2020 Restaurant Tip Pooling + Tip Sharing Laws | TipMetric Software
Tips have always been at the heart of most discussions in the hospitality industry.
For hotels, traditional table service restaurants, counter service businesses like coffee shops, bars and some fast casual restaurants, shared responsibilities encourage a more unified team mentality. In these cases, tip pooling makes sense.
Federal law allows tips to be pooled for front-of-house and, in some cases, back-of-house staff as long as employees are properly notified of the policy and business meet certain federally mandated criteria. Furthermore, different states take it a step further by adding their own laws regulating when tip pooling is allowed, who can participate, and how businesses have to communicate the policy to staff.
What does this mean for businesses considering tip pooling?
Let’s define a few key terms:
Tipped employee: By federal standards, anyone who regularly receives more than $30 in tips a month is considered a tipped employee.
Tip Credit: Under Federal law, employers may pay tipped employees less than the minimum wage, as long as employees receive enough in tips to make up the difference. This is called a “tip credit” — If the tips aren’t enough, the employer has to pay the remainder. The minimum cash wage is the lowest possible wage employers can pay tipped employees under this arrangement. At the federal level, the minimum cash wage is $2.13 per hour. Employers who pay tipped employees that minimum cash wage therefore need tips to make up the remaining $5.12 to reach the federal minimum wage of $7.25 per hour. List of minimum wages of tipped employees by state
Tips: A voluntary gratuity given directly from the customer to the business via cash, credit card or an item of value.
Mandatory Service Charges: This is sometimes added to a customer’s bill if warranted, for things such as larger tables, private parties or similar circumstances. The law generally considers this part of the contract between the customer and the restaurant, not a voluntary acknowledgment of good service by the wait staff. Therefore; service charges are not considered a tip…however, many employers can give part of these service charges to employees, but that’s the employer’s choice — employees have no legal right to that money.
Nb: States like New York require must give all mandatory service charges to their staff unless they make it clear to customers that the restaurant is keeping the money. Alternatively, Washington requires restaurants to indicate on menus and receipts what portion of a mandatory service charge goes to the staff who served the customer.
Credit Card Processing Fees: When a customer leaves a tip for an employee on a credit card, can the employer deduct the credit card processing fee from the tips? Federal courts and the Department of Labor have generally held that employers may subtract a processing fee (~ 2–3%) from an employee’s credit card tips, as long as the employee still receives minimum wage.
Nb: Some states like California have more restrictive laws. Employers may not deduct any portion of the credit card processing fee from the employee’s tips.
Front-of-house (FOH) employees: Employees that have direct interaction with the customer during the meal or service provided. These include hosts, wait staff, servers, bartenders, baristas and bussers.
Back-of-house (BOH) employees: These employees support the front-of-house staff in the kitchen or office, including chefs, sous chefs and dishwashers.
Tip Pooling: The process of gathering all tips earned by tipped employees and placing them into one common collection. The total tips in the collection is then divvied up to the tipped employees based on a percent, points or hourly basis at the end of the shift, day or pay period.
In 2018, federal law lifted the ban on tip pooling for back-of-house staff if, and only if, the employer didn’t take a tip credit, and all employees (FOH and BOH) are paid minimum wage or higher. In this scenario both FOH and BOH staff can participate in tip pooling.
Nb: Managers and Business owners are still not allowed to participate in any tip pool under any circumstances.
In summary, a valid tip pool under federal standard means:
- Between wages and tips, employees must make the equivalent of their area’s minimum wage, or else employers must make up the difference.
- Employers must inform employees of tip sharing policy
- Owners, managers and employers cannot participate in the pool
- Back-of-house employees may participate when the owner does not take a tip credit
State Requirements for Tip Pools
All U.S. states follow federal standards on tip pooling, however some have enacted additional regulations. Specific outlines can be found on each state’s labor website, but we’ll go through some of them below:
States with Chain of service requirement
In some states, employees can only participate in a tip pool if they directly provide service, or assist in serving customers within the main responsibilities of their job. This generally means tip pooling is limited to just front-of-house staff.
California (Employers must also arrange a system that allocates larger percentages of tips to those with larger responsibility, such as a wait staff compared to hostesses.)
Two states that allow employee-mandated tip pools with voluntary exceptions.
Delaware: Employers cannot require the primary service worker — the person who directly waited on the customer — to contribute more than 15 percent of received tips in mandatory tip pools.
North Dakota: Allows tip pooling if more than 50 percent of employees agree to it.
Utah’s Notice in Writing
Utah requires employers to alert new hires of their pool tipping practice in writing when they are offered the position. If a new tip pooling policy is to be implemented, managers must alert all employees in a formal written notice.
States that Cannot Require Tip Pooling
In the following states, employers cannot require their employees to participate in a tip pool. Only when employees agree to tip pooling voluntarily can the system be implemented. In these cases, employees can keep all their individual tips but can also choose to contribute amounts of their choice to a pool that they’ve arranged on their own. The employees may ask their manager to facilitate the voluntary tip pool but cannot require anyone to participate.
Tip pooling methods:
Hours-based tip pooling
If the employees in the tip pool all share roughly the same job responsibilities, then they may opt to simply divide up the total tips collected each shifts OR day OR pay-period based on the number of total hours worked by each employee.
For example: A busy coffee shop with two baristas receives cash tips in a tip jar. At the end of the shift / day / pay period, the tip jar has $1800 in it; if all the three baristas worked a total of 120 hours…
Barista A worked 40 hours = (33% of all hours worked) = 33% of $1800 = $600
Barista B worked 60 hours = (50% of all hours worked) = 50% of 1800 = $900
Barista C worked 20 hours = (17% of all hours worked) = 17% of 1800 = $300
Based on that breakdown, Barista A would get $600 in tips, Barista B would get $900, and Barista C would get $300.
Role-based tip pooling
Sometimes, different position types will be involved in a tip pool. In these scenarios, employees in different roles / position types will get different percentages of the tip pool based on a tip pooling agreement mandated by the Restaurant or agreed upon by Employees among themselves depending on state laws.
For example: A tip pooling agreement at a table service restaurant may be as follows; Servers keep 60% of the tips, give 25% to hostesses pool, and 15% to busser pool. If a server made $500 in tips one night, they would keep $300, put $125 into a pool for hostesses, and put $75 into a pool for bussers. At the end of the shift, day OR pay-period based, hostesses and bussers would divide their respective tip pools among themselves based on hours worked.
Nb: Servers may be required to collectively pool their 60% with other Servers to create unity by preventing jockeying for the best sections.
Is a tip pool right for your business? Follow a few guidelines to get started:
Review federal and state laws: Clarify your state’s tip pooling laws to ensure your employee’s fall within the proper category of service, whether or not you’re required to hold a vote and how to notify your team.
Discuss with your team members: Federal law requires proper notification before implementing a pooling system. Use your discretion on whether a mandatory or voluntary tipping pool is right for you.
Choose a tips distribution policy + system: Choose an approach or one of the tip pooling methods above that fairly distributes tips. Most Restaurants track tips on paper or complex spreadsheets, which is labor intensive and prone to error; adding exposure to wage/tip liabilities and IRS tip audits. Instead, make sure you use an app purpose built to automate & make tips distribution simple, safe & secure like TipMetric.com
Now, with your newfound knowledge, you can ensure you as the employer or employee handle tip pooling the legal and right way.