Tip Pooling in Oregon

Employers use tip pooling arrangements to distribute tips an employee receives among the employer’s various other employees.  Frequently, employers create tip pooling arrangements where the employer requires the tipped employee, such as a waiter or bartender, to place a portion of tips received into a pool which is then distributed to non-tipped employees, such as dishwashers and cooks.  Some employers even take a portion of these tips for management or to distribute to independent contractors, such as DJs, bouncers or dancers.

Are these types of arrangements legal, in other words, can an employee be required to participate in a tip pooling arrangement?

The answer depends on the law in effect in the state that the employee works.  On April 5, 2011 the Department of Labor issued regulations which state that all tips received by an employee are the property of the employee. These regulations clarify the 9th Circuit Court of Appeals decision which found that tips received by an employee are the employee’s property except in cases where there is a tip pooling arrangement.  In that instance, the tips that are subject to the pooling arrangement were not the employee’s property.

The new regulations specifically state that all tips that an employee receives are an employee’s property with no exceptions. The employer may require an employee to participate in a valid tip pooling arrangement or take a credit against minimum wage, but only if the state in which the employee is employed allows such an arrangement or credit.

Each state has different requirements for a tip pooling arrangement.  In Oregon, tip credits against minimum wage are not allowed.  Additionally, tip pooling arrangements must be in writing, provided to the employee at the commencement of employment, and posted in a conspicuous place.  Management and ownership cannot receive any of the pooled tips.   If management or ownership received any of the pooled tips, the employer would be taking a tip credit which is not allowed under Oregon law.

For example, a bar pays its servers and bartenders minimum wage.  The bar manager takes 20 percent of the tips received by the bartenders and servers and places the tips into a pool to be redistributed.  The manager or owner cannot receive any of the funds contributed to the tip pool.  If the manager or owner did receive funds from the tip pool, then the manager would be taking a tip credit against minimum wage and violating Oregon’s minimum wage laws and the Fair Labor Standards Act (FLSA).

Additionally, the tip pool can only include employees that are “customarily and regularly” tipped employees.  If the tip pool includes cooks, dishwashers or other employees who are not customarily or regularly tipped then the tip pool is invalid.  Additionally, the funds in the tip pool cannot be distributed to independent contractors, such as bouncers, DJs or dancers, since they are not employees.

Failure to comply with the FLSA and Oregon law may result in the employer having to pay back wages, penalties for failing to pay wages, and the employee’s attorney fees.  In addition, the employee may have a claim for conversion which could carry punitive damages if the employer’s conduct is egregious.

© 07/12/2012 Kevin J. Tillson of Hunt & Associates, P.C.  All rights reserved.

The Washington Supreme Court Stumbles Over Disclosure of B&O Tax Charges in Sales

A recent Washington Supreme Court case illustrates the extent to which the increasing convolutions of statutes and case law often lead to absurd results. In Peck v. AT&T Mobility, 174 Wn.2d 333 (2012) the Washington Supreme Court grappled with a question of statutory interpretation which only existed because of its own earlier misreading of a statue to mean more than the statute says.  Rather than resort to a straightforward and reasonable interpretation of the statute in question, the court in Peck only entangled its reasoning further to arrive at an illogical result even further detached from the language of the statute than the precedents on which the court relied.

In Peck the court responded to a certified question from the Ninth Circuit Court of Appeals, Peck v. AT&T Mobility, 632 F.3d 1123 (9th Cir. 2011), asking if:

Under RCW 82.04.500, may a seller recoup its B&O taxes where, prior to the sale of a monthly service contract, the seller discloses that in addition to the monthly service fee, it collects a surcharge to cover gross receipts taxes?

RCW 82.04.220(1), the statute in question, states that:

It is not the intention of this chapter that the taxes herein levied upon persons engaging in business [including B&O taxes] be construed as taxes upon purchasers or customers, but that such taxes shall be levied upon, and collectible from, the person engaging in the business activities herein designated and that such taxes shall constitute a part of the operating overhead of such persons.

Washington’s B&O tax is a gross receipts tax on business income.  The issue in Peck was whether a seller could explicitly add the amount of its B&O tax attributable to a specific sale of services to its charge for such services, in this case cellular phone service, where the written sales agreement specifically stated that the seller could recover that amount in addition to its monthly service charge.  The court in Peck acknowledged that the statute permits sellers to include the B&O tax attributable to any specific sale of goods or services to the price or charge for such services as a part of the seller’s total overhead if the amount of overhead included in the cost for B&O tax was not explicitly disclosed to the purchaser.  Nonetheless, Peck held that the seller violates the statute and cannot legally recover the amount of B&O tax attributable to each sale, despite a written agreement permitting such a charge, where the tax is explicitly added to the base price of the transaction.

In short, the seller can always recover the amount of B&O tax which it includes as an undisclosed portion of the selling price but, as Peck demonstrates, risks litigation and the loss of B&O tax which is explicitly disclosed to the purchaser.  This is an unnecessary stretching of the statute’s language to reach an ultimately incoherent and illogical result.

Simply read, RCW 82.04.220(1) just means what it says: i.e., that only the selling business is legally responsible for paying B&O tax even though, the statute recognizes, the customer will usually pay the seller’s B&O tax attributable to each sale just as the customer generally contributes to the payment of all of a seller’s other overhead with each sale.

The distinction between the sales tax and the B&O tax is not who ultimately pays the cost of the tax but instead who is legally liable for payment of the tax.  In the case of the sales tax it is the buyer or customer who is legally responsible for payment even though the seller may be legally obligated to collect that tax.  The seller or business is legally responsible for payment of the B&O tax.

In reaching its conclusion that AT&T’s explicit charge for B&O tax on its monthly statements was legally impermissible the court reaffirmed its rationale and holding in Nelson v. Appleway Chevrolet, Inc., 160 Wn.2d 173, 157 P.3d 847 (2007) holding that a seller could properly include the anticipated amount of B&O tax as an explicitly disclosed item during negotiations before the parties established a final selling price but could not explicitly add that tax as a charge additional to the sale price, even if the parties agreed during their negotiations to such an additional charge in principle before the buyer accepted the price and terms of sale.

The Peck court distinguished its reasoning in Nelson invalidating the B&O charge in that case from the Court of Appeals’ logic and holding in Johnson v. Camp Automotive, Inc., 148 Wn. App. 181, 199 P.3d 491 (2009) where the parties negotiated the amount of B&O tax in arriving at the final sales price including the amount of that tax.  Logically this is a distinction without a difference which bears no relationship to the language of RCW 82.04.220(1).

In the end, the opinion and holding in Peck suggests a court caught in the web of its own superfluous illogic wholly detached from the statutory language it is ostensibly applying.  That said, the only safe response to its holding is to add the cost of B&O tax attributable to any sale without any disclosure of that amount in the transaction documents.  Any explicit statement on the transaction documents concerning the inclusion of the cost of B&O tax risks entanglement in the same web of litigation which has ensnared AT&T in Peck for the past several years through the maze of both state and federal courts.

© 07/12/2012 Lawrence B. Hunt of Hunt & Associates, P.C.  All rights reserved.