Tipping. It's a constant conversation in the restaurant industry. But one can't deny that tips make up a majority of restaurant workers' take-home pay. There have been several ways in which restaurant owners have tried to create a more equitable system for employees to earn consistent, fair wages and improve retention. One of those ways is tip pooling, where all tips are collected into one “pool” and re-distributed back to employees. It eliminates some downsides of tipping, like inconsistent wages, an emphasis on “good tables,” and an individual mentality among serving staff.
In theory, it's simple, but this tip-out method is subject to federal laws and another layer of state-by-state laws on top of that. As an employer, it's essential to get right, lest you upset employees with the wrong tips or find yourself on the wrong end of a Department of Labor violation. But when you get it right, tip pooling ensures fair compensation for everyone involved.
In this article, we'll explain how tip pooling works in different states and what restaurant owners and operators can do to follow the laws.
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Tip Pooling Laws
Tip pooling laws are subject to change, and they do so often depending on federally mandated criteria. One of the most significant changes occurred in 2018 when the Department of Labor ruled that back-of-house employees like cooks and dishwashers are eligible to be included in the tip pool.
Federal Tip Pooling Laws
According to federal law, tipped employees are classified as such if the amount of tips they make in a month exceeds $30 dollars. Employers can pay tipped employees less than minimum wage if that employee's tips add up to at least the federal minimum wage of $7.25. If an employee's wages with tips and hourly pay come out to less than minimum wage, a tip credit must be applied, where the employer makes the difference.
Throughout 2021, the U.S. Department of Labor issued a final rule to regulations affecting tipped workers. Specifically, The DOL applied the updates to the amendments that occurred in 2018 in section 3(m) and other sections in the Fair Labor Standards Act:
- First, employers, supervisors, and managers cannot keep employee tips under any circumstances, even in a tip pool.
- If employers pay tipped employees the full minimum wage (and take no tip credit), non-tipped employees (like cooks and dishwashers) can participate in the tip pool.
- Employers that collect tips to facilitate a mandatory tip pool generally must fully redistribute the tips within the pay period in which they were collected
- Employers that do not take a tip credit, but collect employees' tips to operate a mandatory tip pool, must maintain payroll or other records containing information on each employee who receives tips and the weekly or monthly amount reported by the employee, to the employer, of tips received.
The 80/20 rule was also revived, which states that employers can use only tip credits if 80 percent or more of an employee's work is “tip-generating.” This means servers who serve food and provide table service, bartenders who make and serve drinks, or bussers who clear tables, etc.), and not more than 20% are support work (setting tables, wiping down the bar, etc.). Most importantly, employers must know what laws apply to their establishment and communicate this to their staff. Employees can be proactive and also stay up to date on rules, so they know they are being tipped out fairly or not.
Recommended Reading: Tip Pooling Tools to Easily Manage Tips at Your Restaurant
What about mandatory service charges?
Many restaurants add a service charge on to bills for large tables of diners, private parties, or events.
According to federal law, and most state laws, this is not considered gratuity. It belongs to the employer.
Some states have different rules, though. More on that below.
What about credit card processing fees?
When tips are added on to a credit card transaction, federal law allows employers to pass on the processing fee to employees—docking tips received by 2-3 percent. Some states have different employee protections and prohibit employers from this practice.
Tip Pooling Laws by State
On top of federal laws, each state has the option to set forth its own local tip pooling laws in addition to current federal regulations. States can vary by minimum wage requirements if tips count towards minimum wage, if tip pools are allowed, and if credit card processing fees are deducted from tips.
The following states, however, do not have additional laws in place that differ from federal guidelines. While they have different rules for tip credit amounts, they all allow for mandatory tip pooling:
States A to M
States N to W
- New Jersey
- New Mexico
- Rhode Island
- South Carolina
- South Dakota
- West Virginia
But other states, like the ones below, have additional laws and protections in place.
In California, tip pooling is legal, and all funds in the pool must be distributed fairly. Employees are included, while the back of the house is not. The California Department of Labor Standards Enforcement recommends servers take the largest portion of the tip pool. Managers that have the authority to fire employees cannot be included.
Mandatory service charges are not a tip; if they are paid out, they are considered wages and taxed as such. In California, credit card processing fees must be paid by the employer.
For mandatory service charges, Colorado law requires employers that intend to claim any tips for themselves to post a conspicuous notice to that effect. And when it comes to credit cards fees, an employer who deducts credit card process fees may not claim a tip credit.
Delaware allows both mandatory and voluntary. A mandatory pool is only allowed among employees who provide direct service to a customer. The primary service employee cannot be required to contribute more than 15% of their tips. The employer may not take any portion of the pool.
Delaware also allows employers to set up their own tip pooling system, and the rules are set by employees who participate in it.
In the Capitol, the DC law allows tip pooling, but only among employees who regularly receive tips.
As for credit card fees, employers may pass along the processing fee to employees, but they must provide written notice stating the percentage.
Hawaii employers that use mandatory service charges for the sale of food or beverages must either pay that money to employees as tip income or disclose to the customer that the service charge will be used for expenses and costs other than employee tips and wages.
Kentucky does not allow mandatory tip pooling. Tip pooling is allowed only if employees agree to it voluntarily.
In Maine, mandatory service charges must be treated as a tip, and therefore can be included in the pool. As for credit card processing fees, Maine could be interpreted to prohibit employers from making employees pay the fee.
Under Massachusetts law, only employees who directly provide service can be included in the tip pool.
As for mandatory service charges, they are treated like tips in Massachusetts. They belong to the employees who provided service to the customer, and can be included in the tip pool. Massachusetts state law can also be interpreted as preventing employers from taking credit card processing fees from an employees' tips.
As with Kentucky, Minnesota does not allow a mandatory tip pooling. Additionally, if employees decide to share their tips, the employer may be elected to manage the shared tips and disburse them according to the employees' agreement.
As for service charges, the employer may not take any part of it unless it's expressly stated to the customer that the service charge does not go to the employee.
In Montana, tip pooling is allowed only if employees agree to it voluntarily. Mandatory tip pools are not allowed by law.
As for service fees, in Montana, the money must go to the employee and is treated as a tip.
In New Hampshire, tip pooling or tip sharing is allowed only if employees agree to participate in it voluntarily and without coercion from their employer. The employer may administer the pool, suggest reasonable and customary practices, and administer employee disputes over the pool. However, employers may not require tip pooling.
For New York tip pooling, an employer can include only employees directly involved in the interactions and customer service in a valid tip pool. Employers cannot be a part of the tip pool. Still, an employee with limited supervisory duties can be a part of it (an employee with significant authority cannot be). Employers are not liable for tips that other employees fail to contribute to the pool.
Service charges must go to the employee who provided the service.
Tip pooling is allowed only if tipped employees in a business vote on it. Of the employees, 50 percent, plus one, must favor tip pooling. The employer must keep a record of each vote and name.
While North Carolina law allows mandatory tip pooling, only employees who regularly receive tips may participate in the tip pool. The employer may not keep any part of the pool. And, employees earn at least 85% of the tips they earned prior to contributing to the pool.
Under Utah law, employers must put its tip pooling arrangement in writing, and provide it to employees when they are hired or before the employer implements the pool.
While not a law, the Vermont Department of Labor suggests that employers should advise employees if they follow this practice, in the employee handbook or a written memo.
However, Wyoming does not allow mandatory tip pooling. Employers may not require employees to pool, split, or share their tips. Employees may agree voluntarily to a tip pooling arrangement, but it is not valid if the employer requires or coerces employees to participate.
Protect your restaurant from these costly mistakes
As a restaurant owner or operator, even if you intend to ensure tip pooling is fair and complies with state and federal laws, it is still possible to make mistakes. Tip pooling can be complicated, especially when compared to other tipping structures.
Don't Include Managers in the Tip Pool
“The most common mistake I see is non-tipped employees participating in the tip pool, such as managers; a manager can not retain any money from a tip pool,” says Joshua H. Sheskin, Esq. Sheskin is an attorney specializing in employment law at Lubell Rosen law firm.
Keep Detailed Records
“Other common mistakes are employers not tracking the tipped amounts they pay or not accounting for cash tips. Even if a tip is in cash, you need a record of it.” One way to avoid confusion is to document your policy. Some states even require it.
“First, you must inform your employees that they are participating in a tip pool and that if the tip pool does not come out to the minimum wage, you will compensate them. This is best done on a document your lawyer draws up and the employee signs,” says Sheskin.
Recommended Download: Free Restaurant Tip Pooling Calculator and Template
Consequences of failing to comply with tip pooling laws
For restaurant owners and operators, it is essential to be aware that there is a possibility of being fined if you do not follow tip pool laws. You must be mindful of the federal tip pooling laws in the Fair Labor Standards Act (FLSA) but then know your state laws. Some states ban it, while others regulate this tip-out structure more heavily than federal law.
Federal law clearly states that a fine will be imposed upon those who break the law and must pay employees what they are owed. Penalties for tip pooling vary by state, so there may be an additional fine or penalty depending on your location.
On top of federal or state penalties, Joshua H. Sheskin warns:
“Tip pooling mistakes can be chased down by the Department of Labor. However, the real threat you face is lawsuits under the Fair Labor Standards Act from your employees, and you will be indefensible if you did the tip pool incorrectly. Even to the point of settlement, handling each case can cost a lot of money. These cases can be brought in state courts but are generally in Federal courts where it is expensive just to appear.”
The best tactic to avoid penalties is to be aware of federal law and fines (and pay attention to any updates), read up on your state's rules, and use tip pooling software to keep records.
Frequently Asked Questions
What are the benefits of tip pooling?
There are a few benefits to tip pooling. First, it allows servers to share their tips with other staff members who may have contributed to the dining experience, such as bussers and bartenders. This can lead to improved employee morale and a more positive work environment. Second, tip pooling can help to ensure that tips are distributed more evenly among employees. By pooling tips, employers can help to even out the earnings of employees since some customers may tip more generously than others.
Do pooled tips go to the employer?
Employers can not be included in the tip pool, including restaurant owners and operators. They can enforce tip pooling at their businesses but cannot benefit from it.
Can managers participate in a tip pool?
Mostly, this is uncommon, and managers and supervisors are not included in the tip pool. However, in some states, managers, and supervisors are allowed to participate.
Are tip pools legal in Florida?
Tip pools are legal in Florida as long as they meet specific criteria. For example, the tip pool must be voluntary, and all of the tips must be distributed among the employees who participated in the pool. Additionally, the tip pool cannot include non-tipped employees, such as managers or cooks.
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