Everything you need to know about tip pooling laws

Tips are a part of restaurant life in most North American cities and small towns. From mandatory gratuities for large groups, to adding change to a tip jar at your local café, tipping methods are all around us. And whether you're for or against rewarding or incentivizing good service, many hospitality workers subsidize their wages with tips. But tips don't have to be just a sweaty $5 bill left on a table after a quick meal.

There are different ways to distribute tips among employees, with tip pooling as a primary method. Ahead, we’ll get into the nitty gritty of what tip pooling is, how it differs from tip sharing, what the current federal and state laws say about tip pooling and tip distribution among employees, and some mistakes to avoid when enacting and enforcing a tip pooling policy.

What is tip pooling?

Tip pooling is the policy or practice of a business—often a service-based one, like a restaurant—collecting all of the tips employees have earned during their shift and re-distributing them to staff. The distribution amount is predetermined beforehand, but often it’s evenly split between those who collected the tips. Tips in the pool are redistributed back to employees who are eligible to receive them, like other servers.

Other roles, like hosts, bussers, food runners, also get a percentage of the tip pool redistributed to them. And of course, the kitchen staff and bartenders also receive a cut for their hard work. One of the benefits of tip pooling is that employees don’t feel competitive with each other to make the most in tips. All of the tips that come into the business are the result of good service performed by everyone who touches a table—from host, to server, to food runner, to busser. 

Tip pooling vs tip sharing

Another way hospitality and service businesses handle tips is through tip sharing. Tip sharing primarily focuses on ensuring the people who received the tips—most likely servers—get the largest amount of the tip back, but they tip out a small percentage to other parts of the business. An example of this is a server receiving $300 in tips for a dinner shift. They tip out $20 to the bar team and $20 to the hosts and/or food runners. When there are multiple servers, the tip sharing amounts grow for each other unit in the business. 

Tip pooling vs tip credit

One other way a tip can be given to an employee is through a tip credit. A tip credit is when an employer calculates what tip an employee may receive and includes this in their wage. According to the Fair Labor Standards Act (FLSA), the federal minimum wage is $7.25. If someone’s wage were above that—say $10—and the tip credit was $4, the employer would be responsible for allotting $6 of that as a labor cost to pay for the wage. Employers are legally required to disclose if a wage includes a tip credit. 

Want to read more on the pros and cons of tipping out? Learn more about the different methods and what to look out for.  

What's considered a tip?

According to US law, a tipped employee is someone who makes more than $30 per month in tips. Tips mean anyone who's paid a gratuity for their work, like servers, baristas, and bellhops. Tips are paid on top of the allotted amount a customer is paying for. So, as an example, a customer with a $100 bill at a restaurant has the option to tip the server on top of that for providing excellent service during the meal. In the US and Canada, it’s customary to tip at least 15%, if not more commonly 18% or 20% for really excellent service. 

What are the laws around tip pooling?

Tip pooling laws recently changed in the US. In 2018, the Department of Labor ruled that employees who work back of the house, usually in kitchen-led work like line cooks or dishwashers, are now eligible for tip pooling. This is one example of a federally enacted law that has a broader impact on tip pooling. Businesses that want to have a tip pooling policy in place need to adhere to both federal and state laws on the matter. Next, we’ll get into other federal tip pooling laws and a few examples of state tip pooling laws. 

Federal tip pooling laws

At the federal level, tip pooling laws are pretty clear and concise, both to protect you and your employees who receive tips. A few federal tip pooling laws to watch out for: 

• Employers, owners, or any management-level staff can’t collect and keep employee tips. This includes a tip pool. The exception is if those team members are performing the same duties that would receive tips, like if a manager is pulled onto the floor because someone called in sick.
• Employers and businesses collecting tips for a tip pool need to redistribute tips within the same pay period.
• Businesses need to keep clear records. Track the amount collected in a tip pool for all tips collected in a week, the amount redistributed and to whom, and any other necessary and relevant information.

State tip pooling laws

On top of federal tip pooling laws, state tip pooling laws may apply to your business. These are affected by different state minimum wage policies, and they differ state-by-state. Some states follow the federal tip pooling laws, but some have their own regulations, and it can be tricky to keep track. At any point, it's best to consult with a professional accountant or lawyer to make sure you're up-to-date on the latest regulations.A few examples of state tip pooling laws:

• California: Tip pooling is completely legal, but only allows for certain employees to receive tips. Back of house team members, like chefs and dishwashers, don't get to participate in the tip pool.
• Utah: Employers have to put in writing for employees that they'll be participating in a tip pool. 
• New York: Employees with some supervisory task can still be part of the tip pool, but only if the majority of their work is directly involved in the customer service transaction. 
• Wyoming: Mandatory tip pooling isn't allowed, and employees need to voluntarily participate in tip pooling.

What should you consider when creating a tip pooling policy?

If you’re thinking about creating a tip pooling policy at your business, there are a lot of great benefits: less competition for staff, encouragement to help each other out, and an increased sense of responsibility. With tip pooling, you’re working together to get better tips for everyone. Pointing to the benefits of tip pooling is one thing, but look to other considerations to fully weigh the option of creating a tip pooling policy. Some considerations could include how tips are distributed (shifts, role, etc.) or the state your business is in and if there are any other legal parameters you need to understand. Here's a breakdown of key aspects to consider before instituting a tip pooling policy. 

Industry consideration

Where do we see tips talked about the most? Restaurants or high-touch hospitality jobs. Many servers and other front of house service roles have tips as part of their income. Tip sharing and tip pooling are ubiquitous in the restaurant industry. But they aren’t the only service sector to include tips as part of an employee’s income. Other roles include bartenders, barista, hotel service staff (including concierge, housekeepers, and in-room service attendants), hair dressers, and aestheticians. Any service role could reasonably be considered for tip pooling. As an employer or supervisor in the business, it’s important to understand if tip pooling makes sense for your specific industry and your company. 

State laws

State laws are a serious consideration for tip pooling. If your business ignores those laws, or isn't aware of them, there could be costly consequences. Thoroughly research your state’s specific laws to understand if a) there’s any difference from the federally mandated ones, and b) if there are nuances that need to be understood before implementing a tip pooling policy. For instance, in North Dakota, employees need to vote on a tip pooling policy, with 50% plus one voting in favor for it to pass. 

Distribution criteria

So what is an example of a tip pooling policy, and how might it work? Tips in the tip pool can be distributed a few different ways. Consider the following before putting a tip pool policy in place:

‍1. Hours worked: Some businesses offer a bigger share of the tips from the tip pool based on hours worked during that period.

‍2. Role: In this distribution plan, different roles in the business are awarded points and the tips are paid out based on this point system. You'll total the tips and divide accordingly by points.

‍3. Seniority: In some cases, employees with longer tenure—and therefore more experience at the business—may get more of the tips from the tip pool in that period.

Meanwhile, new hires might get less tips because they're new to the biz or new to that particular business.

Transparency 

Tip pooling is predicated on trust. Because tip pooling is about bringing everyone’s tips together to redistribute, your employees need to know that what they worked hard to earn isn’t going to be lost or considerably downsized.  When starting the tip pooling policy, bring your employees in on the process so they can understand how it works, why it works for them, and how you’re going to manage their tips in a way that’s favorable for both the company and them. Then, make sure you communicate it thoroughly and document it in your company onboarding info—which leads us to our next point.

Employee communication

Keep employee communication top of mind when it comes to tip pooling. That means letting employees know:

• When to expect tips
• Any delays on paying tips
• What the distribution scheme is
• Any changes to the tip pool policy

When making updates, use a company chat function for real-time communication that everyone will receive instantly.

Record keeping 

For employers or supervisors overseeing the tip pooling policy, it’s important to figure out how to track, report, and maintain records of the tip pool for accuracy. Consider which tools or software you may need that will help you keep an efficient tip pooling record. 

5 tip pooling mistakes to avoid

No policy or action is without mistakes. If possible, try to avoid the following when it comes to tip pooling. 

• Don’t “accidentally” tip out ineligible employees.
• Don’t create a tip pooling policy without letting employees know.
• Don’t forget to keep a separate record of tips for tip pooling.
• Adhere to both federal and state tip pooling laws at all times.
• Define rules and responsibilities of managers or supervisors to avoid paying them tips they're technically ineligible for.

Consequences of not complying with tip pooling laws

It’s important to keep up-to-date on both federal and state tip pooling laws. Some states more heavily regulate tip pooling over others. At the federal level, if an employer breaks provisions laid out in the FLSA, you'll most likely incur fines. You'll also be responsible for paying employees what they're owed. A key way to keep on top of your tip pooling is to streamline the process with tools capable of tracking tips in the tip pool each pay period. 

Bonus: Where to find information about tipping laws by state

You may wonder: in what states is tip pooling illegal? There is no simple answer. Many states don't diverge from the federally mandated laws on tipping. That said, there are still a number with different rules and regulations. Here is a complete list of states with resources on their specific tipping laws:

• California
• Colorado
• Delaware
• Hawaii
• Kentucky
• Maine
• Massachusetts
• Minnesota
• Montana
• New Hampshire
• New York
• North Carolina
• North Dakota
• Utah
• Vermont
• Wyoming

Take the dip into tip pooling

Tip pooling is a business choice that affects your whole team. If your business is in the hospitality or restaurant sector, you can now make informed decisions that adhere to your legal obligations. Tip pooling doesn't have to add extra math to your plate, either. Do away with spreadsheets and manual tracking to mitigate mistakes and speed up your process. Homebase can help you track your tips with ease so that payroll is a breeze, and you can use our messaging tool to loop your team in on all the important conversations. If you’re looking to simplify your small business operations and handle everything from time tracking to tipping to payroll, Homebase is right for you.

{{banner-cta}}