Across Portland, Restaurant Owners Are Running Afoul of the Feds for Pooling Employees’ Tips

The national battle over tip pooling has its roots in Oregon.

Last week, a pair of badge-wielding federal inspectors walked into Fuel Cafe, a brunch spot on Northeast Alberta Street that dishes out comfort food. They demanded to speak to the kitchen staff.

Mari Shelby, who bought the small cafe when it was a coffee shop back in 2011, thinks she knows who complained: Three recent hires had threatened to quit en masse, demanding she change the restaurant’s longtime policy of splitting server tips with the “kitchen manager” and other back-of-house staff.

Now Shelby must spend thousands of dollars defending her business from what she says are spurious allegations: that supervisors were stealing tips.

The “kitchen manager,” she admits, did take home the biggest cut from the pool. But that’s because he worked the most hours. He wasn’t salaried and his title, she says, was purely for show. “No one reports to him,” Shelby says. “He doesn’t hire and fire.”

The investigation is just beginning and the outcome uncertain. But, if it’s anything like what happened to Portland restaurant chains McMenamins and Pizzicato, it will mean bad press and perhaps a hefty fine.

On Jan. 23, the U.S. Department of Labor sent a letter to employees at two of McMenamins’ restaurants, telling them their bosses had unlawfully taken upward of $800,000 in tips over three years. The money was “tipped out” to “assistant managers” and “assistant assistant managers.” A week later, on Jan. 30, the federal agency sued Pizzicato, saying the chain had gone even further and given tips to general managers too.

When contacted by the press, representatives for both McMenamins and Pizzicato expressed disbelief, saying they had no idea they were doing anything wrong.

Managers work side by side with line staff, Pizzicato founder Tracy Frankel explains. “We’ve always tipped everyone equally. We’ve done that for decades.”

Frankel’s confusion is perhaps understandable. Over the past decade, all three branches of the federal government have weighed in on the legality of tip pooling, disagreeing over just about everything from whether pools are legal to who can be in them.

Still, says Corinna Spencer-Scheurich, who leads the Northwest Workers’ Justice Project, businesses should know better. “It’s tempting to use tip pools to compensate your managers,” she says, “but it’s not right—and it’s not legal.”

The national battle over tip pooling has its roots in Oregon, which, unlike 43 other states, does not allow tips to count toward the minimum wage. (The states that do and don’t tend to fall along predictable partisan lines.) Since businesses don’t need to use tips to pay their waitstaff, it’s long been tempting for Oregon restaurateurs to redirect that money to shore up wages elsewhere.

They often do this by pooling the day’s tips and then doling them out to staff in proportion to hours worked. The practice benefits cooks and dishwashers, who don’t normally accept tips. But it violates a basic assumption embedded in the concept of tipping: that the money actually goes to the person being tipped.

In 2008, a server named Misty Cumbie sued a Northeast Portland cafe for the practice, taking her case all the way to the 9th U.S. Circuit Court of Appeals with the help of Lake Oswego lawyer Jon Egan.

They lost, but got the attention of policymakers. This began a dizzying back-and-forth between judges, federal bureaucrats and congressional lawmakers over when tip pooling should be legal and who should be included.

Eventually, officials in the Trump administration threatened to gut the rules entirely, effectively allowing businesses to do whatever they wanted with tips, even pocket them.

So, Congress came up with a compromise: Tip pools are fine, as long as everyone gets paid the minimum wage and managers aren’t included.

But even that didn’t end the debate. “It’s about as clear as mud,” Egan says, “because, well, who’s a manager?”

The U.S. Department of Labor created explicit guidelines in 2020 in an attempt to clear up confusion: Managers are anyone who oversees employees and contributes significantly to hiring or firing decisions.

Since then, the department has gone after a series of coffee shops in Louisville, Ky., an Italian restaurant in San Antonio, and a Korean barbecue joint in Los Angeles—all for sharing tips with managers.

This crackdown is perhaps not a surprise. “President Biden promised to be the most pro-worker and pro-union President in American history, and he has kept that promise,” notes a fact sheet published in September on Biden’s website. His administration has recovered $690 million in stolen wages, it says.

But Jason Brandt, president of the Oregon Restaurant and Lodging Association, says the Labor Department’s increased enforcement of tip pooling laws is concerning. Distinguishing between managers and non-managers is difficult, particularly when supervisors work alongside regular employees and titles vary day to day. “In many of these operations, especially counter-service models, the people that are serving the guests are interchangeable,” Brandt says.

In 2022, a Pizzicato employee filed a complaint with the Oregon Bureau of Labor & Industries saying the chain wasn’t following the rules. Nicholas Grover, who’d worked at the chain since 2017, said store managers were still being paid tips. He complained to his bosses, but got nowhere.

BOLI doesn’t enforce tipping laws, so it referred him to the federal agency that does: the U.S. Department of Labor. Grover gave the feds a call.

They investigated, and two years later, the agency confirmed Grover’s suspicions: His bosses had been breaking the law. Pizzicato’s owners have agreed to pay a $570,000 settlement. Nearly all of it will be distributed back to 367 workers who’d lost tips since 2020.

Felix Rippel, Pizzicato’s CEO, says Grover’s complaints never reached him. (The executive Grover says he complained to, the chain’s longtime director of operations, was laid off last year.)

Ultimately, Rippel felt railroaded by regulators. He cooperated fully with the investigation, he says, and once investigators informed him of the violations last summer, he immediately raised managers’ salaries and stopped directing tips to them.

But federal prosecutors filed a lawsuit anyway, accusing him of employing “oppressive child labor” and failing to “maintain, keep and preserve records of tips.” (Rippel says the company lost a few weeks of records. Frankel, the owner, says a manager accidentally sent a 17-year-old out on a delivery a few weeks before his 18th birthday.)

Pizzicato never meant to “steal” tips, Rippel says. “We just thought it was the most egalitarian thing to do. We’re getting hung out to dry.” The lawsuit was dropped two days later following the settlement.

Grover, who was promoted to supervisor in 2021, says he doesn’t begrudge his managers the extra cash. They often worked harder than anyone, he says. The problem, he explains, is companies underpaying managers and using tips to make up the difference. He quit Pizzicato in 2022 after getting a new job driving buses.

Margins in the restaurant business are notoriously thin, and owners say they can’t afford to pay employees more. The Department of Labor initially demanded $2 million in backpay and damages, Rippel says. That amount, he says, “would put us into bankruptcy.”

Shelby, the Fuel Cafe owner, echoes that sentiment. She’s been in the restaurant business for 25 years but has now soured on it, citing new taxes, aggressive regulators, and rising labor costs.

“Employees think they’re entitled to any and everything,” she says. “Small business in America is not what it used to be.”

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