Thinking about implementing a mandatory tip pool?
In more collaborative work environments, tip pooling can be a logical, equitable way to handle employee tips. It can encourage teamwork, build a spirit of camaraderie, and ensure that all of your employees are fairly compensated for their hard work.
But depending on where you’re located, tip pooling laws can get very complicated, very fast. A quick Google search will show you how many restaurants have found themselves at the center of costly lawsuits because they were (often unintentionally) operating illegal tip pools.
So: before you pass go, get up to date on the latest tip pooling laws and regulations to avoid hefty fines and a bad reputation.
Obligatory disclaimer: Kickfin’s content is not intended to be legal advice. Rather, our goal is to highlight key considerations and red flags that can impact operator compliance. Always consult a legal expert if you have questions about your specific tip policy or circumstances!
The Fair Labor Standards Act (FLSA)
Starting in 2020–2021, the U.S. Department of Labor finalized a series of updates to federal tip regulations under the Fair Labor Standards Act (Final Rule, Federal Register). These rules were designed to protect tipped employees and give operators clearer guardrails around how tips can—and cannot—be handled. Key provisions took effect on April 30, 2021 (DOL Tip Regulations Overview), and the DOL has continued to clarify enforcement through guidance and opinion letters in the years since (Wage & Hour Opinion Letters).
For operators, the most important takeaway is this: any system that involves sharing tips is regulated, regardless of what you call it. Whether you use a formal “tip pool,” require servers to “tip out” support staff, or distribute tips through software, the same federal rules apply (DOL Tip Pooling Guidance).
That means:
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Managers and supervisors cannot participate in tip pools, even if they occasionally perform front-of-house work (DOL Guidance on Managers & Supervisors Keeping Tips).
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Only eligible, non-manager employees may receive shared tips, depending on whether you take a tip credit (DOL Fact Sheet #15 – Tipped Employees).
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If tips are redistributed in any way, the arrangement must comply with federal (and applicable state) law—there’s no workaround based on terminology (DOL Tip Regulations Overview).
In short: if tips move from one employee to another, the DOL considers it tip pooling, and operators are responsible for ensuring the structure is compliant.
Who can keep tips?
Employers are completely barred from keeping any tips, pooled or otherwise. According to the FLSA, tips explicitly belong to the employees, not their employer, so any tips withheld by the employer can be seen as wage theft.
As an extension of the employer, managers and supervisors may not participate in a tip pool or retain any employee tips. Managers can, however, keep tips that are directly given to them based on service they directly and solely provided.
Some of the tip pooling laws depend on if your restaurant is taking the federal tip credit:
- If you do take the tip credit, non-tipped employees (like cooks, dishwashers, and other back-of-house employees) cannot participate in the tip pool.
- However, if you do not take the tip credit and pay traditionally tipped employees the full minimum wage, the tip pool can be shared with your back-of-house staff and other non-tipped employees.
Maintaining Payroll Records & Timeliness
For the most part, the Department of Labor rewards employers who don’t take the tip credit and pay their tipped employees the full minimum wage by offering more flexibility around tip pooling.
Still, even non-tip credit establishments have some extra rules to follow. Employers who require employees to pool their tips must maintain thorough records of payroll, tip redistribution, and the weekly/monthly tip amounts for each employee.
Speaking of payroll, all pooled tips must be redistributed to employees by the end of the pay period in which they were earned. The timeliness of returning tips to employees applies to all establishments, whether you take the tip credit or not.
State and Local Tip Pool Laws
For restaurant operators, tip pooling compliance works on two levels:
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Federal law sets the baseline
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State law can add stricter rules—but can’t override federal protections
Understanding how these layers interact is key to staying compliant.
Under the FLSA, as discussed above, there are non-negotiable rules that apply in every state, including:
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Tips belong to employees, not the business
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Employers, managers, and supervisors cannot keep or share in tips
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Any tip sharing arrangement (pooling, tip-outs, redistribution) is regulated
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Tip pool eligibility depends on whether you take a tip credit
These rules always apply—no matter what state you operate in.
States are allowed to pass their own wage and tip laws, as long as they provide equal or greater protection to employees than federal law.
For operators, this generally means: You must follow whichever rule is more protective of the employee—federal or state.
Common ways states go further than federal law include:
- Prohibiting tip credits entirely
- Limiting who can participate in tip pools more narrowly
- Requiring tip pools to be voluntary
- Setting stricter definitions of “manager” or “supervisor”
- Mandating written tip pool disclosures
For example:
In some states, BOH employees can never receive pooled tips, even if you pay full minimum wage. In others, tip pools are allowed but only among specific roles (e.g., servers and bartenders). Some states may require explicit employee consent for tip pooling.
Here are examples of states where tipping and tip pool laws vary. Please keep in mind that regulations change frequently, so be sure you are getting the most up-to-date information from your respective state’s resources or your own legal counsel.
California
At the time of publication, California does not allow employers to take the tip credit–meaning employees must be paid the full minimum wage in addition to their tip earning.
Mandatory tip pooling is legal, but there are at least two key stipulations that operators should pay close attention to:
- Who can be included? A tip pooling policy cannot be used to compensate the owner(s), manager(s), or supervisor(s) of the business. Participants must have provided direct table service are be considered in the “chain of service.” While court cases have upheld policies that include back-of-house employees, like dishwashers and cooks, it’s imperative that you consult a legal expert if you have questions about who can participate in your tip pool.
- How much can tip pool participants receive? Tip pools must be “fair and reasonable;” in the past, this has been interpreted to mean that the amount paid out is relative to contribution to the guest experience. Again, speak with your legal counsel if you are unsure about how your policy is structured.
For more information, visit California’s Department of Industrial Relations webpage regarding tip regulations.
Colorado
Tip pools are legal, but Colorado does have more rules about the tip credit. If you deduct credit card processing fees from your servers’ tips, you cannot take the tip credit and must pay the full minimum wage.
Delaware
Mandatory tip pools are legal, but servers cannot be required to contribute more than 15% of their tips. If servers create their own voluntary tip pool, they can choose to contribute as much as they would like.
Kentucky
Mandatory tip pools are illegal, but employees may voluntarily form their own tip pool.
Maine
Any mandatory service charges must be treated as a tip for employees, so therefore, service charges can be included in the tip pool.
Massachusetts
Mandatory service charges are viewed as tips that can be included in the tip pool, but only employees who provide direct service can take part in the tip pool.
Minnesota
Mandatory tip pools are illegal, but employees may form their own tip pools. The employees may also vote to allow their employer to manage and disperse from the tip pool. Mandatory service charges are also viewed as tips unless it’s explicitly stated to the customer that they are not being paid to the employee.
Montana
It is illegal for employers to mandate a tip pool, but voluntary tip pools are allowed. Mandatory service charges can only be treated as tips for the server.
New Hampshire
Mandatory tip pools are banned, but employees may elect their employer to manage and disperse voluntarily pooled tips.
New York
Mandatory tip pools are legal, but employers are banned from participating. Employees providing direct service and supervisors with limited authority are the only employees allowed to participate in the tip pool. All mandatory service charges must be paid to the employee who provided the service.
North Dakota
To establish a tip pool, employers must hold a vote for the tipped employees to make the final decision. At least 50% plus one of the tipped employees must vote in favor of the tip pool, and the employer must keep record of the vote.
North Carolina
Tip pooling is legal but only among regularly-tipped employees. Employees may only contribute up to 15% of their tips to the pool.
Utah
Tip pools are legal, but the tip pooling policy needs to be provided in writing before establishing a tip pool or hiring any new staff.
Wyoming
Only voluntary tip pools are legal in Wyoming, and employers are banned from pressuring or coercing their employees to form a tip pool.
What’s at stake?
If you don’t comply with federal tip pooling laws – even without your knowledge – you could be liable for massive fines and employee back pay. In 2020, the Department of Labor also released its final rule on Civil Money Penalties (CMPs) to determine the punishments that come with violating the FLSA tip regulations.
The final rule clarified that the Department of Labor can assess penalties of up to $1,162 per violation, even if the violations aren’t repeated or willful. This fine is in addition to back pay and damages that employees can sue for.
On top of the financial risks, you don’t want to ruin your reputation. No one wants to work for a company known for shady tipping practices, and customers generally don’t want to support unfair labor practices either. It’s in your best interest to take tipping laws seriously.
Rulings and regulations can get confusing without expert help. It’s always safest to speak to an attorney to ensure that you’re complying with federal, state, and local tipping laws to keep your business out of hot water.
Additional Resources
Once you’re confident that you’re complying with tipping laws, consider making tip pools and tipping out even easier. Request a demo of Kickfin to see how digital, instant tip-outs simplify tipping, save time, and help you retain employees.
