Tip pooling is combining all or a portion of all of your employees’ tips and redistributing among eligible front-of-house (FOH) employees. Often confused with tip sharing, which traditionally includes employees who don’t directly receive tips, tip pooling can increase morale. However, there are laws, like forbidden management participation, that must be followed to avoid being fined.
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How Tip Pooling Works
To understand tip pooling, you must have a firm grasp of what a tip is.
Per the IRS, a tip is a voluntary amount of money left by a customer to pay workers for their service. It’s money paid in addition to regular wages and is taxable if it exceeds $20 monthly.
Tip pooling can be handled in multiple ways. 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 in a similar fashion the same night (if enough cash is on hand) or paid with the next payroll.
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 allow you to include BOH employees in your tip pooling policy as long as you’re paying all of your employees at least the federal minimum wage rate of $7.25 an hour. Because we are now under a new executive administration, this is on hold. Stay tuned for updates.
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:
Effective April 31, 2021, employers are 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.
Before we proceed on how tip pooling works, let us first define a couple more key terms.
- 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, 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. Several states, however—like Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington—do not allow tip credit.
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 pre-existing laws that disallow paying tipped employees below minimum wage, including Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington, were automatically granted permission to include BOH employees in their tip pooling arrangements. This is because all staff within the establishment were already earning at least minimum wage, which is a requirement for restaurateurs that want 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 hard and fast rules in regards 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%.
State Tip Pooling Laws
Although the final rule revising the tip employee regulation has already been released and scheduled to be implemented April 31, 2021, tip pooling laws still vary widely by state. This rule will have little effect on the 43 states that allow restaurants to claim a tip credit.
However, the changes on the 80/20 rule or dual jobs regulation will have more impact on restaurant owners. If the tipped employee did both tipped and non-tipped work that took up more than 20% of their work hours, the employer had to pay the mandated minimum wage instead of a tip credit. Once the new ruling officially passes, employers can claim tip credit as long as an employee’s non-tipped work was assigned immediately before or after tip-producing duties.
Since California and Arizona allow you to add BOH and FOH employees to a tip pool, the new federal rule will not be an issue, but Minnesota outlaws it all together. New York State only allows FOH employees to participate, stating that eligible employees
“must perform, or assist in performing personal service to patrons at a level that is a principal and regular part of their duties and is not merely occasional or incidental” and that only “food service workers may receive distributions from the tip pool.”
Oregon and many other states don’t have specific regulations for pooling tips, which means employers can include BOH employees in the tip pool. Some states, like Washington, took a lead and established a policy to give employers much-needed guidance. Washington State’s latest policy mentions that the state law doesn’t specify which employees may be included in a tip pool—with the exception that those who don’t meet the definition of an employee cannot participate.
As a restaurant owner, the best option for you is to check with your state’s labor department for guidance since there will be changes in the legislation and you would not want to be caught unaware of it and risk being penalized. Better yet, hire a legal adviser to give assurance that you are indeed following the rules.
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, you’ll likely owe additional penalties.
If you need a way to track sales and tips so you can avoid costly fines, consider Lightspeed Restaurant. It provides an easy way for your employees to clock in and out, take orders, and track tips. It also integrates with time scheduling software Homebase and payroll software Gusto to help you streamline your payroll process. Pooled tips can be tracked, reported, taxed, and paid seamlessly.
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. Tip pooling traditionally only includes FOH employees.
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 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 added together 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 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, check out our article on tip outs.
Employees Who Participate in Tip Pooling
When setting a tip pooling policy for your restaurant, you need to know the positions you can include (and those you have to exclude). According to the amendment we are waiting to be approved, both tipped and non-tipped employees (provided employers are paying each one at least the federal minimum wage) are eligible to be part of tip pooling.
On the other hand, restaurant owners, managers, and supervisors, including business partners owning at least 20% of the establishment are explicitly prohibited from sharing tips with employees. Owners should have limited control over tips and are only allowed to do the following:
- Distribute tips promptly to the employees who received them (no later than the next pay period following the data they are received)
- Require employees to share tips with other qualified employees
- Organize tip pooling by collecting and redistributing it to eligible employees in a tip pool by the next scheduled payday
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 to reduce bickering over certain customers.
Here are some alternatives to mandatory tip pooling that you should consider.
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 employees feel is that their wages don’t fluctuate, which means they don’t rise like that of tipped employees. 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 employees to pool or share tips with BOH employees; it must be optional.
Educate Employees on and 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 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 laws can be confusing due to the new federal amendment allowing BOH employees to participate, and the various state laws that allow or prohibit are unclear, 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.
Because employees who participate in tip pools are required to report their tips, you can make it easy by using payroll software like Gusto. It gives you the option to report and tax employees on cash tips and add credit card tips to their paychecks. Sign up for a free 30-day trial today.