What Employers Should Know About Tip Pooling and the Law

by Josh Biggs in Business on 24th August 2021

If you run a hospitality-focused business, you’re familiar with the controversy surrounding tip pooling and sharing. The practice gained national prominence after a recent change in federal regulations. Tip pooling occurs when employees combine their tips and share them in a pre-arranged fashion after a shift. While this redistribution often involves contributors to the pool, some establishments include non-tipped staff such as bussers and food runners.

What’s the Difference Between Tip Pooling and Tip Sharing?

Although these two terms occur interchangeably, they refer to a similar practice. Historically they would apply to tipped staff until a new law in 2018 made further clarifications. The Consolidated Appropriations Act amended the Fair Labor Standards Act (FSLA)’s provisions on tipping.

Before the new law, there had been a difference of opinion between business owners and workers in the hospitality industry. Employers and associated groups such as The National Restaurant Association called for back-of-the-house workers to become a part of tip sharing.

However, labor groups urged employers to increase the wages of non-tipped staff without affecting the earnings of front-of-the-house employees. After the new law came into effect, the Department of Labor gave its opinion on the matter.

The agency stated that back-of-the-house workers such as cooks and dishwashers could participate under some circumstances. Although there’s still some controversy surrounding tip pooling, federal law expressly forbids restaurant managers or owners from participating.

What’s the Best Way to Distribute Tips?

Federal law regulates those who can benefit from a tip pool but doesn’t outline the collection and sharing methods. Even distribution among all participating staff is one of the most common ways to split tips. Another way is to set a service benchmark, which distributes earnings depending on hours worked or tables served.

If you operate a sizable business, you can share tips proportionally based on the number of rooms served. Because some rooms might tip higher than others, it’s advisable to implement per-room sharing among eligible staff members.

Another tip distribution method involves creating a contest format that awards a bonus to an employee or team. You might reward them for meeting particular goals, such as earning the highest tips per room or serving the most guests.

Finally, your business can share tip pools proportionally depending on employee roles. If it involves tipped and non-tipped staff, the most active ones will be entitled to a substantial portion. For instance, the servers can share 80%, bussers 15%, and bartenders 5%.

Essential Regulations on Tip Pooling That All Employers Should Know

Federal law requires employers to give advance notice to their workers about the establishment’s policy on tip pooling. This precaution makes eligible staff members aware of the distribution method. As of 2018, your business can include participants who were previously non-tipped staff.

Federal law also requires the tipped minimum wage plus employee tips to be equivalent to the federal minimum wage. If they aren’t enough, the employer must top up the difference. This additional amount is known as tipped credit.

For instance, if the federal minimum wage is $7.25 and the tipped minimum wage is $2.13, the maximum tip credit is $5.12. If your employees put in more hours than their shift, you must calculate their overtime wages based on the federal minimum wage, not the tipped minimum wage.

How to Implement a Fair Tip Pooling System

Some local and state laws override federal directives. It’s advisable to consult qualified lawyers for a comprehensive explanation of how your business should comply. Their specialization in state and federal employment law will help you avoid conflict with and among workers while distributing tips.

Other points to include:

  • Network with other businesses in your location that operate similar establishments. Although full-service restaurants are the most preferable for tip pooling research, quick-service restaurants and cafes with communal tip jars are also ideal. Innovative tip-sharing policies will help you avoid the hospitality industry’s high employee turnover rates.
  • Analyze your finances to decide whether you’ll require tip credit or pay your employees the full state minimum wage. Your workers must receive notification if you choose a tip credit policy.
  • Draft a comprehensive tip-sharing agreement form that all eligible employees must read, understand, and sign. This step protects your business from potential legal action by disgruntled employees.

These decisions are critical to the survival of your business. A fair tip pooling arrangement boosts employee morale and makes them more productive. Including front and back-of-the-house non-management staff in the scheme also makes all of them feel appreciated.

Final Thoughts on Tip Pooling

If tip pooling is available in your locality, it will help your business manage costs better. It also improves cooperation between employees to create a harmonious work environment. Because it’s a sensitive subject, remember to involve your workers before making a decision. Additionally, consult competent employment lawyers to ensure compliance with local, state, and federal requirements.

Categories: Business