Thinking about implementing a mandatory tip pool?
In more collaborative work environments, tip pooling might seem like 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.
The Fair Labor Standards Act (FLSA)
Starting in 2020, the federal Department of Labor made significant rulings based on the tip regulations stipulated under the 2018 Fair Labor Standards Act. These new rulings are designed to better protect tipped employees from wage theft and other illegal tipping practices. They’ve released their final rule, which went into effect on April 30, 2021.
One important thing to note: while the DOL uses the umbrella term “tip pooling,” these rules apply to all tip-sharing practices, including tipping out. Even if you’re not explicitly pooling and redistributing tips, any tip sharing at all is subject to these laws.
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 of up to $5.12:
- 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
Don’t forget that tipping laws vary state by state — and some states explicitly bar tip pooling. If you live in Kentucky, Wyoming, Minnesota, or Montana, you cannot require employees to participate in the tip pool, but employees may voluntarily pool tips if they so choose.
Additionally, many states have higher minimum wage requirements than those laid out by the federal government, so you may need to double-check that your tip pool doesn’t cause any employees to fall below their required pay.
As of now, 14 states have additional state laws that extend beyond the FLSA rulings, so make sure to read up on your state’s tipping regulations before implementing a tip pooling system.
Here are the states where tipping & tip pool laws vary:
Tip pools are legal, but they cannot be shared with BOH employees or any manager who has the power to fire employees.
Employers are also required to pay servers the full minimum wage of $15.50/hr — meaning California business owners cannot take the tip credit.
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 of $13.65.
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.
Mandatory tip pools are illegal, but employees may voluntarily form their own tip pool.
Any mandatory service charges must be treated as a tip for employees, so therefore, service charges can be included in the tip pool.
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.
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.
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.
Mandatory tip pools are banned, but employees may elect their employer to manage and disperse voluntarily pooled tips.
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.
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.
Tip pooling is legal but only among regularly-tipped employees. Employees may only contribute up to 15% of their tips to the pool.
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.
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.
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.