Before implementing tip pooling in your restaurant, it’s important to completely understand what’s involved. Learn more about the practice, including applicable laws.
Tip Pooling: What It Is & Laws Employers Should Know [+ Free Template]
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This article is part of a larger series on How to Do Payroll.
Tip pooling is when a portion or all of the tip money collected in a day is redistributed among eligible front-of-house (FOH) employees either evenly or by a set percentage. It can increase morale and is a great option for some restaurants. However, it’s important to implement it correctly as there are laws, like those forbidding management participation, that must be followed to avoid being fined.
As calculating tips using a tip pooling method can get confusing, we’ve created a simple-to-use template that will help you divide your tips in a matter of minutes. Download it for free below.
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How Tip Pooling Works
To understand tip pooling, you must have a firm grasp of the following key terms:
- Tip: According to the IRS, a tip is a voluntary amount of money left by a customer to pay workers for their service. It is money paid in addition to regular wages and is taxable if it exceeds $20 monthly.
- Tipped employees: As defined by the FLSA, they are those who customarily and regularly receive more than $30 per month in tips.
- Tip credit: Based on federal law, this amount is $5.12. This is the difference between federal minimum wage ($7.25 per hour) and what employers are allowed to pay tipped employees ($2.13)—provided they receive enough tips to compensate for the difference. If the tips aren’t enough, the employer is required to pay the remainder. However, several states (like Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington) do not allow tip credit.
There are many ways to handle tip pooling. Generally, tipped employees collect all of the cash tips they receive throughout their shift and combine them with tips from each participating employee working the same shift. Once tips are totaled, the employer or employees divide them evenly among tip pool participants. Tips received by credit or debit card can be distributed the same night (if enough cash is on hand) or paid with the next payroll.
Tip pooling can help ensure staff members are fairly compensated for their work, but can be a point of contention for waitstaff who spent the whole night juggling tables and saw others taking a break in the walk-in.
In the News:
In December 2020, the Department of Labor (DOL) sought to implement a 2018 FLSA amendment that allows back-of-house (BOH) employees, like cooks and dishwashers, to participate in tip pools. This would enable you to include BOH workers in your tip pooling policy as long as you’re paying all of your staff at least the federal minimum wage rate ($7.25 an hour). Due to changes in administration, there still have been no updates here.
Typically, when pooling tips includes BOH employees, it isn’t an even divide. Allocations are generally based on a percentage of sales or a percentage by job title. Usually, servers receive the bulk, at least 70%—but it can be under 50%.
A sample tip pooling arrangement by percentages is as follows:
- Servers: 70%
- Runners: 12%
- Bussers: 10%
- Bar Staff: 8%
As of April 2021, employers were encouraged to compel their FOH employees to share tips with BOH staff using the tip pool. However, there’s still no official guidance regarding how much servers should have to pay out, but it’s a good idea to have some sort of methodology behind your allocation. If your employees create a tip pool on their own, they can decide how much to redistribute and who they want to share it with.
Tip Pooling Laws
Although the federal government is in the process of changing the rules for tip pooling, many states have yet to do so. However, states with preexisting laws that disallow paying tipped employees below minimum wage (California, Nevada, etc.) were automatically granted permission to include BOH employees in their tip pooling arrangements. This is because all staff within establishments were already earning at least minimum wage—a requirement for restaurateurs wanting tips shared with non-tipped staff.
Federal Tip Pooling Laws
Aside from who can participate in a tip pool, the DOL has other regulations you need to be aware of to protect you from liability. It’s important to remember that all tips (not service charges) belong to your employees. Even when paid to your restaurant through a credit or debit card transaction, you’re prohibited from keeping any of the tips for yourself or your business. You’re also not allowed to pool and distribute them to any employees in a supervisory position.
Here are some quick rules to be aware of with regard to pooling tips:
- Notify employees: You must notify tipped employees of any required tip pool contribution amounts and to whom they will be redistributed before their participation. It’s a good idea to have a standard notice on hand to provide upon hiring.
- Don’t keep tips for the business or yourself: Employers are prohibited from retaining employees’ tips for any purpose other than verifying or processing with their next paycheck. All tips are the property of the employees.
- Exclude managers and supervisors: Managers and supervisors are explicitly not allowed to participate in a tip pool under any circumstances.
- Require reasonable contribution amount: You can’t require employees to pay more into the tip pool than is customary and reasonable. In 2011, the DOL initially defined this as 15% of tips received or 2% of daily sales, but there are no hard rules as it hasn’t yet established a maximum contribution amount. Many restaurant employees pay above 15%.
In December 2021, the 80/20 rule, which states that employers can utilize the tip credit as long as 80% or more of the work is tip-generating (providing table service, serving food, etc.), and not more than 20% is directly supporting work (setting tables, wiping down the bar, etc.), was revived. It had been temporarily replaced with more flexible guidelines during the Trump administration.
State Tip Pooling Laws
As mentioned earlier, although federal laws have been changing, tip pooling laws still vary widely by state. To check the tip pooling laws that apply to yours, check out our state payroll guide directory below:
Visit Our State Payroll Directory
Consequences of Not Complying With Tip Pooling Laws
Common violations employers make with regard to tip pooling regulations are including ineligible employees in a required tip pool and not paying employees all tips received. Per the DOL, if you violate any federal tip pooling laws, you’ll have to pay the employees back for any tips they were owed but didn’t receive, tip credits claimed, and an additional amount for liquidated damages.
Keep in mind that the amendment that allows BOH employees to join in the tip pool is pending. If you violate tip pooling laws at the state level in addition to federal, then you’ll likely owe additional penalties.
Alternatives to Mandatory Tip Pooling
To avoid the legal complexities associated with mandatory tip pooling, as well as some of the disadvantages, you should consider alternatives. First, determine why you want to implement a mandatory policy. Common reasons are to raise wages for BOH employees, ensure all tipped employees receive compensation for their service regardless of how well their customers tipped, and reduce bickering over certain customers.
Increase Wages for BOH Employees
If your goal is to even the income disparity between FOH staff (like servers) and BOH staff, consider regularly increasing hourly wages for BOH employees. The pain point BOH workers feel is that their wages don’t fluctuate, which means they don’t rise like that of tipped staff. If you offer performance raises or bonuses, BOH employees are more apt to retain their motivation.
If you’re worried about how regular wage increases will affect your bottom line, consider taking advantage of the tip credit. Per federal law, you can pay tipped employees an hourly wage as low as $2.13 an hour as long as they receive enough tips (individually and in a valid tip pooling arrangement) to earn the $7.25 hourly minimum wage rate.
Just keep in mind that if you opt for the tip credit, you can’t revert back to requiring FOH workers to pool or share tips with BOH employees—it must be optional.
Educate Employees & Encourage Voluntary Tip Pooling
Mandatory tip pooling means you require your employees to pay their tips into a pool to be redistributed. Voluntary tip pooling is similar but is organized completely by the staff. They may ask you if you will help facilitate by distributing through payroll or counting and paying it out in cash, like you would automatically do if it was mandatory, and it’s your decision as to whether you’re willing to do so.
For this setup to be voluntary, you cannot have any say-so in how tips are collected or redistributed. When it comes to tips received electronically and by check, you have a say in how quickly you will pay them out (albeit the upcoming pay period is the latest you’re allowed to pay) because the tips are paid to your restaurant. You still don’t get to decide who gets what or how much.
In this scenario, you can still participate in the tip credit and possibly be assured your BOH staff receives tips—if FOH employees decide to include them. The key to establishing a legal voluntary tip pooling arrangement is to ensure it’s adequately reflected that you didn’t coerce or force employees into the agreement. You could request that they sign a document to verify that their decision to establish a tip pooling arrangement was independent of you.
If you need help learning about other payroll regulations, check out our payroll compliance guide.
Tip Pooling vs Tip Sharing
Once the federal law changes in regards to tip pooling are implemented, the lines between tip pooling and tip sharing will be less clear. Although many mistakenly use them interchangeably, tip sharing is a practice in which tipped employees share some of their tips with BOH employees. It used to be illegal for many restaurants to require this type of distribution when pooling tips, but restaurateurs often encouraged their servers to do so at their own discretion.
Under the 2018 final amendment, restaurateurs who pay at least minimum wage will be able to mandate that BOH employees are compensated from pooling arrangements. This blurs the line between tip pooling and sharing on a federal level.
The DOL’s guidance states, “Employers who pay the full Federal Labor Standards Act (FLSA) minimum wage are no longer prohibited from allowing employees who are not customarily and regularly tipped—such as cooks and dishwashers—to participate in tip pools,” and it doesn’t differentiate between the two.
Many states have laws that still don’t allow establishments to mandate tipped employees share tips with BOH employees, which makes it less confusing to understand the difference between tip pooling and tip sharing. It’s also important to note that for pooling to occur, all or a portion of employee tips must be totaled before distribution. Traditionally, many servers who shared tips with BOH employees did so out of their own individual tips—meaning they didn’t pool them.
It helps to understand the differences between, and the history of, tip pooling and tip sharing so that you’re not confused as new federal and state legislations are passed.
To learn more about the different types of tips, read our guide on tip outs.
Bottom Line
Tip pooling laws can be confusing due to the new federal amendment allowing BOH employees to participate. There are also various state laws that are unclear about allowing or prohibiting it—or don’t express an opinion on the matter. Ensuring you follow all rules may require a legal adviser; otherwise, you can be charged thousands of dollars for violations.
