Oregon Restaurant and Lodging v. Thomas Perez

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

OREGON RESTAURANT AND No. 13-35765
LODGING ASSOCIATION, a non-profit
Oregon corporation; WASHINGTON D.C. No.
RESTAURANT ASSOCIATION, a non- 3:12-cv-01261-
profit Washington corporation; MO
ALASKA CABARET, HOTEL,
RESTAURANT & RETAILERS
ASSOCIATION, a non-profit Alaska
corporation; NATIONAL
RESTAURANT ASSOCIATION, a non-
profit Illinois corporation; DAVIS
STREET TAVERN LLC, an Oregon
limited liability company; SUSAN
PONTON, an individual,
Plaintiffs-Appellees,

v.

THOMAS PEREZ, in his official
capacity as Secretary of the U.S.
Department of Labor; LAURA
FORTMAN, in her official capacity as
Deputy Administrator of the U.S.
Department of Labor; U.S.
DEPARTMENT OF LABOR,
Defendants-Appellants.
2 OREGON REST. & LODGING ASS’N V. PEREZ

Appeal from the United States District Court
for the District of Oregon
Michael W. Mosman, District Judge, Presiding

JOSEPH CESARZ; QUY NGOC TANG, No. 14-15243
individually and on behalf of all
others similarly situated, and all D.C. No.
persons whose names are set forth in 2:13-cv-00109-
Exhibit A to the First Amended RCJ-CWH
Complaint,
Plaintiffs-Appellants,
OPINION
v.

WYNN LAS VEGAS, LLC; ANDREW
PASCAL; STEVE WYNN,
Defendants-Appellees.

Appeal from the United States District Court
for the District of Nevada
Robert Clive Jones, District Judge, Presiding

Argued and Submitted
July 10, 2015—Portland, Oregon*

Filed February 23, 2016

*
We heard oral argument in these two cases together, and we now
consolidate them for disposition. See Fed. R. App. P. 3(b)(2); Mattos v.
Agarano, 661 F.3d 433, 436 n.1 (9th Cir. 2011) (en banc).
 OREGON REST. & LODGING ASS’N V. PEREZ 3

Before: Harry Pregerson, N. Randy Smith,
and John B. Owens, Circuit Judges.

Opinion by Judge Pregerson;
Dissent by Judge N.R. Smith

SUMMARY**

Fair Labor Standards Act

The panel reversed the district courts’ decisions in favor
of employers, and held that Cumbie v. Woody Woo, Inc.,
596 F.3d 577 (9th Cir. 2010), did not foreclose the
Department of Labor’s ability to promulgate subsequently a
formal rule that extended the tip pooling restrictions of
Section 203(m) of the Fair Labor Standards Act of 1938
(“FLSA”); and remanded for further proceedings.

Under 29 U.S.C. § 203(m), an employer may fulfill part
of its hourly minimum wage obligation to a tipped employee
with the employee’s tips by taking a tip credit; and the tip
pool is valid if it is comprised exclusively of employees who
are “customarily and regularly” tipped. In 2010, in Cumbie,
the court held that a tip pooling arrangement comprised of
both customarily tipped employees and non-customarily
tipped employees did not violate section 203(m) of the FLSA
because section 203(m) was silent as to employers who do
not take a tip credit. In 2011, the Department of Labor
promulgated a formal rule that extended the tip pool

**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 OREGON REST. & LODGING ASS’N V. PEREZ

restrictions of section 203(m) to all employers, not just to
those who take a tip credit. 76 Fed. Reg. 18,832, 18,841–42
(April 5, 2011).

The district courts in these cases held that Cumbie
foreclosed the Department of Labor’s ability to promulgate
the 2011 rule and that the 2011 rule was invalid because it
was contrary to Congress’s clear intent.

The panel held that the Department of Labor may regulate
the tip pooling practices of employers who do not take a tip
credit. The panel disagreed with the district courts’
applications of Cumbie and their analyses under Chevron,
U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837
(1984). The panel held that FLSA section 203(m)’s clear
silence as to employers who do not take a tip credit left room
for the Department of Labor to promulgate the 2011 rule. The
panel concluded that step one of the Chevron analysis was
satisfied. At Chevron step two, the panel concluded that the
Department of Labor’s interpretation in the 2011 rule was
reasonable. The panel held that the Department of Labor’s
regulation withstood Chevron review.

Judge N.R. Smith dissented because he would hold that
the cases are controlled by the holding in Cumbie, and he
would affirm the district courts.
 OREGON REST. & LODGING ASS’N V. PEREZ 5

COUNSEL

John S. Koppel (argued) and Michael Jay Singer, Attorneys,
United States Department of Justice, Civil Division,
Washington, D.C.; Stuart F. Delery, Assistant Attorney
General, Office of the Attorney General, Washington, D.C.;
S. Amanda Marshall, United States Attorney, United States
Attorneys’ Office, Oregon, for Defendants-Appellants
Thomas Perez, et al.

Joshua D. Buck (argued), Thierman Buck, Reno, Nevada;
Leon Greenberg and Dana Sniegocki, Leon Greenberg
Professional Corporation, Las Vegas, Nevada, for Plaintiffs-
Appellants Joseph Cesarz and Quy Ngoc Tang.

Paul DeCamp (argued), Jackson Lewis P.C., Reston,
Virginia; Nicholas M. Beerman, Peter H. Nohle, and William
Robert Donovan, Jr., Jackson Lewis P.C., Seattle,
Washington; Scott Oberg Oborn, Jackson Lewis P.C.,
Portland, Oregon, for Plaintiffs-Appellees Oregon Restaurant
and Lodging Association, et al.

Eugene Scalia (argued) and Alexander Cox, Gibson Dunn &
Crutcher LLP, Washington, D.C.; Gregory J. Kramer and
Brian J. Cohen, Kramer Zucker Abbott, Las Vegas, Nevada,
for Defendants-Appellees Wynn Las Vegas, LLC, et al.
6 OREGON REST. & LODGING ASS’N V. PEREZ

OPINION

PREGERSON, Senior Circuit Judge:

Under the Fair Labor Standards Act of 1938 (“FLSA”), as
amended in 1974, an employer may fulfill part of its hourly
minimum wage obligation to a tipped employee with the
employee’s tips. 29 U.S.C. § 203(m). This practice is known
as taking a “tip credit.” Section 203(m) of the FLSA
obligates 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. Id. Under section 203(m), a tip pool is valid if it is
comprised exclusively of employees who are “customarily
and regularly” tipped. Id.

In both cases before this court, Employer-Appellees did
not take a tip credit against their minimum wage obligation;
they paid their tipped employees at least the federal minimum
wage. Employer-Appellees required their employees to
participate in tip pools. Unlike the tip pools contemplated by
section 203(m), however, these tip pools were comprised of
both customarily tipped employees and non-customarily
tipped employees.

In 2010, we held in Cumbie v. Woody Woo, Inc. that this
type of tip pooling arrangement does not violate section
203(m) of the FLSA, because section 203(m) was silent as to
employers who do not take a tip credit. 596 F.3d 577, 583
(9th Cir. 2010). In 2011, shortly after Cumbie was decided,
the Department of Labor (“DOL”) promulgated a formal rule
(“the 2011 rule”) that extended the tip pool restrictions of
section 203(m) to all employers, not just those who take a tip
credit. 76 Fed. Reg. 18,832, 18,841–42 (April 5, 2011).
 OREGON REST. & LODGING ASS’N V. PEREZ 7

The United States District Court for the District of
Oregon held that Cumbie foreclosed the DOL’s ability to
promulgate the 2011 rule and that the 2011 rule was invalid
because it was contrary to Congress’s clear intent. Or. Rest.
& Lodging v. Solis, 948 F. Supp. 2d 1217, 1218, 1226 (D. Or.
2013). The United States District Court for the District of
Nevada followed suit. Cesarz v. Wynn Las Vegas, LLC, No.
2:13-cv-00109-RCJ-CWH, 2014 WL 117579, at *3 (D. Nev.
Jan. 10, 2014). For the reasons set forth below, we reverse
both district court decisions.

Background

In 1937, 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. A self-supporting and self-respecting
democracy can plead no justification for . . . chiseling
workers’ wages . . . .” H.R. Rep. No. 93-913 at 5–6 (1974).
One year later, in 1938, Congress passed the FLSA.
29 U.S.C. § 201. “[T]he FLSA was designed to give specific
minimum protections to individual workers and to ensure that
each employee covered by the Act . . . would be protected
from the ‘evil of overwork as well as underpay.’” Barrentine
v. Ark.-Best Freight Sys., Inc., 450 U.S. 728, 739 (1981)
(quoting Overnight Motor Transp. Co. v. Missel, 316 U.S.
572, 578 (1942)) (internal quotation marks omitted). The
FLSA was intended to provide “greater dignity and security
and economic freedom for millions of American workers.”
H.R. Rep. No. 93-913 at 6 (1974) (quoting President
Kennedy).

In 1942, the Supreme Court in Williams v. Jacksonville
Terminal Co. addressed the question whether tips are a
8 OREGON REST. & LODGING ASS’N V. PEREZ

component of an employee’s wages under the FLSA.
315 U.S. 386, 388 (1942). The petitioners, who worked as
“red caps” or baggage handlers, earned a combination of
wages and tips that equaled the FLSA prescribed minimum
wage. Id. They sued their employer, arguing that the FLSA
required that they be paid the minimum wage without regard
to their earnings from tips. Id. at 389. The Court held that
“where tipping is customary, the tips, in the absence of an
explicit contrary understanding, belong to the recipient.” Id.
at 397. However, when “an arrangement is made by which
the employee agrees to turn over the tips to the employer, in
the absence of statutory interference, no reason is perceived
for its invalidity.” Id. Because the baggage handlers
continued to work after being notified that tips would
constitute part of their wages, the Court held that they
accepted this new compensation arrangement. Id. at 398.

After Jacksonville Terminal, the FLSA underwent a series
of amendments, which “extended the Act’s coverage.” H.R.
Rep. 93-913 at 4. These amendments raised the federal
minimum wage and expanded the FLSA’s coverage to
various public and private sector employees. In 1966, the
FLSA was amended to include hotel and restaurant
employees. 73 Fed. Reg. 43,654, 43,659 (July 28, 2008). To
alleviate the new minimum wage obligations of hotels and
restaurants, “the 1966 amendments also provided for the first
time, within section [20]3(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.’” 76 Fed. Reg. at 18,838.

In 1974, the FLSA was again amended. First, Congress
expressly delegated to the DOL the broad authority “to
prescribe necessary rules, regulations, and orders” to
 OREGON REST. & LODGING ASS’N V. PEREZ 9

implement the FLSA amendments of 1974. Pub. L. No. 93-
259, § 29(b), 88 Stat. 55 (1974). Second, Congress revised
the language in 29 U.S.C. § 203(m) to read:

In determining the wage an employer is
required to pay a tipped employee, the amount
paid such employee by the employee’s
employer shall be an amount equal to—

(1) the cash wage paid such employee which
for purposes of such determination shall not
be less than the cash wage required to be paid
such an employee on [August 20, 1996]; and

(2) an additional amount on account of the
tips received by such employee which amount
is equal to the difference between the wage
specified in paragraph (1) and the wage in
effect under section 206(a)(1) of this title.1

1
In other words, under section 203(m) there are two components of the
employer’s wage obligation to tipped employees: the employer’s cash
wage obligation to the employee and the employee’s tips. The
combination of the employer’s cash wage and the employee’s tips must
equal at least the federal minimum wage. Currently, the employer’s
minimum cash wage obligation to the employee is $2.13 per hour and the
federal minimum wage is $7.25 per hour.

If the employee earns at least $5.12 per hour in tips, then the
employer has no further cash wage obligation because the employer’s
minimum wage obligation of $2.13 plus the employee’s tips of at least
$5.12 equals the minimum wage. In this example, the employer would be
taking a tip credit of $5.12 per hour.

If the employee earns less than $5.12 per hour in tips, the employer
would be responsible for making up the difference between the tip credit
10 OREGON REST. & LODGING ASS’N V. PEREZ

The additional amount on account of tips may
not exceed the value of the tips actually
received by an employee. The preceding 2
sentences shall not apply with respect to any
tipped employee unless such employee has
been informed by the employer of the
provisions of this subsection, and all tips
received by such employee have been retained
by the employee, except that this subsection
shall not be construed to prohibit the pooling
of tips among employees who customarily and
regularly receive tips.

29 U.S.C. § 203(m). As amended in 1974, section 203(m)
required employers to give their employees prior notice of
their intent to use a tip credit and “made it clear that tipped
employees must receive at least minimum wage and must
generally retain any tips.” 73 Fed. Reg. at 43,659.

In 2010, we held in Cumbie v. Woody Woo, Inc. that
section 203(m) does not restrict the tip pooling practices of
employers who do not take tip credits. 596 F.3d at 583. The
employer, Woody Woo, Inc., paid its servers a cash wage that
exceeded the federal minimum wage but required its servers
to contribute their tips to a “tip pool” that included employees
who were not regularly or customarily tipped. Id. at 578–79.
The servers claimed that Woody Woo’s tip pooling practice
violated section 203(m) because the practice included non-
customarily tipped employees. Id. at 579. We applied the
“default” rule from Jacksonville Terminal, and found that “in

and the minimum wage. For example, if an employee receives $1.00 per
hour in tips, the employer would be required to pay $6.25 per hour. In this
example, the employer would be taking a tip credit of $1.00 per hour.
 OREGON REST. & LODGING ASS’N V. PEREZ 11

the absence of statutory interference, no reason is perceived
for [Woody Woo’s tip pooling practice’s] invalidity.” Id.
(quoting Jacksonville Terminal, 315 U.S. at 397) (emphasis
and internal quotation marks omitted).

In Cumbie, we read section 203(m) to apply only to
employers who did take a tip credit; for these employers,
section 203(m) is considered “statutory interference.”
596 F.3d at 581. In contrast, for an employer that meets its
minimum wage obligation without taking a tip credit, section
203(m) is silent; therefore, there is no statutory interference.
Without statutory interference, Jacksonville Terminal’s
default rule controlled, and we concluded that Woody Woo’s
tip pooling practice was valid. Id. at 583.

In 2008, two years before the Cumbie decision, the DOL
published a notice of proposed rulemaking and request for
comments under the Administrative Procedure Act, 5 U.S.C.
§§ 556–557. The lengthy notice set forth specific revisions
to sections that governed tipped employees in order “to
incorporate . . . legislative history, subsequent court
decisions, and the [DOL’s] interpretations” into the FLSA.
73 Fed. Reg. at 43,659. More than ten different organizations
submitted comments. These comments and the Cumbie
decision disclosed that section 203(m)’s tip pooling
restrictions could be read to apply only to employers who take
a tip credit. The comments also revealed that section 203(m)
could encourage abuse in an already “high-violation
industry.” See 76 Fed. Reg. at 18,840–42.

In 2011, in response to these comments and the statutory
silence that Cumbie exposed, the DOL promulgated new rules
to make it clear that tips are the property of the employee. Id.
at 18,841–42; 29 C.F.R. §§ 531.52, 531.55, 531.59.
12 OREGON REST. & LODGING ASS’N V. PEREZ

Specifically, the DOL revised 29 C.F.R. § 531.52 by
replacing the sentence:

In the absence of an agreement to the contrary
between the recipient and a third party, a tip
becomes the property of the person in
recognition of whose service it is presented by
the customer.

with the following language:

Tips are the property of the employee whether
or not the employer has taken a tip credit
under section [20]3(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 section [20]3(m):
As a credit against its minimum wage
obligations to the employee, or in furtherance
of a valid tip pool.

Compare 32 Fed. Reg. 13,575, 13,580 (Sept. 28, 1967), with
29 C.F.R. § 531.52 (2011). The 2011 rule expressly prohibits
the use of a tip pool that violates section 203(m) regardless of
whether an employer uses a tip credit.

These revisions to 29 C.F.R. § 531.52 are the subject of
the two cases before us. The Oregon Restaurant and Lodging
Association, consisting of restaurants, taverns, and one
individual, brought suit against the DOL, challenging the
validity of the 2011 rule and seeking to enjoin its
enforcement. Later, a group of casino dealers brought suit
against their employer, Wynn Las Vegas, LLC, challenging
 OREGON REST. & LODGING ASS’N V. PEREZ 13

Wynn’s tip pooling practice as violating the 2011 rule. In
both cases, the employers paid the employees at least the
federal minimum wage and did not take a tip credit. The
employers also instituted tip pools, in which customarily
tipped employees, i.e., servers and casino dealers, were
required to share tips with non-customarily tipped employees,
i.e., kitchen staff and casino floor supervisors. Both district
courts sided with the employers, relying in large part on our
holding in Cumbie.2 The DOL and the casino dealers
appealed.

Discussion

I. Standard of Review

We review a district court’s grant of summary judgment
de novo. Los Coyotes Band of Cahuilla & Cupeño Indians v.
Jewell, 729 F.3d 1025, 1035 (9th Cir. 2013). We also review
a district court’s grant of a motion to dismiss de novo. Fayer
v. Vaughn, 649 F.3d 1061, 1063–64 (9th Cir. 2011).

We review the validity of an agency’s regulatory
interpretation of a statute under the two-step framework set
forth in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
467 U.S. 837 (1984).3 The first step is to ask, “has

2
In Oregon, the district court granted summary judgment in favor of the
Oregon Restaurant and Lodging Association. In Nevada, the district court
granted Wynn’s motion to dismiss under 12(b)(6) for failure to state a
claim.
3
At Chevron step zero, we ask whether the Chevron framework applies
at all. An “administrative implementation of a particular statutory
provision qualifies for Chevron deference when it appears that Congress
delegated authority to the agency generally to make rules carrying the
14 OREGON REST. & LODGING ASS’N V. PEREZ

[Congress] directly spoken to the precise question at issue.”
Id. at 842. If Congress’s intent is clear, then that is the end of
our inquiry. Id. at 842–43. If, however, “the statute is silent
or ambiguous with respect to the specific issue,” we proceed
to step two and ask if the agency’s action is “based on a
permissible construction of the statute.” Id. at 843. Even if
we believe the agency’s construction is not the best
construction, it is entitled to “controlling weight unless [it is]
arbitrary, capricious, or manifestly contrary to the statute.”
Id. at 844; see also Nat’l Cable & Telecomms. Ass’n v. Brand
X Internet Servs.(“Brand X”), 545 U.S. 967, 980 (2005).

II. Analysis

When the Oregon district court and the Nevada district
court conducted their Chevron analysis, both held that
Cumbie left “no room” for the DOL to promulgate its 2011
rule and thus granted Oregon Restaurant & Lodging’s motion
for summary judgment, Or. Rest. & Lodging, 948 F. Supp. 2d
at 1226, and Wynn’s motion to dismiss, Cesarz, 2014 WL
117579, at *3. We disagree with the district courts’
applications of Cumbie and their Chevron analyses.

force of law, and that the agency interpretation claiming deference was
promulgated in the exercise of that authority.” United States v. Mead
Corp., 533 U.S. 218, 226–27 (2001). In 1974, Congress granted the
Secretary of Labor the authority to “prescribe necessary rules, regulations,
and orders with regard to the [1974] amendments” to the FLSA, which
included section 203(m). Pub. L. No. 93-259, § 29(b), 88 Stat. 55, 76.
The DOL exercised its rulemaking authority within its substantive field
when it promulgated the 2011 rule. This is sufficient to satisfy the
Chevron step zero inquiry. See City of Arlington v. FCC, 133 S. Ct. 1863,
1874 (2013).
 OREGON REST. & LODGING ASS’N V. PEREZ 15

A. Chevron Step One

The precise question before this court is whether the DOL
may regulate the tip pooling practices of employers who do
not take a tip credit. The restaurants and casinos argue that
we answered this question in Cumbie. We did not.

Our task in Cumbie was to decide whether a restaurant’s
tip pooling practice violated the FLSA. 596 F.3d at 578. We
did not hold that the FLSA unambiguously and categorically
protects the practice in question. Rather, we held that
“nothing in the text purports to restrict” the practice in
question. Id. at 583. In reaching this holding, we relied on
Christensen, in which the “Supreme Court . . . made clear that
an employment practice does not violate the FLSA unless the
FLSA prohibits it.” Id. (citing Christensen v. Harris Cty, 529
U.S. 576, 588 (2000)). Christensen illustrates the crucial
distinction between statutory language that affirmatively
protects or prohibits a practice and statutory language that is
silent about that practice.

In Christensen, the plaintiffs-employees worked a
substantial amount of unpaid overtime for their employer,
Harris County, for which the employees accumulated
“compensatory time” in lieu of cash compensation at a rate of
one and a half hours for every hour of overtime worked.
529 U.S. at 579–80. The FLSA expressly authorized the use
of the compensatory time but also set a statutory cap on the
amount of compensatory time an employee could accrue,
after which the employer would be required to pay monetary
compensation for every additional hour of overtime worked.
Id. To avoid having to pay large sums of monetary overtime
compensation, Harris County enacted a policy whereby it
could force its employees to use their compensatory time so
16 OREGON REST. & LODGING ASS’N V. PEREZ

that they would not reach the statutory cap. Id. at 580–81.
The employees sued and argued that Harris County’s policy
violated a provision of the FLSA that required employers to
reasonably accommodate employee requests to use
compensatory time. Id. at 581 (citing 29 U.S.C. § 207(o)(5)).

The Supreme Court rejected the employees’ argument
because “no relevant statutory provision expressly or
implicitly prohibits” the employer’s policy. Id. at 588. As
we held in Cumbie, the Court in Christensen held that the
employer’s policy did not violate the FLSA because nothing
in the FLSA prohibited the employer’s policy. Id. at 585–86.
The Court reasoned that “[b]ecause the statute is silent on this
issue and because Harris County’s policy is entirely
compatible with [the statute],” there was no violation. Id. at
585 (emphasis added). Thus, just as we did in Cumbie, the
Court in Christensen construed the FLSA’s silence in favor
of the employer.

But, critically, the Court in Christensen did not preclude
the DOL from enacting future regulations that prohibited the
challenged policy. Indeed, the Court suggested that were the
agency to enact future regulations, Chevron deference would
apply. See id. at 586–87. The Court noted that “[o]f course,
the framework of deference set forth in Chevron does apply
to an agency interpretation contained in a regulation. But in
this case the Department of Labor’s regulation does not
address the issue of compelled compensatory time.” Id. at
587. The Court also acknowledged that the DOL had issued
an opinion letter on the subject, but noted that an
interpretation in an opinion letter is not entitled to Chevron
deference because it is “not one arrived at after, for example,
a formal adjudication or notice-and-comment rulemaking.”
Id. Five Justices joined this portion of the Court’s opinion,
 OREGON REST. & LODGING ASS’N V. PEREZ 17

including Justice Souter, who filed a single-sentence
concurrence:

I join the opinion of the Court on the
assumption that it does not foreclose a reading
of the Fair Labor Standards Act of 1938 that
allows the Secretary of Labor to issue
regulations limiting forced use.

Id. at 589 (Souter, J., concurring). The Court’s comments
regarding Chevron deference, along with Justice Souter’s
concurrence, suggest that the DOL, by regulation, could
prohibit the very practice the Court held to be neither
explicitly nor implicitly prohibited by the FLSA. Following
that reasoning, Cumbie should not be read to foreclose the
DOL’s ability to subsequently issue a regulation prohibiting
the challenged tip pooling practice.

Here, the Oregon district court, the Nevada district court,
the parties, and the dissent overlook the part of Christensen
that discussed Chevron deference and Judge Souter’s
concurrence. Instead, the district courts, the parties, and the
dissent focus their attention on the rule from Brand X.

In Brand X, the Supreme Court held that “[a] court’s prior
judicial construction of a statute trumps an agency
construction otherwise entitled to 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.” 545 U.S. at 982. Relying on
Brand X, the restaurants and casinos argued that Cumbie
trumps the 2011 rule because Cumbie relied on the “clear”
language of the FLSA. The district courts adopted this
18 OREGON REST. & LODGING ASS’N V. PEREZ

position. Or. Rest. & Lodging, 948 F. Supp. 2d at 1223;
Cesarz, 2014 WL 117579 at *3.

But as Christensen strongly suggests, there is a distinction
between court decisions that interpret statutory commands
and court decisions that interpret statutory silence. Moreover,
Chevron itself distinguishes between statutes that directly
address the precise question at issue and those for which the
statute is “silent.” Chevron, 467 U.S. at 843. As such, if a
court holds that a statute unambiguously protects or prohibits
certain conduct, the court “leaves no room for agency
discretion” under Brand X, 545 U.S. at 982. However, if a
court holds that a statute does not prohibit conduct because it
is silent, the court’s ruling leaves room for agency discretion
under Christensen.

Cumbie falls precisely into the latter category of
cases—cases grounded in statutory silence. When we
decided Cumbie, the DOL had not yet promulgated the 2011
rule. Thus, there was no occasion to conduct a Chevron
analysis in Cumbie because there was no agency
interpretation to analyze.4 The Cumbie analysis was limited

4
In Cumbie, after citing Jacksonville Terminal for the “background
principle” that an arrangement to turn over or redistribute tips is valid “in
the absence of statutory interference,” we noted that we “need not decide
whether” the DOL’s over forty-year-old regulations governing tips “are
still valid and what level of deference they merit” “because we conclude
that the meaning of the FLSA’s tip credit provision is clear.” 596 F.3d at
579 & n.6. However, the DOL regulations at the time did not specifically
address the issue of employers who require tip pooling and do not take a
tip credit. See 32 Fed. Reg. at 13,580; see also Christensen, 529 U.S. at
587. Moreover, contrary to the dissent’s assertion, our characterization in
Cumbie of the FLSA’s tip credit provision as “clear” does not necessarily
foreclose agency discretion. What was “clear” in Cumbie was that the
FLSA’s tip credit provision did not impose any “statutory interference”
 OREGON REST. & LODGING ASS’N V. PEREZ 19

to the text of section 203(m). After a careful reading of
section 203(m) 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” and therefore there
was “no statutory impediment” to the practice. 596 F.3d at
583. Applying the reasoning in Christensen, we conclude
that section 203(m)’s clear silence as to employers who do
not take a tip credit has left room for the DOL to promulgate
the 2011 rule. Whereas the restaurants, casinos, and the
district courts equate this silence concerning employers who
do not take a tip credit to “repudiation” of future regulation
of such employers, we decline to make that great leap without
more persuasive evidence. See United States v. Home
Concrete & Supply, LLC, 132 S. Ct 1836, 1843 (2012) ( “[A]
statute’s silence or ambiguity as to a particular issue means
that Congress has . . . likely delegat[ed] gap-filling power to
the agency[.]”); Entergy Corp. v. Riverkeeper, Inc., 556 U.S.
208, 222 (2009) (“[S]ilence is meant to convey nothing more
than a refusal to tie the agency’s hands . . . .”); S.J. Amoroso
Constr. Co. v. United States, 981 F.2d 1073, 1075 (9th Cir.
1992) (“Without language in the statute so precluding [the
agency’s challenged interpretation], it must be said that
Congress has not spoken to the issue.”).

In sum, we conclude that step one of the Chevron analysis
is satisfied because the FLSA is silent regarding the tip
pooling practices of employers who do not take a tip credit.
Our decision in Cumbie did not hold otherwise.

that would invalidate tip pooling when no tip credit is taken – i.e., that the
FLSA was silent regarding this practice.
20 OREGON REST. & LODGING ASS’N V. PEREZ

B. Chevron Step Two

Having found that the statute is silent as to the precise
question at issue, we continue to step two. At Chevron step
two, we must determine if the DOL’s interpretation is
reasonable. Chevron, 467 U.S. at 843–44. This is a generous
standard, requiring deference “even if the agency’s reading
differs from what the court believes is the best statutory
interpretation.” Brand X, 545 U.S. at 980. We may reject an
agency’s construction only if it is arbitrary, capricious, or
manifestly contrary to the statute. Chevron, 467 U.S. at 844.
To determine whether the DOL’s interpretation is reasonable,
“we look 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.” Nat. Res.
Def. Council v. U.S. Envtl. Prot. Agency, 526 F.3d 591, 605
(9th Cir. 2008) (citation omitted).

The DOL promulgated the 2011 rule after taking into
consideration numerous comments and our holding in
Cumbie. The AFL-CIO, National Employment Lawyers
Association, and the Chamber of Commerce all commented
that section 203(m) was either “confusing” or “misleading”
with respect to the ownership of tips. 76 Fed. Reg. at
18840–41. The DOL also considered our reading of section
203(m) in Cumbie and concluded that, as written, 203(m)
contained a “loophole” that allowed employers to exploit the
FLSA tipping provisions. Id. at 18841. It was certainly
reasonable to conclude that clarification by the DOL was
needed. The DOL’s clarification—the 2011 rule—was a
reasonable response to these comments and relevant case law.

The legislative history of the FLSA supports the DOL’s
interpretation of section 203(m) of the FLSA. An
 OREGON REST. & LODGING ASS’N V. PEREZ 21

“authoritative source for finding the Legislature’s intent lies
in the Committee Reports on the bill, which represent the
considered and collective understanding of those
Congressmen [and women] involved in drafting and studying
proposed legislation.” Garcia v. United States, 469 U.S. 70,
76 (1984) (citation and internal quotation marks omitted). On
February 21, 1974, the Senate Committee published its views
on the 1974 amendments to section 203(m). S. Rep. No. 93-
690 (1974).

Employer-Appellees argue that the report reveals an
intent contrary to the DOL’s interpretation because the report
states that an “employer will lose the benefit of [the tip credit]
exception if tipped employees are required to share their tips
with employees who do not customarily and regularly receive
tips[.]” In other words, Appellees contend that Congress
viewed the ability to take a tip credit as a benefit that came
with conditions and should an employer fail to meet these
conditions, such employer would be ineligible to reap the
benefits of taking a tip credit. While this is a fair
interpretation of the statute, it is a leap too far to conclude
that Congress clearly intended to deprive the DOL the ability
to later apply similar conditions on employers who do not
take a tip credit.

Moreover, the surrounding text in the Senate Committee
report supports the DOL’s reading of section 203(m). The
Committee reported that the 1974 amendment “modifies
section [20]3(m) of the Fair Labor Standards Act by requiring
. . . that all tips received be paid out to tipped employees.” S.
Rep. No. 93-690, at 42. 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.”
29 C.F.R. § 531.52. In the same report, the Committee wrote
22 OREGON REST. & LODGING ASS’N V. PEREZ

that “tipped employee[s] should have stronger protection,”
and reiterated that a “tip is . . . distinguished from payment of
a charge . . . [and the customer] has the right to determine
who shall be the recipient of the gratuity.” S. Rep. No. 93-
690, at 42.

In 1977, the Committee again reported that “[t]ips are not
wages, and under the 1974 amendments tips must be retained
by the employees . . . and cannot be paid to the employer or
otherwise used by the employer to offset his wage obligation,
except to the extent permitted by section [20]3(m).” S. Rep.
No. 95-440 at 368 (1977) (emphasis added). The use of the
word “or” supports the DOL’s interpretation of the FLSA
because it implies that the only acceptable use by an
employer of employee tips is a tip credit.

Additionally, we find that the purpose of the FLSA does
not support the view that Congress clearly intended to
permanently allow employers that do not take a tip credit to
do whatever they wish with their employees’ tips. The
district courts’ reading that the FLSA provides “specific
statutory protections” related only to “substandard wages and
oppressive working hours” is too narrow. As previously
noted, the FLSA is a broad and remedial act that Congress
has frequently expanded and extended.

Considering the statements in the relevant legislative
history and the purpose and structure of the FLSA, we find
that the DOL’s interpretation is more closely aligned with
Congressional intent, and at the very least, that the DOL’s
interpretation is reasonable.
 OREGON REST. & LODGING ASS’N V. PEREZ 23

Conclusion

To be clear, we have no quarrel with Cumbie v. Woody
Woo Inc., 596 F.3d 577 (9th Cir. 2010). Our conclusion with
respect to Cumbie is only that its holding was grounded in
statutory silence. Following Christensen v. Harris Cty.,
529 U.S. 576 (2000), we find that Cumbie does not foreclose
the DOL’s ability to regulate tip pooling practices of
employers who do not take a tip credit.

Applying Chevron, we conclude that Congress has not
addressed the question at issue because section 203(m) is
silent as to the tip pooling practices of employers who do not
take a tip credit. 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.

Therefore, having decided that the regulation withstands
Chevron review, we reverse both judgments and remand for
proceedings consistent with this opinion.

REVERSED and REMANDED.
24 OREGON REST. & LODGING ASS’N V. PEREZ

N.R. SMITH, Circuit Judge, dissenting:

Colleagues, even if you don’t like circuit precedent, you
must follow it. Afterwards, you call the case en banc. You
cannot create your own contrary precedent.1

This case is nothing more than Cumbie II. Because the
majority ignores our precedent in Cumbie v. Woody Woo, Inc.
(“Cumbie”), 596 F.3d 577 (9th Cir. 2010), I begin by
describing it in some detail. I will then compare Cumbie to
this case.

In Cumbie, a waitress working at an Oregon restaurant
sued the restaurant, alleging that its tip-pooling arrangement
violated 29 U.S.C. § 203(m). Id. at 579.

[The restaurant] paid its servers a cash wage
at or exceeding Oregon’s minimum wage,
which at the time was $2.10 more than the
federal minimum wage. In addition to this
cash wage, the servers received a portion of
their daily tips. [The restaurant] required its
servers to contribute their tips to a “tip pool”
that was redistributed to all restaurant
employees. The largest portion of the tip pool
(between 55% and 70%) went to kitchen staff
(e.g., dishwashers and cooks), who are not

1
As a three-judge panel of this circuit, we are bound by prior panel
opinions and can only reexamine them when “the reasoning or theory of
our prior circuit authority is clearly irreconcilable with the reasoning or
theory of intervening higher authority.” Miller v. Gammie, 335 F.3d 889,
893 (9th Cir. 2003) (en banc). Here, our circuit precedent is clear and
there has been no intervening higher authority. Therefore, we are bound
to follow precedent.
 OREGON REST. & LODGING ASS’N V. PEREZ 25

customarily tipped in the restaurant industry.
The remainder (between 30% and 45%) was
returned to the servers in proportion to their
hours worked.

Id. at 578–79 (footnotes omitted). The district court dismissed
the waitress’s complaint for failure to state a claim, and she
timely appealed. Id. at 579.

On appeal, the waitress argued the restaurant’s tip-pooling
arrangement was invalid, because it included employees who
were not “customarily and regularly tipped employees” under
section 203(m). Id. The restaurant argued that this
interpretation of section 203(m) was correct only “vis-à-vis
employers who take a ‘tip credit’ toward their minimum-
wage obligation,” and that, because the restaurant had not
taken a tip credit, it had not violated section 203(m). Id.

We affirmed the district court, relying on the precedent
established by the Supreme Court in Williams v. Jacksonville
Terminal Co., 315 U.S. 386 (1942). Cumbie, 596 F.3d at 579.
In Williams, the Supreme Court held that “[i]n businesses
where tipping is customary, the tips, in the absence of an
explicit contrary understanding, belong to the recipient.
Where, however, [such] an arrangement is made . . . , in the
absence of statutory interference, no reason is perceived for
its invalidity.” Williams, 315 U.S. at 397 (internal citations
omitted). Thus, “Williams establish[ed] the default rule that
an arrangement to turn over or to redistribute tips is
presumptively valid.” Cumbie, 596 F.3d at 579.

We also held, as a matter of first impression, that section
203(m) did not interfere with the default rule articulated in
Williams. Id. at 580–81. Employers (who do not take a tip
26 OREGON REST. & LODGING ASS’N V. PEREZ

credit) remain free to contract with their tipped employees to
redistribute tips among all employees, including those who
are not customarily tipped. Cumbie, 596 F.3d at 579–81. We
reasoned that section 203(m) did not impose statutory
interference, because the plain text of section 203(m) had
only imposed a condition on employers who take a tip credit,
rather than a blanket requirement on all employers regardless
of whether they take a tip credit. Cumbie, 596 F.3d at 581. As
we concluded, “[a] statute that provides that a person must do
X in order to achieve Y does not mandate that a person must
do X, period.” Id. We continued:

If Congress wanted to articulate a general
principle that tips are the property of the
employee [when the employer does not take a
tip credit], it could have done so without
reference to the tip credit. “It is our duty to
give effect, if possible, to every clause and
word of a statute.” United States v. Menasche,
348 U.S. 528, 538–39, 75 S.Ct. 513, 99 L.Ed.
615 (1955) (internal quotation marks
omitted). Therefore, we decline to read
[section 203(m)] in such a way as to render its
reference to the tip credit, as well as its
conditional language and structure,
superfluous.

Id. Because the restaurant in Cumbie did not take a tip credit,
there was no basis for concluding that the restaurant’s tip-
pooling arrangement violated section 203(m). Id.

Lastly, we addressed the waitress’s argument that the
restaurant was functionally taking a tip credit by using a tip-
pooling arrangement to subsidize the wages of its non-tipped
 OREGON REST. & LODGING ASS’N V. PEREZ 27

employees. Id. at 582. We said, even if this were the case, this
“de facto” tip credit was not “so absurd or glaringly unjust as
to warrant a departure from the plain language of the statute.”
Id. (quoting Ingals Shipbuilding, Inc. v. Dir., Office of
Workers’ Comp. Programs, 519 U.S. 248, 261 (1997)). We
recognized that “[t]he purpose of the [Fair Labor Standards
Act (“FLSA”)] is to protect workers from ‘substandard wages
and oppressive working hours,’” and concluded that the
restaurant’s tip-pooling arrangement did not thwart that
purpose. Id. (quoting Barrentine v. Ark.-Best Freight Sys.,
Inc., 450 U.S. 728, 739 (1981)). Thus, because “[t]he
Supreme Court has made it clear that an employment practice
does not violate the FLSA unless the FLSA prohibits it,” we
rejected the waitress’s argument and concluded that the FLSA
does not restrict employee tip-pooling arrangements when the
employer does not take a tip credit. Id. at 583.

We now decide a case identical to Cumbie. Once again,
an Oregon restaurant (named aptly enough “Oregon
Restaurant”) is defending its practice of pooling the tips of its
tipped employees and redistributing those tips among all of
its employees, including those who are not customarily
tipped. Exactly like Cumbie, the restaurant is paying all of its
employees above minimum wage and has not taken a tip
credit. Again, its tipped employees are challenging that
practice—not under a new theory, but under the same theory
advanced in Cumbie. Again, they argue that section 203(m)
prohibits the redistribution of tips.2 Because we are obligated

2
Technically, rather than waiting to be sued by its tipped employees,
Oregon Restaurant is instead suing the Department of Labor in response
to its newly promulgated rule reinterpreting section 203(m). Nonetheless,
in Cesarz v. Wynn Las Vegas (the other case in this appeal), involving a
casino instead of a restaurant, the tipped casino dealers are indeed suing
28 OREGON REST. & LODGING ASS’N V. PEREZ

to follow precedent, this case should have ended with a
memorandum disposition.

Instead, the majority ignores our circuit precedent and
pretends this case is different, because this time the
Department of Labor (“DOL”) has promulgated a new rule
interpreting section 203(m) differently than we interpreted it
in Cumbie. However, the DOL’s promulgation of this new
rule changes nothing. As the majority notes, if Congress’s
intent behind a statute is clear, that is the end of our inquiry.
We need not defer to an agency’s interpretation of this
statute. Maj. Op. at 13–14; Chevron U.S.A., Inc. v. Nat. Res.
Def. Council, Inc., 467 U.S. 837, 842–43 (1984).

No one disputes that the courts can determine whether a
statute is clear. In fact, the Supreme Court has held that a
prior judicial construction of a statute “trumps an agency
construction otherwise entitled to Chevron deference” when
“the prior court decision holds that its construction follows
from the unambiguous terms of the statute and thus leaves no
room for agency discretion.” See Nat’l Cable & Telecomms.
Ass’n v. Brand X Internet Servs. (“Brand X”), 545 U.S. 967,
982 (2005). The majority wants to dodge the Brand X bullet
by saying Cumbie did not determine that the meaning of
section 203(m) is clear and unambiguous, but instead only
determined that “nothing in the text purports to restrict” the
practice of redistributing tips, thereby leaving room for
agency interpretation. Maj. Op. at 15, 18–19 (quoting
Cumbie, 596 F.3d at 583). This interpretation of Cumbie has
no merit. Any rational reading of Cumbie unequivocally

the casino just as the waitress in Cumbie sued the restaurant. Thus, the
facts and procedural posture in both cases remain functionally identical to
those in Cumbie.
 OREGON REST. & LODGING ASS’N V. PEREZ 29

demonstrates that we determined the meaning of section
203(m) is clear and unambiguous, leaving no room for
agency interpretation. We explicitly concluded that section
203(m) is “clear” or “plain” multiple times—not only in the
footnotes to the opinion, but also in the text of the opinion
itself. Cumbie, 596 F.3d at 579 n.6, 580–81, 581 n.11.
Moreover, because the language of the statute was clear and
unambiguous, we expressly concluded there was no need to
refer to the legislative history. Id. at 581 n.11. If there were
any remaining question concerning the plain language of the
statute, we clearly stated that any alternate reading would
render its language and structure superfluous. Id. at 581.
Indeed, there has not been penned a stronger application of
the Brand X standard than the majority encounters in Cumbie.
If Cumbie did anything at all, it held that the meaning of
section 203(m) was clear an§d unambiguous.3

The majority next tries to dodge Cumbie by suggesting
section 203(m) is silent as to whether the DOL can regulate
tip pooling arrangements of employers who do not take a tip
credit. Cumbie addressed this “statutory silence” argument
squarely: according to the plain text of the statute, section
203(m) only applies to employers who do take a tip credit
(because they are not paying the minimum wage), and
therefore does not apply to employers who do not take a tip
credit. Nowhere in its text, either explicitly or implicitly, does
section 203(m) impose a blanket tipping requirement on all

3
The majority counters that “[w]hat was ‘clear’ in Cumbie was that the
FLSA’s tip credit provision did not impose any ‘statutory interference’
that would invalidate tip pooling when no tip credit is taken.” Maj. Op. at
18–19, n.4. Read Cumbie; the majority is wrong. Instead, we explicitly
held in Cumbie that section 203(m) does not apply to employers who do
not take a tip credit, and that any alternate reading would render its
language and structure superfluous. Cumbie, 596 F.3d at 581.
30 OREGON REST. & LODGING ASS’N V. PEREZ

employers. We explained, “[a] statute that provides that a
person must do X in order to achieve Y does not mandate that
a person must do X, period.” Cumbie, 596 F.3d at 581. There
is no contrived ambiguity to address in section 203(m).
Contrary to the majority opinion, Christensen has no validity
here. Maj. Op. at 15; see Christensen v. Harris Cty., 529 U.S.
576, 588 (2000).4

Even if Christensen were relevant, the majority’s
interpretation of Christensen turns Chevron on its head.
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. The Supreme
Court has made clear that it is only in the ambiguous
“interstices” within the statute where silence warrants
administrative interpretation, not the vast void of silence on
either side of it. Util. Air Regulatory Grp. v. E.P.A., 134 S.
Ct. 2427, 2445 (2014) (“Agencies exercise discretion only in
the interstices created by statutory silence or ambiguity

4
The majority states “the dissent overlook[s] the part of Christensen that
discussed Chevron deference and Judge Souter’s concurrence.” Maj. Op.
at 17.

Again, the majority is wrong. In Christensen, the Supreme Court
allowed the DOL to enact further regulation over compensatory time,
because the DOL had been given the express authority to do so.
Christensen, 529 U.S. at 580–81. However, under section 203(m), the
DOL has only been given authority to regulate the tips of employers who
take a tip credit. The DOL has not been given authority to regulate the tips
of employers who pay their employees a minimum wage and do not take
a tip credit. Therefore, unlike Christensen, there was no statutory silence
permitting the DOL further regulation of this issue.
 OREGON REST. & LODGING ASS’N V. PEREZ 31

. . . .”). If it were otherwise, within each statute granting
administrative authority, Congress would need to erect walls,
making it clear that the agency is limited to regulating only
that which the statute expressly addresses, or implies within
those parameters. As the district court below correctly noted,
“[t]o express its intention that certain activities be left free
from regulation, Congress need not lace the United States
Code with the phrase, ‘You shall not pass!’” Oregon Rest. &
Lodging v. Solis, 948 F.Supp. 2d 1217, 1225–26 (D. Oreg.
2013). Thus, because section 203(m) is “silent” to regulation
over employers who do not take a tip credit, any such
regulation falls outside of the scope of the statute and the
DOL has no power to regulate there. See City of Arlington v.
F.C.C., 133 S. Ct. 1863, 1868 (2013) (“No matter how it is
framed, the question a court faces when confronted with an
agency’s interpretation of a statute it administers is always,
simply, whether the agency has stayed within the bounds of
its statutory authority.”).

It is curious why the majority seizes on the DOL’s newly
promulgated rule as the basis for its decision. The argument
the DOL makes now was the same argument made in
Cumbie.5 However in Cumbie, the waitress ultimately
“recogniz[ed] that section 203(m) [was] of no assistance” in
prohibiting employers (who do not take a tip credit) from
pooling their employees’ tips and “disavowed reliance on it
in her reply brief and at oral argument” in favor of an
alternative, albeit equally meritless argument. Cumbie,
596 F.3d at 581. Now, after losing in Cumbie, the DOL has
decided to go through the backdoor by promulgating a new

5
The DOL supported the waitress’s appeal in Cumbie by filing an
amicus brief.
32 OREGON REST. & LODGING ASS’N V. PEREZ

rule codifying its argument in Cumbie and its preferred
interpretation of section 203(m).

Chevron deference does not work that way. The DOL is
not a legislative body unto itself, but instead must carry out
Congress’s intent. Chevron, 467 U.S. at 842–43. To the
extent Congress’s intent is unclear with regard to a particular
statute, the DOL may engage in statutory interpretation and
issue rules. Id. But that circumstance is not presented here.
Instead, we explicitly and unequivocally found section
203(m) clear and unambiguous. Congress’s intent was clear
on this matter. Regardless of how much the DOL dislikes the
interpretation, it must follow it. See Brand X, 545 U.S. at 982.
The DOL is not free to manufacture an ambiguity, which
circuit precedent mandates is not there.

CONCLUSION

There are two cases before us. In the first case, the
Oregon Restaurant and Lodging Association sued the DOL,
challenging the validity of its newly promulgated rule and
seeking to enjoin its enforcement. In the second case, a group
of casino dealers sued their employer, Wynn Las Vegas,
LLC, challenging its tip pooling practice as a violation of the
DOL’s new rule. In both of these cases, the employer paid its
employees above minimum wage and did not take a tip credit.
In both cases, the district court ruled in favor of the employer,
relying in large measure on our decision in Cumbie.

Our course is clear in both cases. Williams is still good
law; the Supreme Court has done nothing to overturn or alter
it. See Williams, 315 U.S. at 397. Thus, the rule remains that
tips belong to the tipped employee unless otherwise agreed
between the employee and the employer. Here, such
 OREGON REST. & LODGING ASS’N V. PEREZ 33

agreements existed between the employers and their
respective employees. These tip redistribution agreements are
presumptively valid and compliant with our circuit’s law.
Thus, in each case, we ought to be affirming the district court.
To do otherwise is to ignore circuit precedent and disregard
stare decisis, as the majority does here.

I respectfully dissent.