and case law, and to the legislative purpose and intent.”^[69]

The Ninth Circuit first considered the legislative history of the FLSA and found that it supports the DOL’s interpretation of § 203(m).^[70] The court points to the Senate Committee report, which reads “tipped employee[s] should have stronger protection,” and reiterates that a “tip is … distinguished from payment of charge … [and the customer] has the right to determine who shall be the recipient of the gratuity.”^[71] The majority held that this language supports the DOL’s statutory construction that “[t]ips are the property of the employee whether or not the employer has taken a tip credit.”^[72] Second, the court found that because the FLSA is a broad act that Congress has repeatedly expanded and extended, it is not clear that it intended to allow employers that do not take a tip credit to do whatever they wish with their employees’ tips.^[73] Therefore, the Ninth Circuit held that the DOL’s 2011 rule is more closely aligned with Congressional intent than against it, and “at the very least, that the DOL’s interpretation is reasonable.”^[74]

ANALYSIS

The majority is correct in its holding. Despite the dissent’s argument, the majority is correct in upholding the DOL’s statute rule because the court previously held in Cumbie that the FLSA was silent on the matter.^[75] The Ninth Circuit reflected its support of Oregon Restaurant when it denied a petition for a rehearing en banc.^[76] However, the dissent of the denial for a rehearing en banc raises a new argument that Congress might be silent for one of two reasons: to allow an agency to regulate and fill the gap or to restrict agency regulation.^[77] Here, the dissent argues that in Oregon Restaurant, the relevant statute rule involves the latter type of silence, and thus, Congress wanted to restrict the DOL from constructing rules regarding employers who do not take a tip credit.^[78] Because of this, the dissent argues that the DOL’s 2011 rule is invalid.^[79] While the dissent’s silence argument has some merit, the majority in Oregon Restaurant was still correct in its holding.

The Dissent’s Silence Argument

The dissent of the denial of a rehearing en banc argues that since § 203(m) only regulates tip pooling by one specific class of employer: the employer who takes a tip credit, Congress inhibited the DOL from regulating employers who do not take a tip credit.^[80] It notes that the majority in Oregon Restaurant failed to recognize that while a reasonable person could read § 203(m) as prohibiting tip pooling even by employers who do not take a tip credit, a reasonable person could also read it as prohibiting the DOL from interfering with such practice.^[81] The dissent further states, “sometimes ‘[s]tatutory silence is meant to convey nothing more than a refusal to tie the agency’s hands,’ meaning that Congress has given the agency discretion to choose between policy options Congress itself has placed on the table. But ‘sometimes statutory silence, when viewed in context, is best interpreted as limiting agency discretion.’”^[82]

The dissent concludes that Congress’s silence in § 203(m) was meant to restrict the DOL from regulating tip pools when employers do not take a tip credit.^[83] The dissent argues that Congress inhibited the DOL from regulating employers who do not take a tip credit since § 203(m) only regulates tip pooling by one specific class of employer: the employer who takes a tip credit.^[84]

Remaining Questions to the Dissent’s Silence Argument

The dissent has a valid point regarding Congressional silence. The Supreme Court has stated, “the purpose of a statute includes not only what it sets out to change, but also what it resolves to leave alone.”^[85] It seems true that while Congress is sometimes silent to allow for agency discretion, other times Congress remains silent to prevent agencies from legislating on certain issues.^[86] Therefore, it is unclear how to decipher the purpose of each instance of Congressional silence. Accordingly, the central question here is: was Congress silent regarding employees who do not take a tip credit in § 203(m) because it wanted the DOL to regulate and fill the gap or because it wanted to prevent the DOL from doing so?

While the dissent believes the answer is clear, I am not convinced. For example, it is true, as the dissent points out, that the Supreme Court has stated, “Congress knows to speak in plain terms when it wishes to circumscribe, and in capacious terms when it wishes to enlarge, agency discretion.”^[87] Yet, how do interpreters know whether Congress wished to circumscribe, opposed to enlarge, agency discretion? This is a question that the dissent failed to persuasively answer, and therefore, its argument that Oregon Restaurant should be reversed is unpersuasive.

1. The Dissent’s Reliance on Bad Analogies

The dissent used two ineffective analogies to argue that Congress’s silence signified that it did not want the DOL to interfere with employers who do not take a tip credit.^[88] First, it implied that upholding the DOL’s 2011 rule is akin to upholding a DOL rule interpreting § 203(m) that prohibits employers from requiring their employees to wear business attire since Congress is silent on both issues.^[89]

That analogy is not persuasive. Unlike a rule that would prohibit employers from requiring their employees to wear certain clothes, the DOL’s 2011 rule pertains to a central topic actually included in § 203(m): valid tip pools.^[90] The only commonality between the dissent’s hypothetical and § 203(m) is that it regulates employers. The DOL’s 2011 rule, however, centers on regulating employers and the type of tip pools they can make their employees join, both of which are included in § 203(m).^[91] Thus, an employer-required dress code rule is not truly comparable to the DOL’s 2011 rule. This analogy stretches the imagination too far. It is not as if the DOL, in issuing the 2011 rule, drafted a rogue rule having nothing to do with § 203(m).^[92] It simply used the definition of a valid tip pool, which was already in § 203(m), and expanded it slightly to apply to employers who do not take a tip credit.^[93]

Next, the dissent makes a weak analogy between the DOL’s 2011 rule and another agency rule pertaining to a different Congressional statute, which was invalidated in Martinez v. Wells Fargo Home Mortg., Inc. (“Martinez”).^[94] In Martinez, the Ninth Circuit rejected an agency rule, which altered a Congressional statute prohibiting parties in a real estate action from accepting “unearned fees” by administering a rule prohibiting the same parties from “overcharging.”^[95] The court held that Congress’s “‘silence’ on the subject of overcharges does not mean that Congress’s actions were ambiguous on that subject.^[96] Congress simply did not legislate at all on overcharges.”^[97] The court reasoned that the act of charging a customer for unearned fees is substantively different than simply overcharging because the latter requires fees “‘for’ services actually rendered” while the former does not.^[98]

However, unlike the agency’s rule in Martinez, which centers on “overcharging”, a topic not specifically mentioned in the Congressional statute, the DOL’s 2011 rule directly centers on two topics explicitly mentioned in § 203(m): regulating employers and the type of tip pools employers can make their employees join.^[99] The DOL’s 2011 rule simply extended § 203(m) a little from forcing employers who take a tip credit to facilitate valid tip pools to forcing employers who do not take a tip credit to do the same.^[100] The agency rule in Martinez, however, substantively altered a Congressional statute prohibiting accepting “unearned fees” by administering a rule prohibiting “overcharging.”^[101] A prohibition of “overcharging” differs in substance from a prohibition of accepting “unearned fees,” whereas forcing employers who do not take a tip credit to implement valid tip pools is materially similar to forcing employers who do take a tip credit to do the same. Accordingly, the comparison fails because the cases differ in a vital way.

2. Oregon Restaurant Does not Create a Circuit Split

Finally, the dissent to the denial of a rehearing en banc argues that the majority’s “shoddy reasoning” in Oregon Restaurant caused a circuit split.^[102] However, Oregon Restaurant did not create a circuit split. The dissent to the denial of a rehearing en banc argues that in Trejo, the Fourth Circuit necessarily invalidated the DOL’s 2011 rule by holding that “it is clear that th[e] language [of § 203(m)] could give rise to a cause of action only if the employer is using tips to satisfy its minimum wage requirements” since, under Brand X, “a precedent holding a statute to be unambiguous forecloses a contrary agency construction.”^[103]

Yet, it is not evident that the Fourth Circuit effectively foreclosed the DOL’s 2011 rule. In fact, it seems obvious that the court in Trejo took special care not to invalidate the rule.^[104] For example, the court in Trejo noted that the defendants made a case against the DOL’s regulation, but plaintiffs had not relied on the DOL’s 2011 rule at all.^[105] Directly after pointing that out, the court clearly stated, “those circumstances, we should take special care not to enter, even a little, into a debate that all agree is not properly before us.”^[106] Therefore, the Fourth Circuit clearly took special care to avoid commenting at all on the validity of the DOL’s 2011 rule.^[107] While it is true that under Brand X, “a precedent holding a statute to be unambiguous forecloses a contrary agency construction”,^[108] the Fourth Circuit’s statement that it is taking “special care” not to rule on the validity of the DOL’s 2011 rule suggests that it does not want to foreclose the rule.^[109] Therefore, until the Fourth Circuit actually rules on the DOL’s 2011 rule, the question remains whether the Ninth Circuit held in Trejo that § 203(m) was unambiguous and thus, foreclosed the rule. Accordingly, the dissent to the denial of a rehearing en banc is incorrect in its argument that the Fourth Circuit necessarily foreclosed the DOL’s 2011 rule. Oregon Restaurant did not create a circuit split.

VI. CONCLUSION

The Ninth Circuit’s recent holding in Oregon Restaurant benefits all waiters, waitresses, card dealers, and other tipped employees working in the Ninth Circuit by preventing their employers from forcing them to share their tips with non-regularly tipped employees. The Ninth Circuit was correct in upholding the DOL’s interpretation of the FLSA despite its prior ruling in Cumbie. Following Chevron, it is clear that the DOL acted within its authority in promulgating the 2011 rule.

Even though the silence argument raised by the dissent of the denial for a rehearing en banc has merit, the vital question remains: What is the test for determining why Congress is silent on certain issues? While the dissent’s argument, as presently laid out, is not convincing that the Ninth Circuit was wrong, it is important for courts to continue to explore this silence dilemma in an effort to determine the precise authority Congress gives to agencies.

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