What You Need to Know About Tip Pooling

Tipping can be tricky for both customers and restaurant workers. In the United States, tipping is voluntary but widely practiced. Even if a customer receives sub par service, it is still considered customary to at least leave a small tip.

For most servers, the majority of their money comes from tips. It’s how they make their living. And the amount they take home from tips can make a huge difference for them.

Things can get even trickier when tip pooling comes into play. Tip pooling — the process of dividing a percentage of server tips amongst restaurant staff — is a debated practice. It recently received some attention when legislation was updated to regulate tip pooling.

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Who owns a tip?

When an employee receives a tip, it belongs to them. Earned tips do not belong to the employer, and they cannot require employees to give their tips to the owner of the business or share their tips with managers and supervisors.

What are the legal requirements for tips and tip pooling?
It may not seem so, but tip pooling can be a fairly complicated practice, and restaurant employers and employees should fully understand the operational and legal aspects before participating.

Even though employers do not own the tips their employees receive, under federal law, are allowed to enforce tip pooling, or tip sharing, for service employees who receive tips on a regular basis.

In March of this year, a new bill was signed into law that included a plan to scale back the current administration’s proposed tip pooling regulation from 2017. Part of that plan included amendments to the Fair Labor Standards Act (FLSA), which protects tipped workers.

This bill allows tip sharing between tipped and non-tipped employees. It also states that if a restaurant establishes tip pooling that involves non-tipped employees, they will have to pay the tipped workers the federal minimum wage, not the reduced wage that was previously allowed for businesses practicing tip pooling.

In many states, employers are allowed to pay tipped employees less than minimum wage as long as employees earn more than $30 per month in tips. This is also known as a “tip credit.”

Under federal law the maximum tip credit allowed is $5.12 per hour. If employers are enforcing tip credits, they first need to ensure that employees make enough in tips to earn at least $7.25 per hour, which is the current federal minimum wage.

The change outlined in the bill is eligible even for the states that do not have a tip credit — California, Oregon, Washington, Nevada, Minnesota, Montana, and Alaska — so long as they pay employees the full minimum wage. There are still a handful of states, including New York and Massachusetts, where it remains illegal to tip the “back of the house” (restaurant employees who work in the kitchen area).

In summary, under this bill servers can share tips with kitchen staff, so long as the restaurant pays full minimum wage and does not take a tip credit.

Who benefits from tip pooling?

Tip pooling is supposed to be set up in a way that benefits both employers and employees. The entire restaurant works together to provide customers with a positive experience.

Tip pooling fosters this environment of teamwork and rewards everyone who takes part in its success, from the hostess to the server to the back of the house. It also allows employers to subsidize the wages of employees who typically would not receive tips.

What happens when a tip is left on a credit card?

When tips are left on a credit card, and not in cash, the employer has to pay the credit card company a processing fee on each sale. Because of this deduction, the employer is allowed to deduct that percentage from the employee’s tip.

If employers choose to do so, they must make sure that removing this charge does not violate the FLSA rules and reduce the employee’s wage below the minimum requirement. For tip pooling, the amount remaining after the deduction is the amount eligible for the pool.

Best practices for tip pooling

Given all the legal requirements and recent changes to tip pooling policies, setting in place a few guidelines can be helpful for making sure management and employees fully understand tip pooling.

  1. Define the policy. To start, define a percentage to allocate toward the tip pool. Then decide on a procedure for how the tip pool is distributed among the other employees. Will staff be tipped out at the end of the day or the end of the week, or with their regularly scheduled paycheck?
  2. Clear communication and documentation. Clearly communicate and document your policy. Make sure your employees understand why your business practices tip pooling and answer all their questions before their first shift. Restaurant payroll software can make things easier on employees. Look for payroll software that can log and process tip pooling based on the number of hours each employee works.
  3. Be open to change. Since management is not eligible for tip pooling, listen to your employees for feedback on your policy and any adjustments they feel that it needs.
  4. Seek out legal advice. After you have identified the best policy for your restaurant, run it by your lawyer and accountant to make sure you are compliant with all tipping laws.