Tip Pooling: What Every Restaurateur Should Know

In the hospitality industry, tips aren’t icing on the cake: they’re often the reason employees can make a living wage. Tip pooling and tip sharing can ensure that everyone who contributes to a customer’s experience, not just servers, can be reap the rewards of a job well done.

To truly benefit your team and business — without damaging your culture — tip pooling and sharing must be done fairly, transparently, and in accordance with current regulations. Unfortunately, the latter is easier said than done: legislation is always changing, and the rules vary from state to state.

Whether you’re in California or Connecticut, here’s an overview of how tip pooling should work, plus some resources to make sure you’re in compliance with the laws in your own state.

What is tip pooling?

Let’s make sure we’re all on the same page: Tip pooling is a practice unique to the hospitality industry where all tipped employees contribute some portion of their tips into a pool. That pool is then divided evenly among a group of employees. 

Sometimes tip pooling is simply recommended or encouraged by an employer, but it’s ultimately at the discretion of the employees. When tip pooling is voluntary, it’s not regulated.

Other times, restaurants require tip pooling, and if that’s the case, then they need to comply with certain regulations. The biggest rule you need to be aware of: tips belong to employees, not employers. Whatever your tipping policies are, tips cannot be distributed among managers, supervisors or employers.   

Who is a tipped employee?

There are some positions that are commonly tipped — like servers, bartenders, bellhops, valets — but the title isn’t what really matters. Your employees qualify as tipped employees if they “customarily and regularly” receive more than $30 in tips per month.

Non-tipped employees are often, but not always, back-of-house staff, like chefs, line cooks, dishwashers and janitors. These people typically contribute to some aspect of a guest’s experience, but they don’t actually interface with the guests and don’t have the opportunity to receive a tip.

Tip pooling vs tip sharing

Tip sharing involves pulling a certain percentage of tips from tipped employees and distributing those earnings among non-tipped employees. Employers are not allowed to require tip sharing; it can only be done voluntarily, at the discretion of the tip-earning employees. Prior to 2018, this was the only way non-tipped employees could gain access to tips. 

However, with the amendment of the Fair Labor Standards Act in 2018, non-tipped employees are now allowed to participate in a tip pool. There’s one condition, though: employers who include non-tipped employees in their pool cannot be taking a tip credit. If an employer is taking a tip credit, their tip pool can only include tipped employees.

Which leads us to our next point…

What’s a tip credit?

Employers in the hospitality industry can legally pay their employees less than minimum wage if their employees’ tips make up the difference. When employers do this, it’s called taking a tip credit, because they’re crediting their employees’ tips toward an employer obligation to pay minimum wage.

Federal law states that the largest tip credit and employer can take is $5.12; minimum wage is currently $7.25, so that means means employers can’t pay their employees less than $2.13 an hour, even if tips put employees way over the minimum wage threshold. 

Of course, minimum wage varies by state, and some states are more stringent with their tip credits. A few don’t allow tip credits at all. (To check out minimum wage rules for your state, go here. For a general fact sheet about what’s allowed under the Fair Labor Standards Act, go here.)

Employer tip “deductions”

As stated above: tips belong to employees, not employers. However, when your employees are tipped via credit card, federal law generally allows restaurants to deduct a proportionate percentage of the credit card processing fee from the tip.

(That is, if you have to pay a 4% credit card processing fee, you can legally deduct 4% from your employees’ tips. Keep in mind: this is another case where federal law may permit this policy, but states may have stricter rules.)

Also, service charges — for large parties or private events — aren’t considered tips, so you’re not required to share those with your employees, although many employers do so anyway.

What’s right for your restaurant?

Tip pooling can be a sensitive subject. Many restaurateurs have the best of intentions when they decide to establish a tip pool, but it’s not always done in a way that benefits the team.

While everyone plays a role in a guest’s experience, servers typically put in the face time and (arguably) can make or break the tip by managing the experience — i.e., establishing rapport, avoiding mistakes, doing damage control when the kitchen’s backed up or runs out of salmon. Servers and other tipped employees may be less excited about sharing tips with back-of-house staff.

Unfortunately, there’s also a level of distrust that your employees may have around tip pools, as some restaurateurs and employees have gamed or abused the system for their own benefit. While they’re certainly in the minority, they’ve given tip pooling a bad rap.

On the other hand, there are some pros to tip pooling and tip sharing with non-tipped employees. Your back-of-house staff certainly contributes to the experience a guest has — and they’re working just as hard as their tipped co-workers — but they don’t have the earning potential that comes with being a tipped employee. 

If you’re establishing a tip pool for the first time, after ensuring that you’re 100% compliant with state and federal laws, think through the policies and specific percentages that will work best for your restaurant. 

Then, focus on transparency: clearly communicate your objectives and policies. Not only is it required by law that you provide oral or written notice, but it’s also important from a culture and trust perspective. If employees understand the thought and logic behind your decisions, they’ll feel confident that you care about the financial well-being of every person on your team.

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