October 7, 2016

The Ninth Circuit Got It Wrong in ORLA v. Perez



This article originally appeared in the October 8, 2016, Digital Edition of the Portland Business Journal

“Our court today rejects the most elemental teaching of administrative law:  agencies exercise whatever powers they possess because – and only because – such powers have been delegated to them by Congress.”  So wrote Ninth Circuit Court of Appeals Judge Diarmuid O’Scannlain in a trenchant dissent to a September 6, 2016, Order issued by the Ninth Circuit Court of Appeals denying a petition to reconsider its fallacious opinion in Oregon Restaurant and Lodging Association v. Perez.  In the Perez decision issued on February 23, 2016, the Ninth Circuit, to the surprise of many, disregarded its own precedent in Cumbie v. Woodie Woo to hold that the United States Department of Labor (“DOL”) had lawfully promulgated a rule under Section 203(m) of the Fair Labor Standards Act (“FLSA”) that restricts employers from implementing “tip-pooling” arrangements that require employees that are customarily and regularly tipped (such as restaurant servers) to share such tips with their fellow employees who are not customarily and regularly tipped (such as kitchen staff).  Not only does this decision offend generations of reasonable industry practices to equitably allow all restaurant and other service industry employees to share in the financial benefits that flow from excellent service to grateful customers that were produced by an entire team of dedicated service professionals, it simply disregards the constitutional principle of separation of powers–a cornerstone of our democracy.  Or, as Judge O’Scannlain put it, “Indeed, in the panel majority’s attempt to dance around Cumbie and its manifestly correct reading of Section 203(m), it has stumbled off a constitutional precipice.”


The rule at issue was promulgated by the DOL in 2011 in reaction to a 2010 decision by the Ninth Circuit Court of Appeals in Cumbie.  In Cumbie, the court interpreted Section 203(m) of the FLSA not to restrict employers from implementing tip-pooling arrangements that included both servers and kitchen staff (and others) regardless of whether such employees are customarily and regularly tipped.  The crux of this decision was a determination by the court that the plain language of the statute applied to place parameters on tip-pooling arrangements only for those employers that seek to take advantage of a “tip credit” as a means of meeting the employer’s obligation to pay at least the state or federal mandated minimum wage.  Simply put, if the employer decides to pay minimum wage to its employees without factoring in tips received by employees, the tip-pooling restrictions in Section 203(m) do not apply and the employer is free to require employees to share tips in any manner it so chooses.    


The problem with the DOL’s rule is that it purports to overturn a judicial opinion (Cumbie) interpreting the meaning of a legislatively adopted statute through the exercise of executive authority.  As described by the dissent in Perez, “the Department is in reality legislating, yet that is a power the Constitution does not permit executive agencies to exercise.”  You do not have to have a law degree or be an expert in Constitutional theory to immediately recognize the problem with this rule, which is why the Oregon Restaurant and Lodging Association, along with the National Restaurant Association, the Washington Restaurant Association, and others, filed suit to challenge the rule.  This challenge served not only to defend longstanding and reasonable industry employment practices, but to challenge the apparent belief by the DOL, and other executive agencies, that, “…executive agencies have plenary power to regulate whatever they want, unless and until Congress affirmatively preempts them,” as Judge O’Scannlain puts it.  Importantly, the industry’s position in this regard was not only supported by Cumbie, which upheld effectively the same tip pooling practices, but by several other federal district courts and circuit courts of appeal. 


In upholding the DOL’s rule in its February 23, 2016, Opinion, and in declining to reconsider that Opinion in its September 6, 2016, Order, the Ninth Circuit simply got it wrong.  As Judge O’Scannlain lamented, “the only court in the land to misread Cumbie is our own!”  I will take it one step further.  Decisions like the one handed down by the Ninth Circuit in Perez are dangerous as they run the serious risk of destabilizing the citizenry’s confidence in the even-handed and impartial exercise of limited authority granted to both the judicial and executive branches under the United States Constitution.  We can only hope, as has been necessary all too often in the past, that the United States Supreme Court will agree to review and repudiate the Ninth Circuit Court of Appeals’ flawed, and to a large extent, reckless decision in Perez.  Doing so will not only be in the best interests of the hospitality industry as a whole, but will re-affirm the principle of separation of powers and remind executive agencies of their proper non-legislative role in our democracy.  

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