A federal district court recently invalidated regulations issued by the U.S. Department of Labor (DOL) that prohibit employees from including non-tipped employees in a tip pool in certain situations. In the case of Oregon Restaurants and Lodging v. Solis, the judge ruled that the DOL exceeded its rulemaking authority with regard to the tip-credit provisions of the Fair Labor Standards Act (FLSA) when it issued the provisions in 29 C.F.R. § 531.52, 531.54, and 531.59. These three provisions, which the DOL issued in 2011, prohibit employers that do not take a tip credit from contracting with their tipped employees to establish a tip pool that includes non-tipped employees. The court acknowledged that the FLSA did not explicitly address an employer’s ability to use employees’ tips when the employer does not take a tip credit. The court nevertheless rejected the DOL’s arguments that the FLSA was ambiguous or was silent and that its regulations addressed the implicit “gap” in the statute. In addressing this issue, the court stated:

Congressional silence often signifies unclear intent. But not here. Employing traditional tools of statutory construction . . . the intent of Congress is clear: Congress intended to impose conditions on employers that take a tip credit but did not intend to impose a freestanding requirement pertaining to all tipped employees.

In reaching its decision, the court relied upon the 2010 decision of the Ninth Circuit Court of Appeals in Cumbie v. Woody Woo, Inc. There, the appellate court ruled that a restaurant did not violate the FLSA by requiring its wait staff to participate in a tip pool from which kitchen staff received a portion of tips. The Ninth Circuit had rejected the same argument that the DOL made in the Oregon Restaurant case—that employees retain all their tips, regardless of whether the employer takes a tip credit, except in the limited situation in which a valid tip pool exists. In its 2011 final rule containing the tip-pool regulations, the DOL rejected the court’s reasoning in the Woody Woo case, stating that its interpretation of the FLSA filled the “gap” in the FLSA as to an employer’s ability to use an employee’s tips when the employer does not take a tip credit. However, the Oregon Restaurant court rejected the DOL’s position because the DOL exceeded its authority under the FLSA.

In the Oregon Restaurant case, the judge analyzed the DOL’s 2011 final tip-pooling rules to determine whether they were entitled to deference under the Supreme Court decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. First, the court acknowledged that the DOL had the general rulemaking authority to issue the challenged regulations. The court then turned to the question of whether Congress had addressed the precise question that the regulations were intended to answer, noting that if Congressional intent was clear, then the court and the DOL must effectuate the “unambiguously expressed intent of Congress.” Relying in part on the Woody Woo decision, the court analyzed the wording of the FLSA and found it to be clear and unambiguous. Congress intended for the FLSA to limit the use of tips by employers, it observed, only when the employer takes a tip credit such that an employee is allowed to retain all their tips except when there is a valid tip-pool arrangement. The court reasoned that, if Congress had wanted employees to retain all their tips, except where a valid tip pool is established, then it would not have needed to include the language about taking a tip credit.

Also, the court looked at the purpose of the tip-credit provisions in the FLSA, which gives employers a choice—either to pay a cash wage and take a tip credit to equal the minimum wage or to pay the full minimum wage. Under either option, an employee would receive the federal minimum wage. The court further reasoned that Congress did not intend to add the protection of guaranteeing an employee who is paid the minimum wage the right to retain all tips, except where a valid tip pool exists. Finally, the Oregon Restaurant court rejected the DOL’s argument that Congress left a “gap” or that it was “silent” and the regulations filled the gap or addressed the silence. The court stated that Congressional silence may suggest unclear intent, but not in this case. Rather, Congress clearly intended to limit an employer’s use of tips only as to employers that take a tip credit, but did not intend to impose such limitations on all tipped employees who are paid the minimum wage.

While this case may not be as far-reaching as some would like, it is an important decision. Notwithstanding efforts or claims by the DOL’s Wage and Hour Division to minimize its impact (since it is only one district court decision), the case is significant for employers that do business in states, such as Oregon and California, which prohibit an employer from taking a tip credit. The practice of sharing tips with non-tipped employees is reaffirmed as a legitimate business model to compensate and incentivize all employees to provide good service. More broadly, it indicates the willingness of the federal courts to act as a check-and-balance on the regulatory activities of agencies when they exceed their statutory authority. As agencies’ rulemaking activities grow, it is important that they exercise their power to regulate within their statutory authority and the intent of Congress. The case, as noted, also provides a good resource for arguments that Congressional “silence” is not necessarily an invitation to an agency to make rules; that is a useful tool for future litigation in other cases challenging an agency’s promulgation of rules.

Elizabeth A. Falcone is a shareholder in the Portland office of Ogletree Deakins. Alfred B. Robinson, Jr. is a shareholder in the Washington, D.C. office of Ogletree Deakins.

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Yesterday the Supreme Court of the United States issued its opinion in Lawson v. FMR LLC, No. 12-3, holding that the whistleblower protections of the Sarbanes-Oxley Act of 2002 protect not only the employees of regulated public companies but also the employees of contractors and subcontractors of those companies. By reaching into the workforces of companies that are not themselves regulated by Sarbanes-Oxley, but merely do business with regulated companies, the Court, through this decision, has vastly increased the scope of potential whistleblower claims. This increased scope will likely result in more Sarbanes-Oxley whistleblower litigation and, in particular, more litigation against non-public companies.

Jackie Hosang Lawson was employed by an investment advising firm that handled the day-to-day investment decisions for certain Fidelity mutual funds. The funds are public companies with no employees, but are managed by private firms such as Lawson’s employer. Lawson alleged that she had been constructively discharged—essentially, forced to resign—because she raised concerns about overstating certain expenses related to the management of the mutual funds. FMR moved to dismiss the case, arguing that Lawson could not bring an action because she was not an employee of a public company regulated by Sarbanes-Oxley.

The relevant language of the statute provides that neither a public company nor “any officer, employee, contractor, subcontractor, or agent of such company may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee” due to whistleblowing activity [emphasis added]. The question before the Court was whether the term “an employee” means an employee of the public company only or also an employee of any of the persons and entities prohibited from discriminating.

The Court concluded that Sarbanes-Oxley was intended not only to protect employees of the public company at issue, but also to “shelter[] employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.”

The Court based its conclusion on a number of factors. First, it reasoned that the text of the statute clearly supported its conclusion. It also noted that, at least in the mutual fund industry, it is common for the public company to have no employees and to manage its affairs entirely through outside contractors. In this context, whistleblower protection for employees of the public company only would make little sense. The Court also looked to the context and legislative history of the Sarbanes-Oxley Act, noting that it was designed as a response to the Enron scandal, which was perpetrated not only by Enron employees but by outside entities such as the Arthur Andersen accounting firm.

The Court declined to decide whether employees of all of the other actors governed by the whistleblower retaliation provision (“any officer, employee, contractor, subcontractor, or agent”) would also be covered. The Court concluded that it “need not determine the bounds of [the whistleblower provision] today” because the whistleblower claim made by Lawson and her co-plaintiff sought only a “mainstream application” of the provision. Nevertheless, it admitted that it would make little sense for employees of contractors to be covered but not employees of other actors specifically listed in the statute, such as public company employees and subcontractors.

In the dissenting opinion, Justice Sotomayor found no principled basis for limiting the majority’s reasoning. Thus, the dissent reasoned, someone who worked as a babysitter for an employee of a public company could bring a whistleblower claim under the majority’s decision based on an assertion that the employee had engaged in fraudulent activity covered by the act. This is because, pursuant to the majority’s reasoning, an employee of an employee of a public company would be protected.

Key Takeaways

Although it remains to be seen whether the Court or Congress will eventually place some limit on liability in scenarios such as the example described above, the Lawson decision should be a sobering one for employers. Sarbanes-Oxley whistleblower complaints are not exclusively the concern of public companies. All employers should ensure that they have robust internal compliance procedures in place, evaluate carefully internal complaints about company wrongdoing, and consider the likelihood that a business relationship with a public company might give rise to Sarbanes-Oxley whistleblower liability. Because Sarbanes-Oxley whistleblower claims are subject to different substantive and procedural rules than retaliation claims under other statutes, it is essential that employers act quickly to evaluate and minimize risk when such a claim is possible.

We will be covering this decision and the latest news from the Supreme Court at Ogletree Deakins’ national seminar, Workplace Strategies 2014, which will be held on May 7-10 at the Bellagio in Las Vegas. Designed for sophisticated human resources professionals and in-house counsel, this seminar will feature more than 75 topics and 180 speakers.

The attorneys in Ogletree Deakins’ Ethics Compliance, Investigations, and Whistleblower Response Practice Group provide our clients with compliance program best practice solutions, as well as assist clients with investigations and defense of claims under myriad whistleblower statutes, including Sarbanes-Oxley.

Jeffrey P. Dunlaevy is a shareholder in the Greenville office of Ogletree Deakins.

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